Can prepaid cards drive financial inclusion?
In recent years, there has been significant progress made towards financial inclusion. According to the latest data from the World Bank, more than 1.2 billion adults worldwide have gained access to financial services since 2011, and today 69% have a bank account. However, there is a long way to go, with close to one-third of adults (2 billion) unable to access financial services.
Despite common perceptions, financial inclusion is not just a problem for the developing world –according to the Federal Deposit Insurance Corporation’s (FDIC) latest report, over 6% of US households, or 14.1 million American adults, are unbanked. On top of this, over 18.7% of households, or 38.9 million adults, are underbanked. These figures continue to rise in ‘bank deserts’ – rural communities where access to financial services is non-existent. However, unlike elsewhere in the world, in the US it isn’t just a lack of geographic access that prevents people from utilising banking services, but a lack of incentive – a recent FDIC report stated that almost 50% of unbanked individuals said they don't have an account because they can't meet the minimum balances most banks have established.
While the financially excluded and underserved are often portrayed as homeless, impoverished, immigrants or poorly educated, many work and receive wages. However, their lack of formal financial services means they are unable to pay bills through direct debit, make bank transfers or use ATMs. There is light at the end of the tunnel though, as financial institutions invest in products that can help in the fight against financial exclusion – step forward the prepaid card.
With the rising popularity of prepaid cards, there is an opportunity for financial institutions to both gain financially from this segment and to encourage people to manage their money more responsibly in a symbiotic relationship.
Prepaid cards in the US offer a range of capabilities that closely mimic the advantages of having a bank account. Therefore, they have become a viable alternative for the unbanked and underbanked, allowing cardholders to store money securely and to exercise better control over their money to avoid expensive overdraft charges.
In fact, many prepaid cards only differ from bank cards in that they do not need to be linked to a bank account, and they require no proof of credit history. Not only can they be used to purchases goods and services where debit and credit cards are accepted, including online, the ability to obtain a prepaid card easily form various sources, including bank branches and online, and load funds onto it immediately is a hugely convenient factor.
Many prepaid cards also facilitate access to digital services; allow the receipt of direct deposits including pay checks; and enable bill pay, all without the possibility of allowing the cardholder to get into debt - US prepaid card issuers have realised that the underserved should have access to the same services as everyone else with the same quality of experience.
With 70% of American adults saying they are struggling financially, according to the Financial Health Network the prepaid card’s growing popularity as a financial tool offers an unprecedented opportunity for financial institutions to drive loyalty within their current customer base, instil trust in their future customer base and create new revenue streams - the value in prepaid cards for a financial institution is in the customer acquisition potential that it represents.
With the Consumer Financial Protection Bureau’s Prepaid Card rule, which requires prepaid issuers to disclose fees and other important terms in a consistent industry-wide format, enabling easy comparisons between prepaid programs, it is more important than ever to think about the approach to take. For example, many prepaid products boast little to no monthly fees, load fees or transfer fees, which might be worth considering. While fees are a natural inclination for financial institutions and represent increased revenue, they can ultimately deter the underserved who are often seeking the lowest-cost alternative to a traditional checking account.
Creating a compelling use case
As much attention should be paid to prepaid cardholders as is paid to that of other account holders. The card should therefore offer access to mobile and internet banking services and enable the use of the loyalty and rewards programs and personal financial management (PFM) tools a financial institution offers.
Ensuring the message is clear
Underserved consumers need to be shown the value proposition of having direct access to banking services, and this value needs to shoot other alternative financial services out of the water in terms of the advantages that lie therein. The message needs to demonstrate that prepaid cards are easy to use, safe, affordable, financially viable and, most importantly, that these products were developed to enable consumers to control their spending, avoid debt and eliminate risk of overdraft rather than to trick them out of their money with hidden fees and confusing jargon.
Promoting the products
As with any product launch, the campaign needs to be distributed via multiple channels, including a website, mobile app, in-branch materials and promotion by staff. Social media and advertisements on ATM and kiosk screens are also important ways to reach people who aren’t currently doing business with a financial institution. The message needs to be simple and hit on the main financial issues a prepaid card could solve for an underserved person, such as spending control, electronic bill pay capability, direct deposit and online account access.
With prepaid cards regularly being used to dispense government benefits and as payroll cards, the habit for the underserved to use this card type has already been created - in fact, by 2027, the global market for prepaid cards is projected to reach a staggering $4.1 trillion, with the majority of users expected to be unbanked or underbanked. The foundation for use is already there and, with this large new potential revenue stream, financial institutions need to reassess their stance on the underserved population. The opportunity far outweighs the risk and with this comes a change in perspective: can financial institutions risk not catering to this segment?