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Prepaid or deposits?

17 December 2007 1 comment

Retired member

If a bank like A & L offers on one hand deposit accounts and on the other hand prepaid accounts - where does the regulator draw the line between the two fundamentally different services?

How does the bank know who holds the prepaid account it the card and account is handed over as a gift to somebody else than the original purscaser? Are the prepaid funds covered by the EU deposit protection order in case of bankrupcy of the institution? And if not, why - if the institution is a bank that takes deposits as well? After all the prepaid accounts contain funds accepted from the public and are to be kept separate from anybody else's funds and are to be paid out on demand to the account holder. In what material sense do prepaid and deposit funds then differ from each other?

Is this the reason for A & L to set up a special company outside the bank for the purpose?

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Comments: (1)

Paul Penrose Head of Research at Finextra

18 December 2007

Jan-Oloff, welcome to the Finextra community. Your comments on the A&L strategy are interesting and perceptive.

We recently received a research note from Celent, which identifies pre-paid cards as a major opportunity for disintermediation in the banking sector, with non-bank competitors tapping the market as a means to provide financial services to the unbanked sector of the population.

"The nontraditional/nonbanks have realized that a bank account can actually be broken down into two major components: one is the actual account, and the other is a wide variety of value-added, potentially fee-based ancillary products/ services, such as debit cards, bill pay, direct deposit, etc. Nontraditional/nonbanks also offer ATM withdrawals, mobile account access, international remittance, savings features, and overdraft protection."

The report, which looks at the US market, concludes that banks have yet to pursue the growth potential of general purpose reloadable cards for the unbanked population, which Celent estimates as an untapped US$192 billion market.

It would indeed seem that the approach adopted by A&L would enable the bank to take an agile approach to this market opportunity while skirting the regulatory constraints - and any negative old-school banking connotations - that might encumber traditional deposit takers.

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