The Federal Reserve Bank of Philadelphia Takes A Closer Look at Prepaid Cards

Recently the Payment Cards Center at the Federal Reserve Bank of Philadelphia and the Center for Financial Services Innovation jointly released a discussion paper on the use of certain open-loop prepaid cards.  Consumers’ Use of Prepaid Cards: A Transaction-Based Analysis analyzes  general purpose reloadable prepaid (GPR) and payroll cards based on more than 280 million transactions on 3 million cards issued by Meta Payment Systems.  According to the Centers, prepaid transactions are growing faster than transactions on debit and credit cards, and open loop cards account for 30% of prepaid cards.

The study reveals a number of trends, some of which may have been expected, including:

• Prepaid products have a relatively short lifecycle.  The cards studied for the paper had a typical lifespan of 6 months.
• Purchases made were fairly modest with some variation. Card use and purchase volume had a U-shaped pattern, illustrating that a sizable share of cardholders used the cards very little and smaller share used the cards intensively.  The median purchase volume for GPR cards distributed via the web and cards distributed via payroll programs, was just under $500. The median purchase volume for GPR cards distributed through retailers. was approximately $120.

The paper also provides data about the importance of direct deposit to the economics of GPR cards, identifies the most significant fees paid by GPR cardholders, and discusses the impact of ATM surcharges on the total share of cardholder costs:

• Prepaid cards in the study with value loaded via direct deposit remained active more than twice as long as prepaid cards without direct deposit loads, accounted for 10 times more purchase and other activity, and resulted in 4 times more issuer revenue.  The transaction activity for prepaid cards with direct deposit was closest in characteristics to a checking account. However, outside of payroll programs such prepaid cards represented a small portion of active GPR cards and their life span did not expand beyond 1/10^th of the median lifespan of a consumer checking account.
• Fees charged to cardholders for PIN purchases at the point of sale and ATM withdrawals accounted for 80% of the number of fees charged. ATM withdrawal fees could account for approximately 25-50% of cardholder fees on a dollar value basis depending on the distribution channel.  ATM fees for GPR cards distributed via the web were slightly more than 25% of value of fees charged and for cards distributed via payroll programs they accounted for approximately 54% of fees charged.   Origination and maintenance fees accounted for majority of cardholder fee revenue for GPR cards distributed via the web or a financial institution.
• ATM surcharges accounted for 15-40% of cardholder costs of using a prepaid card.

No doubt influenced by prepaid cards’ volume of transactions and rate of growth, the Consumer Financial Protection Bureau also is examining these products.  Specifically, the CFPB recently issued an “Advanced Notice of Proposed Rulemaking” addressing GPR cards, which we wrote about here.  As detailed in the ANPRM, the CFPB intends to regulate GPR cards under Regulation E and solicited comments on, among other topics, whether all prepaid cards should be subject to provisions in Regulation E, whether prepaid issuers should be exempt from certain provisions under Regulation E, and whether there were any potential consumer protection issues in connection with disclosure of GPR cardholder fees and costs that should be addressed by regulation.  The ANPRM is no longer open for comment but the submitted comments can be found here.  According to the CFPB semiannual regulatory agenda, this matter will be under consideration until May 2013, so any extension of Regulation E to prepaid cards likely won’t take effect until 2013.