Packaged Facts: How the Coronavirus Pandemic Impacts U.S. Prepaid Card Industry

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Jul 23, 2020, 12:19 ET

ROCKVILLE, Md., July 23, 2020 /PRNewswire/ -- For the payments industry, a fundamental consequence of the COVID-19 pandemic is lower consumer and business spending, which naturally affects prepaid card use. However, prepaid purchase volume declines will hit certain industry participants differently, reports market research firm Packaged Facts in the recent study Prepaid Cards in the U.S., 7th Edition.

Packaged Facts finds that:

Issuers, for example, must grapple with lower yields on prepaid card deposit balances, thanks to Federal Reserve interest rate decreases made in response to recessionary pressures.
Fee income in the form of prepaid card reload activity is also affected, not only because of lower spending but also because of almost certain drop off in in-person fund reloads, due to pandemic-driven store closings and stay-at-home orders.
Interchange fee revenue is affected since purchase volume directly correlates to interchange fee generation. Some players may also lose interchange fee incentive income. Green Dot, for example, has noted that interchange fees it earns are tied to a tiered volume pricing structure in which it earns disproportionately less in fees when volume declines.

However, against a likely backdrop of credit tightening and the possibility of higher bars required for traditional bank accounts, prepaid accounts may see an inflow of consumers affected by those trends.

"The effects of the coronavirus pandemic will be much deeper and more widespread than the above trends," says David Sprinkle, research director for Packaged Facts.

While prepaid cards are a subset of debit cards, their use case is different, owing to the type of consumers who use them. Consumers who select prepaid cards as their primary payment instruments (or as one of their main payment instruments) probably use them for both discretionary and non-discretionary spending. Under a recessionary scenario, prepaid cards will see reduced discretionary and non-discretionary spending by these users. The same will likely hold true of younger and more upwardly mobile, digitally inclined prepaid card users, who make up another slice of the prepaid card use space.

The pandemic also places significant roadblocks in the way of general-purpose reloadable prepaid card users' cash preferences. At a time when physical locations are either still closed or opened with limitations, consumers seeking to engage in commerce or pay bills are forced to go online where cash is not an option (and these days who wants to pay with cash, after thinking about how many people have touched it?). For many, cash has likely become a pariah. Either way, the result, for the prepaid card industry, translates to cash-only holdouts giving up and obtaining a card—and likely a prepaid card, since they have eschewed or been turned away by mainstream banking channels—and a movement among generally cash-friendly prepaid card users to use it less and their cards more.

Data helps make the case. Some 46% of general-purpose reloadable prepaid card users agree that they often prefer to pay cash for things they buy, and 25% agree that they always use cash to pay for their bills. Cash payment preferences among general-purpose reloadable prepaid card users correlate very strongly to household income, with the preference diminishing as income increases. This likely correlates to prepaid card holders' unbanked or underbanked status, suggesting that the more economically marginalized card users continue to rely heavily on cash.

Lingering closures in many states translate to reduced foot traffic, which reduces point-of-sale purchases. For any form of payment, this is bad news. The silver lining is that at least some of this reduction must shift to the online realm. The net result as a share of payments and in the context of cash use is less cash, more prepaid cards, and more online prepaid cards. A significant related effect is that this shift towards online purchases puts digital commerce into overdrive and may keep it there. Once consumers adjust to this payment shift, many may find they like things just fine.

This has negative ramifications for the mighty J-hook. While many key prepaid card locations have generally remained open, physical store prepaid card sales have nevertheless taken a hit. As consumers acclimate to changes in alternative acquisition methods, they may be inclined to stick with them, further pressuring in-store sales in the long run.

But it has positive overall ramifications for interchange fee revenue. While overall spending may decline due to the pandemic, the share of purchases made online—when the card is not present—increases, which results in an interchange boost. Here, too, once consumers acclimate to transacting online more than they did before, they may tend to stick with it in the long run, resulting in a higher share of interchange fees.

The federal government's attempts to stabilize the economy have included billions of dollars in cash payments to consumers, some of which was loaded onto prepaid card accounts, providing a short-term boost to program load values.

Effects by card type are likely mixed. Government-administered prepaid card programs are a certain winner, as benefits disbursements flow toward them. Conversely, job losses undoubtedly affect the payroll card space. Any adverse effects of the pandemic on lower-wage workers will weigh disproportionately on the prepaid card programs that serve them. Moving forward, job losses and investment asset declines will correlate to lower reported incomes, which could translate to lower refunds put onto prepaid cards.

About the Report

Prepaid Cards in the U.S., 7th Edition (published June 2020) is now on sale. The report provides insight into significant near-term and longer-term factors shaping this varied and growing card segment.

Media members please contact our Communications Manager Daniel Granderson at [email protected] to request a copy of the report summary. Those interested in purchasing the report may contact Research Specialist Frank Gaines at [email protected] or visit https://www.packagedfacts.com/Prepaid-Cards-Edition-13339154/.

About Packaged Facts

Packaged Facts, a division of MarketResearch.com, publishes market intelligence on a wide range of consumer market topics, including consumer demographics and shopper insights, consumer financial products and services, consumer goods and retailing, and pet products and services. Packaged Facts also offers a full range of custom research services. Reports can be purchased at our company website and are also available through MarketResearch.com.

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SOURCE Packaged Facts