Power of Prepaid: Consumer Research Reveals Rising Prepaid Usage, More Work to Do
By Loraine DeBonis, Editor-in-Chief
On the final day of the NBPCA’s Power of Prepaid conference in Washington, D.C., last month, experts shared results from two recent studies that shed light on how U.S. consumers conduct their financial lives and where prepaid providers can fill a need. While the first shows encouraging signs about prepaid adoption and the benefits cardholders identify with their cards, the second reveals surprisingly low usage among minority populations, including Latinos, African- and Asian-Americans, suggesting that the industry has some work to do in further penetrating these demographic markets.
“Prepaid cards are not the fringe financial service they may have been [considered] in the past,” said Kathy Steinberg, senior research manager, Harris Interactive, which conducted the 2013 Financial Literacy Study for the National Foundation for Credit Counseling (NFCC) and the NBPCA. “The No. 1 reason for using a prepaid debit card was convenience,” said Steinberg. Only 24 percent of U.S. adults who typically use prepaid debit cards to pay for everyday transactions said they rely on prepaid debit cards because they lack other payment/banking options, according to the study, which is based on a nationally representative online survey conducted in March 2013 among 2,037 U.S. adults ages 18 and older, including 91 prepaid debit card users.
2013 Consumer Financial Literacy Survey conducted by Harris Interactive for the NBPCA and National Foundation for Credit Counseling
“What we found is that 8 percent of U.S. adults—or nearly 19 million people—have used a prepaid card in the past 12 months, and 6 percent of U.S. adults—about 14 million people—say they typically use prepaid cards to pay for everyday transactions,” Steinberg noted. Eighty-one percent of prepaid card users say they feel more in control of their money with a prepaid debit card than a debit card connected to a checking account at a bank or credit union. Additionally, nearly half (46 percent) say prepaid cards are safer than carrying cash, and 40 percent cite the inability to overspend as a reason why they use prepaid debit cards to pay for everyday transactions. Despite liking the fact that prepaid doesn’t allow them to overspend, 71 percent of prepaid debit card users strongly agree (41 percent) or somewhat agree (30 percent) that they wish their prepaid card offered the option to enroll in overdraft protection.
The overdraft finding, in particular, struck some attendees as unusual since being able to control spending is what a lot of consumers say they like most about prepaid. Steinberg noted that Harris would continue to track user attitudes toward overdraft in future surveys for the NBPCA. Many consumer advocates have been vocal opponents of overdraft protection and other forms of short-term credit associated with prepaid cards. Last week, the National Consumer Law Center issued a brief calling for the Consumer Financial Protection Bureau to keep prepaid and credit products separate.
“Offering overdraft protection with prepaid cards could be a good idea,” noted Steinberg, “but it would have to be managed delicately,” she said. “You need to be clear in the fine print about what’s allowed and not allowed and the implications of choosing to enroll.”
“We think having more affordable, accessible credit products is always good,” added Enrique Lopezlira, senior policy advisor, economic policy, for the National Council of La Raza, (NCLR), a nonprofit advocacy group for Hispanics. “In general, I would not think having more options for access to affordable credit is a bad thing.”
Must Work Harder to Reach Minorities
Lopezlira shared preliminary findings from the second study, which was conducted by the Alliance for Stabilizing Our Communities (ASOC), a partnership between NCLR, National Urban League and the National Coalition for Asian Pacific American Community Development. The results suggest prepaid providers have some work to do in gaining further market share among these consumer segments. Only 4 percent of the more than 5,000 consumers surveyed use prepaid cards for financial transactions. Cash was the No. 1 tool cited at 69 percent, followed by debit card (52 percent), credit card (35 percent), checks (9 percent), EBT/public benefit cards (8 percent), gift cards (7 percent) and other (1 percent). (See table below.) Prepaid, which was not defined, scored even lower as a tool for paying bills (at 3 percent), with cash (45 percent) and debit card (39 percent) as the most popular choices.
“We wanted to find out how our clients are transacting in their daily lives,” said NCLR’s Lopezlira. “We wanted to look at the impact of technology, which service providers they are using, whether they are aware of their own credit [score] and the cultural drivers that are influencing how they manage their money,” he said.
2013 Financial Services Research Project. Partnership between NCLR, National Urban League and National Coalition for Asian Pacific American Community Development
Although the nonprofit organizations behind the survey haven’t done in-depth analysis of the results yet—the full study will be released in the fall—Lopezlira shared some key factors influencing where these consumers conduct financial transactions. The top two factors are related to convenience: distance (48 percent) and number of branches/ATMs (34 percent), while fees and requirements took the No. 3 spot at 31 percent.
Lopezlira noted that even if a bank provides a lower fee for a particular service, if the branch is too far away, the price is ultimately higher for consumers to use that service. He also explained that many of those surveyed get paid in cash, so ways of depositing in person was a big factor in determining where respondents conduct financial transactions.
One way to increase prepaid adoption, Steinberg suggested, is increasing current cardholders’ willingness to recommend the card to friends and family. “One of the things we’ve been finding in the annual Financial Literacy Survey that we’ve been conducting for the NFCC since 2009, is that parents are the No. 1 source for learning about personal finance. … Issuers have a unique role to play and may be able to educate consumers through excellent customer service, and those satisfied customers will then educate their friends and family,” she said.
Lopezlira also recommended advertising in Spanish to reach the Hispanic community. “Doing some outreach in the native language is very helpful,” he said. “The Hispanic community, and to an extent the black community, were hurt by mortgage products they didn’t fully understand. Any new product in the financial sector, not just prepaid, is going to need to help consumers get over their skepticism and fear of getting burned again,” he said. “Make products that are transparent and easy to understand—safe products to help consumers in their daily financial lives.”
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