Prepaid Cards Are Fast-Living, Hard-to-Peg Animals

Nomadic. Short, but thrilling. Mysterious.

That would be the nature-special version of the life of the prepaid card, as adapted from a more sober Federal Reserve Bank of Philadelphia report issued Tuesday.

The Philadelphia Fed analyzed over 280 million prepaid card transactions on 3 million cards issued by Meta Payment Systems, a division of Meta Financial Group (CASH), collecting data on how the cards are used, at what cost and for what duration.

Spending on prepaid cards is short-lived and incredibly varied, and there are a lot of unanswered questions about the behavior of the people who use them, the report concludes.

"The thing that struck us almost immediately when we started analyzing the data was the very significant variation in the way the cards are used," Robert Hunt, vice president and director of the payment cards center at the Philadelphia Fed and one of the report's authors, said in an interview.

Stephanie M. Wilshusen and James van Opstal of the Philadelphia Fed and Rachel Schneider of the Center for Financial Services Innovation co-authored the report, "Consumers' Use of Prepaid Cards: A Transaction-Based Analysis."

It analyzes card use across five types of cards: payroll cards, cards linked with flexible spending accounts, and general purpose reloadable (GPR) cards offered online, in retail stores and at one bank. Consumer use data are available starting in 2004, but the bulk of the transactions occurred in 2009 and 2010.

Card use varies widely even within card types, Hunt says For example, 37.9% of consumers spent less than $50 on a retail GPR card over its active life span, while 18.1% of consumers spent more than $1,000.

Retail GPR cards, the kind available in pharmacies and convenience stores, represented 15% of the cards in the sample and had the shortest life span of the card types, with a median use of just 63 days. Because researchers were limited to tracking anonymous card data, they are not able to say what causes consumers to stop using a card.

"The interesting thing is, why do they put it down? Do they go and get another card? Is it that the card served its purpose? Is it that a consumer found a card they liked better or switched into another financial product they liked better?" asks Hunt.

Such questions are increasingly critical for prepaid issuers to answer, particularly as many, including some banks and other providers like NetSpend (NTSP) and Green Dot (GDOT), continue to advertise the cards as an alternative to checking accounts.

As the report notes, even if the cards function like checking accounts, the revenue stream remains quite different.

"Prepaid cards offer much of the functionality of checking accounts, but that does not mean the underlying economics are the same. A typical prepaid card in the data is active for six months or less, a small fraction of the longevity seen with consumer checking accounts," the report says. "As a result, account- acquisition strategy and the recovery of fixed and variable costs are likely different than for checking accounts."

But the report also finds that establishing direct deposit is one avenue for extending a card's life and dramatically increasing revenue.

Though just 5% of retail GPR cards were reloaded at regularly scheduled intervals, those with direct deposit were used for a median of 382 days, compared with 59 days for those without direct deposit. The median revenue earned over the life of the retail GPR card rose to $152.80 with direct deposit, almost 13 times greater than for cards without direct deposit.

And while direct deposit dramatically increases how long the card is used and the accompanying revenue for the issuer, those figures are still not on par with data for checking accounts, according to the report.

Cards with direct deposit "are clearly important for the consumers who obtain them, and they are almost certainly the most profitable accounts in these programs," the report says.

"Yet, outside of the payroll programs, they represent only a small proportion of active GPR cards. And while these cards are used much longer than prepaid cards in general, their life span remains only about one-tenth that of the median consumer checking account," it adds.

The report also examines consumer use of bank-issued GPR cards, a small but growing segment of the market. Banks including JPMorgan Chase (JPM), U.S. Bancorp (USB) and Regions Financial (RF) now offer GPR cards to existing bank customers and those who might not qualify for a checking account.

Synovus Financial (SNV), of Columbus, Ga., joined rivals to offer its own prepaid program on Tuesday.

"We are excited to bring this new payment option to our customers because it gives them a prepaid card they can use for a wide variety of purposes," R. Dallis Copeland Jr., chief banking officer of Synovus, said in a press release.

Researchers at the Philadelphia Fed examined customer use of cards from one unnamed bank, which represented less than 1% of cards in the data sample. The active life of the bank-issued cards was 189 days at the median, though the cards were also more likely to go through periods when they weren't being used.

Researchers say that they have just scratched the surface of understanding how and why consumers are using prepaid cards, emphasizing in the report that many questions remain unanswered.

"We sort of lifted the hood up a little bit, where we see this diversity of usage patterns that just raises dozens of more questions we'd like to get at," says Hunt, including why people stop using a particular card and how consumers who have multiple cards might be using them.

The researchers say they want a better grasp of how prepaid card use is affected by the larger economy.

"Seeing how people's use of transactional products evolves with the state of the economy … goes back to economic research from World War II. People used to study cash, and then checking-account behavior, and now it may be time to think about prepaid in the same way," Hunt says.