Finovate Blog

Prepaid cards have been a bit of an afterthought for most banks and card issuers. Sure, they make the occasional appearance on banking sites in December as holiday gifts. But mainstream they are not.

But that was before traditional debit cards suddenly became unprofitable (note 1) thanks to the upcoming U.S. debit interchange price controls (see Durbin rant, note 2) combined with with last year’s reining in of overdraft fees.

It’s pretty easy to predict what happens next. Banks will do what any business would do when offering a popular, yet unprofitable product. Raise prices with new monthly/annual/transaction fees. And for customers that are fee adverse, banks will offer two alternatives:

• Credit cards for the credit worthy
• Prepaid cards for everyone else

Bottom line: Prepaid bankcards are about to become much more popular. Here’s why:

• More interchange revenue to the issuer
• Easier to sell online with fewer risk management and compliance issues
• Great entry product for teens and pre-teens
• Porting the prepaid “card” into mobile phones and other contactless form factors
• Valuable service for underbanked segments
• More utility: can be gifted, used for traveling, used to deliver allowance, and so on

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Notes: 

1. The price controls apply only to banks of $10 billion or more.
2. I am really disappointed in the Durbin interchange price controls. I was sure Congress would delay the matter, but unfortunately I was wrong. My feeling is that price controls are an absolute last resort when there is not enough competition to create a free market price. I don’t think that was the case with debit interchange.

Long-term, the whole exercise is a zero-sum game for the businesses, merchants and banks, who will adjust their prices to cover costs and ensure a normal profit. The only likely loser is the consumer who will be deprived of innovations killed off by the dramatic shift in interchange.

Here’s my scorecard of the post-Durbin winners and losers: 

Short-term winners:

• Merchants, obviously
• Prepaid card issuers (which are not covered by Durbin price controls)
• Consultants, lawyers, marketers and professional services firms involved in drafting and communicating new bank prices and policies 
• Financial institutions exempted from Durbin (under $10 billion) could pick up share and/or be able to gain fee revenue by matching the large bank price increases

Short-term losers:

• Large banks will see revenue declines until they can get new fees introduced and move transactions to credit/prepaid
• Consumers who will see fee increases from banks faster than they’ll see price decreases from merchants
• Payment startups and business consortiums whose business model was predicated on disrupting debit

Long-term unchanged:

• Merchants who will eventually pass on the interchange savings due to price competition
• Banks who will make up the revenue loss with new fees and/or by channeling transactions to higher-margin products
• Consumers who will pay more in bank fees but less for goods and services, an overall wash