Even as innovations like digital wallets usher in a new era for the payments industry, an older form of payment seems to be growing in popularity: prepaid cards, a category that includes gift cards, payroll cards, and cards that consumers can reload with more funds once the initial funds on the card are spent.

Transactions from these prepaid cards — which, unlike debit cards, are not attached to a bank account — are expected to surpass $1 trillion worldwide for the first time this year, according to a recent report from the payments company Worldpay. The company's survey looked at 40 markets around the world, including the United States.

If that prediction holds, it would represent a significant increase over 2023, when Worldplay said there were $906 billion worth of prepaid card transactions. The company said there were $836 billion worth of prepaid card transactions in 2022.

The company’s report doesn’t speculate on the underlying reasons for the increase, but says “prepaid cards offer utility to merchants, businesses, fintechs, banks, and card networks.”

Who uses prepaid cards?

Researchers who study Americans’ spending habits say the increase is likely driven by a rise in the use of payroll cards and other reloadable prepaid cards.

Payroll cards are appealing to employers and useful for migrant workers who leave their home country for temporary jobs, and don’t have a bank account in the country they’re working in, Worldpay’s report said.

The hospitality and construction industries, which employ large numbers of migrants and low-income workers, frequently issue payroll cards to their employees, financial researchers like Kimberly Palmer, a personal finance expert at NerdWallet, told Industry Dive.

Payroll cards — a common type of prepaid card — are appealing to employers because setting up direct deposit takes time and money, and paper checks can be lost or stolen, said Adam Rust, director of financial services for the Consumer Federation of America.

“If you get a lot of people who are being paid in checks or in cash, that is suboptimal for the employers,” he said.

About 6% of Americans didn’t have bank accounts in 2023, according to an American Bankers Association survey, compared to 27% worldwide.

Direct deposit is not an option for the unbanked, and prepaid cards such as payroll cards offer them a safe place to put their money.

While debit cards are attached to a bank account, prepaid cards are not. The user doesn’t need a savings or checking account.

Low-income workers and migrants, who are less likely to have bank accounts, make up the bulk of prepaid card users, Palmer said. A Federal Reserve survey from 2023 found that 17% of adults with incomes below $25,000 do not have bank accounts, compared with 6% of the general population.

“It can be more convenient (for the unbanked) and that's why we're seeing them being used,” she said.

What are the advantages of prepaid cards?

Some people don’t have enough money to maintain a free checking or savings account, or don’t trust banks, said Brian Gilmore, vice president of Commonwealth, a Cambridge, Massachusetts nonprofit dedicated to building financial security for poor and vulnerable people.

"There is a segment of the working population who sees these as a way to get to more checking and banking services outside" the traditional financial system, he said.

A prepaid card is also potentially more secure than carrying all of your money in cash or keeping it in your house, noted Lauren Saunders, associate director of the National Consumer Law Center. Cash carried on your person is more easily lost or stolen, she said. “If you have access to a network branded card, that’s safer,” Saunders said.

However, Yvette Bohanan, a partner at the payments research firm Glenbrook Partners, said the usage pattern for prepaid debit cards and payroll cards show that some users don't keep the money on their cards.

"People get the payroll card, then they immediately go to the ATM and they take out the cash," she said. "They don't actually use it for spending."

What are the drawbacks?

The downside of prepaid cards for users are fees and a lack of control. When you put money in a bank account, you can withdraw that money any time, in many cases for free, from a bank teller or an ATM.

Some earned wage access companies give employees an advance on their paycheck by issuing them payroll cards. Although some earned wage access providers have been criticized for charging excessive fees.

However, Palmer noted that regulators have added protections to prepaid card users in recent years.

“There are all sorts of requirements and regulations when it comes to paying employees in this way,” Palmer said. “The specific regulations vary by state,” but there are federal rules that govern all prepaid card holders in the United States.

Prepaid card holders, for example, must be given at least one opportunity per pay period to withdraw money from the card’s account without a fee, and employers are required to offer workers an alternative, she said.

A major drawback of using prepaid cards is fraud. Scammers may ask targeted victims to put money on a prepaid card and give them the card's serial number, then the crook withdraws all the money from the card and disappears.

“Bad actors are out there who may be more likely to use these prepaid products, and that can lead to people who are using them inappropriately,” Gilmore said.

By Patrick Cooley on July 16, 2024
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