Editor’s note: Tim Spenny is the vice president of financial services consulting at GfK Custom Research North America, Chicago.
The verdict is unanimous: Prepaid cards are the fasting-growing segment of the card industry. However, despite the time and devotion spent by card companies on innovation, product design and awareness and usage, there remains a cloud of negative perception and potential misinformation surrounding prepaid cards.
There is no question that there are enormous opportunities for prepaid cards both in the U.S. and abroad, providing payment options to:
• the unbanked, who do not qualify for a traditional checking account;
• government agencies who want to improve efficiencies by issuing reloadable cards for benefits and entitlement payments;
• the employer who wants to reward or incentivize employees; and
• parents who want to be able to monitor their children’s spending habits.
But prepaid cards are not without controversy. Typically perceived as being marketed to and used by the less-affluent and unbanked populations, prepaid cards have a reputation for requiring exorbitant fees and for balances that disappear before the card is ever used for a purchase. Because of these perceptions, prepaid cards have been the target of consumer advocacy groups that have tried to change the way cards are designed, regulated, used and marketed.
Understanding the consumer
A prepaid card’s primary value proposition is that it is much more convenient, more secure and easier to use than many other payment methods. Being able to make purchases without the use of cash, or paying bills without a check-cashing service is a big draw for the less-affluent. But what is the value proposition for more-affluent households? Are they even using prepaid cards? And if these cards have such high fees, why is the number of cards being issued growing so much?
To better understand the usage, value proposition and satisfaction with prepaid cards in the U.S., GfK surveyed 1,000 consumers using a probability-selected Internet panel (recruited initially through mail addresses) that is representative of the U.S. population. The panel captures cell phone-only households, as well as the 25 percent of the U.S. population that does not have Internet access, by providing those panelists with a laptop and an ISP.
First, I want to define prepaid cards in terms of this study. GfK only included branded prepaid cards in the research – cards that have a logo, such as American Express, Discover, MasterCard and Visa.
In order to capture the entire branded prepaid card market, the study included:
• gift cards
• prepaid debit cards
• government benefit cards – unemployment, Social Security, child support, tax refunds and disability
• health cards – HSA, FSA
• corporate disbursement card - insurance payment or commission payment
• payroll cards issued by employers
• student cards
• rewards or rebate prepaid cards
• transit/toll prepaid cards
The survey was designed to gather insights into the overall usage of the types of prepaid cards, what consumers are using the cards for, the benefits of using prepaid cards and relative value versus other available methods, including: cash, traditional checking, check-cashing services and overall satisfaction. Of the 1,000 consumer surveyed this May, nearly 60 percent had used more than one prepaid card in the last 12 months, with the majority of respondents using gift cards, rewards cards and prepaid debit cards. The 18-to-24-year-olds used prepaid cards the least (8.4 percent) in the past 12 months and the 50-64-year-old group had the highest level of use (24.6 percent). Slightly over 57 percent of respondents indicated that they had used more than one type of prepaid card in the past 12 months, with only 3 percent indicating that they used only one type of prepaid card.
The income distribution of prepaid card use showed that perception is not always reality, with Figure 1 showing the highest usage (44.5 percent) being among consumers with incomes above $75,000 a year. The lowest income bracket actually recorded the lowest rate (13.5 percent) of prepaid card usage.
What are consumers using prepaid cards for? Predominantly, they are for purchases of everyday items, like food, gas and clothing (57 percent), with the majority of the more-affluent respondents (incomes greater than $50,000 annually) using prepaid cards for everyday purchases and shopping online (Figure 2). Less-affluent respondents also use prepaid cards for everyday purchases and shopping online but they also indicated a higher rate of using prepaid cards for a safe, secure way to store, save, spend money and pay bills.
Despite their less-than-favorable market perception, prepaid cards recorded high satisfaction across all income brackets when looking at the top two box scores, fluctuating between 67 percent and 72 percent (Figure 4). This is great news for the prepaid card industry. In fact, the lowest income bracket (under $25,000 annual income) indicated the highest satisfaction, at 72 percent. The 50-to-64-year-olds had the highest satisfaction ratings at 75.3 percent across the age group distribution (Figure 5).
We also asked respondents to rate prepaid branded cards in terms of value compared to various other traditional payment methods, including checking, check-cashing services and cash. The results were more than interesting (Figures 6 and 7).
Nearly 27 percent of respondents in the most affluent income bracket also found that prepaid cards were a better value than traditional checking and an additional 39.7 percent of the same group rated prepaid cards as an equal value to traditional checking.
Among the lowest income bracket, 76.2 percent stated that prepaid cards were a better or equal value to traditional checking. This could be an indication of dissatisfaction with monthly service charges or overdraft fees associated with traditional checking accounts.
The favorable value numbers increase across all income brackets when comparing prepaid cards to cash and check-cashing services, with over 50 percent indicating that prepaid cards were of better or equal value to check-cashing services, and an additional 33 percent stating that prepaid cards were an equal value. Nearly 76 percent of respondents stated that prepaid cards were better or equal value to using cash.
These findings are a very strong indicator of the value that prepaid cards bring to the market – both the wealthy and less affluent, the young and the old.
Out of the seven benefits categories included in the study, Figure 8 shows “ease of use” and “flexibility” were cited the most across all income levels. The affluent (incomes over $75,000) chose ease of use more often than other income groups, which ties back to the more affluent consumers using their cards more often for everyday shopping on food, gas and clothing.
“Flexibility,” “locations accepted” and “financial security” were valued features among the lowest income bracket; all were indicated more often by this group than the other income levels. This corresponds to the less-affluent consumers indicating at a higher rate that they use prepaid cards as a safe, secure way to spend money and pay bills.
GfK’s research clearly shows that consumers are using prepaid cards widely in the U.S., with most consumers using more than one type of prepaid card over the past 12 months. And while the perception is that prepaid cards are for the less-affluent, and that those who use them do not have many choices for convenient payments methods, our study shows that consumers across all income levels are using prepaid cards and that their perceived value is greater than or equal to that of check-cashing services, traditional checking and cash. Consumers are using prepaid like they would traditional checking or cash, purchasing food, gas, clothing and shopping online.
Exceptional growth opportunities
Despite some clouds of negativity, prepaid cards have found a home in U.S. consumers’ wallets and are fulfilling a need across all income levels and age groups. The ability to offer a means to make purchases online and off has positioned prepaid cards as a secure way to save and spend, pay bills and budget. With their wide array of potential applications, prepaid cards have exceptional growth opportunities in a variety of areas.