The rapid growth of the prepaid card market provides instructive lessons on the changing dynamic of consumer behaviour patterns, and illustrates how banks can best innovate and adapt to this fluid landscape.

The 2008 recession initiated a number of significant shifts in consumer habits – from a migration away from premium brands to changing shopping frequencies.  Several industries have faced challenges adapting to this fluid landscape and, with the additionally rapid pace of disruptive technology, many of the purchase and payment patterns of 2009 seem unrecognisable today.

Out of this changing mosaic, one particular development is perhaps worth greater scrutiny. The prepaid payment card market, once confined to servicing a narrow underbanked niche segment, has expanded dramatically over the past five years. In the UK the number of prepaid programmes has risen by over 380% since the start of the recession. Today, over a third of UK adults regularly use prepaid cards as the payment mechanism of choice for goods and services. This growth trend is not confined to the UK - figures from Nilson reveal that prepaid card purchases in the US grew from $74bn in 2009 to $220bn last year, a rise of 200% and by far the fastest growing payment mechanism, now representing nearly 5% of all purchases.

Move to the Mainstream

With over 35% of the UK population now using prepaid, the wide adoption clearly goes well beyond the 9 million adults that the UK Government has identified as falling outside the traditional banking system. This broader demographic take-up has been mirrored in the US, where prepaid card use has grown to over 23% of the population, rising to over 45% of ‘millennials’ aged between 18-32.

So what has driven this rapid expansion? We can identify a number of disparate pull and push factors. Prepaid travel cards have provided convenient protection against currency fluctuations and loss (if a card is lost, it can be cancelled, replaced and the funds restored); consumers have also increasingly relied upon prepaid for security in online and mobile purchases, and parents have adopted prepaid to provide spend control for students and young adults.

At a corporate level, many businesses have also seen the benefits of utilising prepaid payroll cards, digitising the last mile of payment for an increasingly fluid and mobile workforce. High street brands, such as Starbucks, have seen closed-loop prepaid as an effective loyalty generating device, with 60% of surveyed merchants indicating building customer loyalty through prepaid is a priority over the next 24 months.

Expanding out from private sector usage, the public sector is taking advantage of prepaid cards as an alternate way to manage and distribute benefit payments. MasterCard estimates that £10bn of government benefits will be issued through prepaid cards in the UK and Ireland by 2017. The expansion of charges for traditionally free bank account services has also pushed consumer adoption of prepaid as a cost-efficient alternative.

The total impact of these habit changes on the banking market is perhaps much more significant than the sum of its parts – prepaid is no longer confined to a low-income and underbanked demographic; it has evolved into an accepted mainstream mechanism, providing convenient security and budget control across many sectors. Market growth has been predominantly with fully banked individuals of average to above-average incomes. A recent study by TD Bank revealed that 21% of prepaid card users have an income in excess of £66,000.

So is the growing adoption of prepaid a sustainable trend? The global market is forecast to expand by an increasing multiple over the next five years, reaching $2.4 trillion in value by 2020[1]. To provide some context, total combined UK card payments last year stood at £802 billion (or $1.2 trillion - $4.91 trillion for the US market). So prepaid is expected to represent an increasingly significant share of overall payments.

Growth Pains

The expansion of the prepaid market has not been without its challenges however. Despite increasing adoption rates, wider penetration of prepaid cards have been constrained by the frictions in moving funds into and out of prepaid accounts, with no access to the mainstream ACH services of a conventional bank account. With new entrants joining the market and expansion among broader demographics demanding greater simplicity of use, security, and immediacy of payment, the pressures to improve competiveness and convenience have been on the increase.

For Agency Banks and prepaid programme providers dependent upon legacy infrastructures, service innovation was often seen as a low priority and costly endeavour, acting as a drag on growth.

Bridging the Gap

The solution? The increasing collaboration and partnership between banks and technology companies has provided a win-win for both parties – with the consumer being the ultimate beneficiary. With some sophisticated innovation, existing payment gateways and digital banking assets are bridging the ‘service gap’ between traditional ACH functionality and prepaid card programmes. With banking domain expertise on one side, and technology knowhow on the other, cost-efficient collaborative solutions today provide full ‘banking-lite’ solutions to this growth market, without requiring significant investment from banks in new infrastructure capabilities.

With bank-grade sort codes and account numbers, a wide range of additional ACH payment services have now been introduced to the prepaid market, including 24x7 Faster Payments, Bacs compliant Direct Debits and international payments. This additional functionality promises to further enhance the use case applicability and attractiveness of prepaid solutions, helping to generate increased customer loyalty and improve retention for card providers.

Collaboration = Innovation + Agility

How the prepaid market is tackling these ‘growth pains’ has a much broader relevance and is perhaps illustrative of more significant lessons for the whole banking sector when it comes to innovation and exceeding customer expectations. In working in alliance with financial technology partners, Agency Banks and prepaid card providers remain focused upon their core competence, yet are able to overcome perceived limitations to provide speedy, effective, and – for the end-user – dramatically improved functionality and service. All achieved without the need to overhaul and replace existing infrastructures or systems.

Payments UK and the FCA Payment Systems Regulator provide the banking sector with a regulatory focus to improving payment infrastructures and deliver greater transparency for customers. Tasked with maintaining embedded legacy infrastructures, Banks have in the past perhaps seen innovation as costly and a high risk to existing systems.

Facing what at times may have seemed like a tsunami of challenges over recent years, the recognition within the banking sector that technical and service innovations can most effectively be provided through strategic and intelligent external partnerships has required a culture change within many organisations. Facing a changing regulator landscape, rapid technology developments, an unprecedented velocity of changing consumer behaviour patterns, and a plethora of new entrants, the banks that recognise their core strengths and collaborate with proven external innovators, will be the ones agile and responsive enough to capture the new opportunities when they arise.

Banks, with their unrivalled domain expertise, are well placed to leverage the more nimble and innovative solutions experiences of a strong and vibrant Fintech sector – a sector  that is being viewed as agents of disruption, but also one that has a strong interest in partnering with the banking expertise of incumbents to provide compelling solutions for today’s demanding consumer market. The enhancement of the prepaid card proposition is just one example of such a successful partnership. Let’s hope there will be many more to come.