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Analysis: Prepaid Solutions Pushed by the Durbin Amendment

  • An American consulting company explains how the revision of US card business models can stimulate the offer of prepaid card accounts by the banks.
  • In fact, the caps imposed in 2010 on penalties due to payment incidents and on debit interchange have a direct impact on pricing. Issuers, deprived from these two significant sources of revenue, are prompted to drop free of charge current accounts and less profitable customers. Free accounts will then be the privilege of more wealthy customers.
  • The Durbin Amendment excludes prepaid cards from interchange caps. It makes it possible for banks to compensate the risks of revenue losses by proposing more prepaid cards. Until now, prepaid cards have been distributed and managed mainly by public administrations (tax offices, social benefits, etc.) and merchants (even if banks are co-issuers).
  • If banks manage prepaid cards themselves, they may offer attached services very similar to those of a traditional card account, but less expensive, as prepaid cards still generate interchange. Return on experience is expected from the test performed by the Federal Treasury Department. This administration will follow the reloading rates on the first prepaid accounts for federal tax refund. In addition, the Treasury plans to impose prepaid funds guarantee similar to the one required for traditional deposit account.
  • The dematerialisation of public benefits is under way in the United States, on both Federal and State levels (with MasterCard and Visa mainly –see December 2010 and January 2011 watches). Prepaid cards had a good chance to escape the interchange reform (See news above, on the decrease of banks’ revenue around the world). Interchange revenue indeed ensures viable prepaid programs for the two co-issuers (State and partner bank). On top of that, the State also saves on the cost of paper documents (checks, post mail, processing).
  • Issuing reloadable prepaid cards can be compared to creating permanent current accounts. A new population, with no credit history or a poor one, can then benefit from banking services. Co-issuing banks will only have to rely on this customer basis to add in functionalities to the existing prepaid account. Reasonable pricing should provide them with new revenues, without having to manage usually associated risks.
See “Players' Strategies” section in this issue, as well as January 2011 and December 2010 Watches