In recent years, banks have managed to alienate customers with high fees and increasingly rigid rules. In response, some US consumers have joined the ranks of the unbanked or underbanked - those who choose not to have a relationship with a local bank or use community financial services to supplement their bank accounts.
Once considered an anomaly, not having a bank account is becoming fairly common among consumers. In fact, one government report found that nearly 25 percent of Americans are considered unbanked.
The unbanked and underbanked are some of the biggest users of prepaid debit cards; however, millions of other Americans love these cards as well. In seeking an alternative to impersonal treatment, inconvenient hours, and ever-increasing bank fees, prepaid cards have become a popular alternative. The Retail Banking Research’s (RBR) Global Payment Cards Data and Forecasts to 2021 reported that credit cards have seen a steady decline in recent years, while debit cards in general make up about 70 percent of payment cards globally.
Undoubtedly a part of this growth, prepaid debit cards continue to gain momentum as a preferred payment method. Fitch Ratings reported that this trend is partially due to the popularity of prepaid cards, the use of which accelerated following the last major financial recession in the US.
In the year 2012 alone, there were 3.1 billion prepaid debit card transactions, and the number of these transactions increased by 33 percent between 2009 and 2012. These numbers greatly surpassed other non-cash forms of payment. Here, we’ll explore why prepaid cards have continued rise in popularity and how they are set to earn the title of the fastest-growing payment method in the US.
Prepaid Cards Are Financial Tools for the Underbanked and Unbanked
According to the World Bank, there are currently 2 billion unbanked individuals worldwide. With such a large number of people without traditional bank accounts, payments still need to be made, and prepaid card issuers have filled a huge void for these consumers. More prepaid card options are not only good for consumers, additional options are also good for business owners who would like to provide a service while simultaneously growing their businesses and minimizing losses.
Banks have taken notice of the decline in account holders - and the associated decline in revenue. As a result, they have added and increased fees on their deposit accounts. For those who frequently keep low balances, maintaining a bank account often becomes more hassle than its worth, and consumers end up closing their accounts in favor of alternatives like prepaid debit cards.
Unbanked and underbanked consumers have the same or similar financial needs as those who have traditional bank accounts - they need a way to receive funds and they need a way to pay for goods and services. Prepaid debit cards allow them to accomplish both tasks, minus the inconvenience of constantly changing fee structures of local and national banks.
Some banks have begun offering products that target these consumers. However, many consumers still obtain their prepaid cards elsewhere, preferring to avoid banks altogether.
Prepaid Cards Are Less Expensive Than Credit Cards
Another reason prepaid debit cards have grown in popularity has to do with the decline in credit card usage. On the consumer end, credit card usage has dropped because Americans are becoming more financially savvy and have come to understand just how crippling credit card debt can be. In 2015 alone, the US had a total credit card debt of over $70 billion. With numbers like these, it’s no wonder consumers are shying away from credit cards and turning to prepaid debit cards.
For many merchants, credit card payments are financially burdensome because of the interchange fees that banks charge to process them. The European Union recognized the problem with these high fees and instituted an interchange fee cap. While this was better for merchants, it also led banks to issue fewer cards to customers since they would no longer be as profitable. Currently, the United States has not instituted a similar cap on interchange fees.
Prepaid cards may be a better choice, both for consumers and merchants, due to the instability in world financial markets. With a prepaid card, there is no risk of overdrawing an account, as is the case for bank accounts. Additionally, there is also no risk of default, as is possible with credit cards.
In addition to being the preferred payment option of customers and retailers, prepaid cards may also be a better way to pay employees. Rather than investing in costly paper checks, employers can avoid the hassle by paying employees via direct deposit to a prepaid card. Employees are able to access their funds more quickly and avoid walking around with large sums of cash after cashing paper checks.
There’s no doubt that prepaid debit cards are set to be a dominant force - one of the preferred payment methods among consumers and merchants alike. From their ease of use to their acceptance by retailers all over the world and online, it’s no wonder consumers are flocking to these cards.
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