According to the latest payments data provided by the Federal Reserve, general purpose prepaid card payments have been the fastest-growing noncash payment method in the U.S. for the last several years. Between 2009 and 2012, the number of prepaid card transactions grew by an annual rate of 33.5%, far outstripping similar rates for other types of noncash payment. The total number of prepaid card transactions reached 3.1 billion in 2012, 1.8 billion more than 2009. Private-label prepaid cards also posted strong growth, up 9.7% annually over the same period.
The growing popularity of prepaid cards is, in part, a consequence of the Durbin Amendment, which reduced the amount of interchange revenue earned by banks for debit card transactions. To help offset the revenue decline, many banks reinstituted fees on checking accounts and cancelled associated reward programs. The checking fees are burdensome to low-balance account holders, and many have closed accounts and looked for alternative banking products.
Prepaid cards have become a popular substitute for checking accounts and some banks have introduced products to target the large "under-banked" population. In
Still, a large portion of prepaid cards continue to charge fees (e.g. monthly fees, ATM fees) and some come with expiration dates, which has garnered the attention of the
JP Morgan recently announced its intention to sell its prepaid card business. This is mainly due to higher perceived risk, but also because relationships with consumers are not direct and therefore harder to manage. It is possible that increased regulatory oversight could prompt more banks to rethink their strategy on prepaid cards and potentially exit the business. In this scenario, Fitch believes there are benefits for nonbank players such as American Express, Green Dot and NetSpend (a wholly owned subsidiary of
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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Source: Fitch Ratings
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