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How prepaid debit went mainstream

By Claes Bell · Bankrate.com
Wednesday, July 18, 2012
Posted: 3 pm ET

Reloadable prepaid cards started out as a niche product largely aimed at those who couldn't qualify for or didn't want a checking account, but who still wanted the convenience of plastic.

But with the advent of reloadable prepaid debit cards from major banks like JPMorgan Chase and Regions, it's safe to say these products have entered the financial mainstream.

I spoke recently with Hyung Choi, Visa's head of U.S. prepaid products, about what's behind U.S. consumers' embrace of the cards and where he sees the industry headed.

Do you think that prepaid debit cards are overpriced relative to checking accounts? How do you compare the two products?

First and foremost, Visa is not engaged in any of the consumer pricing, whether it's a prepaid card linked to a prepaid account or a debit card linked to a checking account.

I think the important thing really is not so much to focus on the pricing as it is to really to look at it through the consumer lens and find out what are the financial needs and payment needs that a consumer has. And provided that a prepaid account with a prepaid card linked to it is the right product and fulfills the needs that that particular person has, it's a product that is available for him or her to choose from.

I don't look at it so much as an either/or. It is rather, as a consumer, understanding what needs you have, with pricing being one component of the buying decision. It is to understand, in totality, what is the right product, based on features and functions, in terms of how it's serviced for me, including, as well, the pricing element.

For some consumers a checking account makes sense, for others a prepaid account might make sense, depending upon the way in which they use it.

You mentioned some of the bigger institutions getting into prepaid debit. Do you see that happening more going forward?

It is hard for me to speculate to say whether there are going to be other institutions that, like Chase, Regions, U.S. Bank, PNC, and others, will start to engage in reloadable prepaid. Certainly, it would not surprise me.

I think most of them are looking at reloadable prepaid. It would not surprise me to find other retail financial institutions fulfilling and delivering a reloadable prepaid product account as a transaction account alternative for consumers to choose from.

The research seems to show a lot of people that had checking accounts also used prepaid debit cards. Can you get into some of the reasons why people would do that and how people use this as a secondary product?

If you think about the mass banked population, there are certain consumers that, even though they have a checking account and a debit card linked to it, they want to be even more intentional or more in control of their spending overall or for specific types of purchases or payments.

They want be very much in control with respect to their needs-based purchases or payments and make sure that they have the appropriate funds, or they have allocated specific a budget and do not want to spend more than that. This provides a vehicle for them to do that on an explicit basis.

On the other hand, you also have consumers that want to have a separate set of funds for those want types of purchases that is separate from their primary checking account balances and the debit card that they could use to access those funds.

I will use myself as an example. I am somebody who drinks a lot of coffee. I buy my coffee every day at Starbucks. Instead of using my debit card, I am just going to put $100 on a reloadable prepaid product that I know is for my Starbucks. Every month I will reload that card and when I use it, I use it, and I know that it is separate and distinct from my funds in my checking account.

This helps me to make sure that I have the requisite funds in my checking account to fund the payments I need to make on a monthly or weekly basis because I have a separate set of funds here that I can spend freely on Starbucks.

Others use it as a separate tool when they travel on vacation or they may provide a reloadable product for their children when they are off traveling or at school. They are just specific types of purchases: one on the needs-based side to be more in control, one on the other side for where I can just spend freely without having any concern that I am not going to have the funds in my core checking account to make the payments that I need to make, whether it is rent, mortgage, etc.

So it is almost like a digital version of the sort of cash envelope system that some people use for managing their funds?

Precisely, and it is more secure than having those different envelopes of cash sitting around the house.

What do you think is fueling the popularity or the rise of these cards?

I think there are a couple of fundamental reasons. It is not one set of consumers, because as we have all seen there are a number of uses for reloadable prepaid products, particularly if we are talking about the consumer side of the equation. Therefore, you have a number of different ways the consumers are using them and different types of consumers that are using these products.

Talking specifically about the under-banked consumer and the underserved segment in the U.S., I think there a couple of fundamental reasons why that particular consumer segment has really engaged with reloadable prepaid products. One is, I have immediate access to my funds 24/7, whenever I need it, wherever I need it, and for whatever payments I need to make, whether I am going to buy something in a retail environment, whether I am going to shop online, whether I just need to go to an ATM to get cash. The money is immediately available to them.

Two is, the reason low- and-moderate income household consumers have engaged in this product as well is the same reason why the general American consumers generally have adopted and engaged electronic payment products: convenience.

A consumer can spend easily anywhere Visa is accepted such as retail, shopping online or what have you. It is more secure certainly for that low- and moderate-income household consumer. Instead of going to the check casher and cashing their check and then walking, transacting and living through cash, all of that money is now available in electronic form. If the card or is lost or stolen, the provider or issuer of that product will provide a replacement for the card, so it is secure.

Lastly, it is reliable. When you use the card, you know that it is going to work.

So, I think you find that with those four primary elements of access, convenience, security, reliability it certainly is a motivator for that under bank consumer to be able to do a lot of things that the majority of American households take for granted every day. I hope that you have Visa product in your wallet, but even if it is not, presumably you have some other branded electronic payment product whether it is MasterCard, AmEx or what have you, and you can do all those things conveniently. But if you are living through cash, you cannot and it is more difficult.

Even just to buy things and to conduct commerce such as buying gas. Not having to walk into the gas station to pay for your fuel, you can just pay at the pump. It is those kinds of basic things along with the security and the reliability that I think really makes these things in terms of reloadable prepaid products particularly interesting. A significant number of consumers in American households have not had access to the financial mainstream.

Do you think that group has gotten bigger because of the down economy? Do you think that more people are using prepaid cards because they are locked out of the checking system because of prior issues?

Certainly. I am not going to speak for all of the banks or an individual bank, but certainly depending upon what the deposit underwriting criteria is for a retail financial institution, in some instances if you are a consumer that is on ChexSystems, you might not qualify for a checking account.

Now with the advent of reloadable prepaid products and even before retail banks started offering them, so whether it is a Green Dot, NetSpend, Wal-Mart, and so on, that you can go in and have access to the financial mainstream. These consumers now can move from living through cash to having access to the financial mainstream that they have not otherwise had access to.

I think it is true that the innovation of reloadable prepaid and the industry generally has certainly helped and provided millions of Americans access to a more secure method of payment and access to the financial mainstream that, before the advent of reloadable prepaid, was not available for them.

Many consumer advocates have complained about high fees and prepaid debit cards. How do you respond to that? Do you think the prepaid cards necessarily are ever going to get to a place where consumer advocates are feeling like people are getting a good deal or that it is a fair product?

I think the important thing is to provide choice for the consumer to choose, but to make sure that the consumer is clear on what the products are including and the pricing elements of it. Then, ultimately let the consumer make an informed choice as to which product makes the best sense for them.

It might be a reloadable prepaid product. It might be a checking account. For some, they may just continue to live through cash for both rational and emotional reasons. I think the important thing is to make sure that the consumer is informed and that they understand what the features and functions are, what are the particular things that they get with this particular product. Then, let the consumer choose which product makes the most sense for them.

The CFPB has recently started looking into regulating prepaid cards a little more closely. What would you like to see the CFPB do? What do you think stands to be accomplished there?

First and foremost, we applaud what the CFPB is doing in terms of their approach as it relates to the rulemaking process that they have initiated.

They're engaging the industry to really understand how these reloadable prepaid products are being used, who is using them, and why are they using them and to capture the facts so that as they think about the appropriate consumer protections for reloadable prepaid products that they are doing it in the right way to again make sure that consumers are appropriately protected.

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