Can banks take advantage of the prepaid card boom?

Andrew Harrer/Bloomberg

As prepaid cards continue to gain traction, enterprising banks have several opportunities to grab market share.

Prepaid cards are poised to exceed $1 trillion in global transaction value this year, according to the Worldpay 2024 global payments report. Success of these cards turns on their many use cases beyond just serving underbanked or unbanked individuals. Prepaid cards today are used for gift cards, reloadable stored value cards, payroll, health care cards, government benefits and more. 

"A major driver of growth is versatility and prepaid card processors keep finding ways to make them relevant to more users," said Aaron McPherson, principal at AFM Consulting Partners in Boston.

Between 2018 and 2023, U.S. transaction values have grown 10% per year, according to data from McKinsey & Co. That's expected to moderate, but continue to grow at a healthy clip of 5% to 7% over the next five years, McKinsey data show.

One option for banks looking to grab a piece of this pie is to court corporate customers looking to offer earned wage access through a prepaid card, an option that's of interest to many employees, McPherson said. This could be especially relevant if the Consumer Financial Protection Bureau prevails and paycheck advance products are deemed consumer loans subject to the Truth in Lending Act. This would raise the cost for companies that aren't already complying, leveling the playing field and making it easier for banks to compete since they are already adhering to these rules, McPherson said. 

Payroll cards have been growing in popularity and not just for the purpose of early wage access. Though many employers find direct deposit the most efficient and cost-effective, some employees prefer payroll cards. They can be used, for instance, to set aside a certain portion of pay as a budgeting tool, according to commonly asked questions on the website of payroll provider Paychex. Payroll cards can also be issued to family members such as an employee's college-age children as an efficient way to shift funds, Paychex said. 

Regulation and compliance

Earned wage access providers rebuke CFPB, plan to sue over proposal

July 18, 2024 4:32 PM

Banks may also be able to grab market share by offering prepaid cards for disbursements, said Philip Bruno, partner at McKinsey who co-leads the firm's global payments practice. Businesses like airlines, for example, might offer these cards to customers who opt to give up their seat on a crowded flight. More banks might decide there's an opportunity to offer these prepaid cards for business customers or government entities, he said.

There's also an opportunity for banks to work with companies that employ gig workers, which is a growing market representing some 38% of the U.S. workforce, according to a 2023 report by the Upwork Research Institute.

Instead of getting a paycheck once or twice a month, prepaid cards can be reloaded on an as- worked basis. "It provides flexibility for the person being paid," said Sean Viergutz, partner at PwC. This method has some advantages over physical checks since the gig worker doesn't have to deposit anything and some of these cards can be loaded in a digital wallet. 

Banks could also decide to make more of a push to market prepaid cards to parents of teens, Viergutz said. With the rise of online gaming, it could be particularly attractive to parents to use reloadable prepaid cards for spending control purposes, he said. 

Health care spending cards are another area where banks could play more of a role. This could be especially compelling amid the rise in popularity of health-savings accounts, which offer multiple tax advantages and investment options. The health care card segment represents roughly 11% of the total U.S. prepaid market in terms of transaction value, said Laura Heaphy, partner at McKinsey and a leader within the firm's banking practice.

There are, of course, challenges for banks that want to establish or boost their presence in the prepaid market. They are far less profitable than credit and debit cards and branches aren't the obvious place to sell the types of gift cards that are popular in retail outlets, said Eric Grover, principal at Intrepid Ventures, a Minden, Nev.-based corporate development and strategy consultancy.

Large banks, in particular, have had a rough go in past attempts to crack the prepaid market, Grover said, pointing to efforts like Chase's Visa-branded Liquid card that was launched in 2012 and shuttered a few years later.

"Prepaid is big and growing and there are all sorts of niches, but I would be surprised if any of the retail colossi banks developed a sizable prepaid business," Grover said.

That said, he sees ample opportunities within the prepaid segment for medium-size and smaller banks. "There are enough of them out there. If there's an opportunity, the chances that somebody takes a run at it are pretty good."

If a bank is considering more prepaid capabilities, it helps to consider where it's already doing business, McPherson said. "As much as possible you want to have synergies with other parts of the business. You really have to treat it like an investment. It's not something you can just bolt on."