You are here

Seven Things that Matter about Pew's Prepaid Report

Adam R.'s picture

Posted February 11, 2014

With the formal publication of their research on prepaid cards, the Pew Charitable Trust's policy staff has reset how people will debate the issues surrounding these cards.

Their findings in "Why Americans Use Prepaid Cards" come from telephone surveys that Pew conducted over the course of last year. They presented

a panel of questions to 613 people who each reported that they had used a prepaid card in the prior month. With that definition, Pew captured a fairly heterogeneous mix of use patterns. That might seem like a plan to sample both apples and oranges, but in the context of prepaid it makes a lot of sense. There truly is no unitary prepaid card user profile. Indeed, the awareness of that among industry is more than evident by the endless variety of functionality and price paradigms. 

1) Most are at least somewhat banked. More than half of all active prepaid card users currently have a checking account and almost nine in ten have had one at some point in their lives. "Even though prepaid cards are often discussed as a substitute for a bank account, a majority of prepaid card users have one." One of the things that critics of prepaid cards often say is that the product presages a new line in the sand between financial haves and have-nots. Generally, that is used to put blame on mainstream banks for abandoning consumers. I would disagree with anyone that follows up that opinion by calling out the prepaid industry. I believe that no one should blame prepaid card providers for decisions made by retail banks. But in the context of this finding, the aforementioned critique is undermined in the first place. Pew has reset the conversation. 

2) People use prepaid cards for a variety of reasons, but chief among them is that they want to have a barrier between their spending and overdraft fees. NetSpend defends overdraft, often by pillorying those that would seek to eliminate overdraft on prepaid. But this finding shows that at least to some degree, overdraft critics are not out of touch. Recently I have heard rumblings that other cards want to create new iterations of overdraft. Pew's findings should unsettle decision-makers that hope to do so. In fact, it would be interesting if the provision of overdraft on a card that currently does not have them prior actually put some brakes on their sales. Pew found that 1 in 3 prepaid card users closed their checking account solely because they suffered charges for overdraft or for NSF. Twenty-one percent (there was some overlap with the account closers) had their accounts closed by their bank or credit union. How will they react when their prepaid card pitches them to sign up for it? In a related vein, more than half do not want to have a credit card.

3) Many users are underbanked and on average they have lower incomes. One in five had taken out a payday loan and almost two in five had used a check cashing service. At least for the latter, a prepaid card is a bargain. Increasingly, most people can remote deposit a paper check. Industry-funded research touts that users of prepaid cards make as much as $75,000 per year. That may be true. A segment may make that much. But on the whole, most make far less. Pew found that they averaged approximately $30,000 in income. That is the salary of a second-year school teacher in North Carolina (but less than an experienced cafeteria worker) and close to the wages earned by a CNA. About those remote deposits: while BlueBird will clear a remote deposit in 24 hours, I have had to wait more than two weeks for GoBank to do it. Remote deposit is only going to be valuable when people can get their money quickly.

4) They like their cards: Again, this undermines some of the critiques of the cards. Almost four in five users said that their experience exceeded or met their expectations. About seven in ten said that a prepaid card was either better or equivalent to a checking account.

5) They do want to save money. Here is the catch, unfortunately: they don't save money. One PM executive told me that his savers generally put away less than $80 per year. Moreover, these were the right sample of aspirationals. His numbers captured only the ones that actually sought to save. On the other hand, they still don't want to go into negative territory. See above about overdraft and credit cards. One excellent expression of that is Pew's finding that two-thirds want a card with either a linked savings account or a savings sub-account.

6) Some of the reasons for having a prepaid card are discrete and often fairly singular: they want to pay for Netflix, they want to avoid carrying cash, I want to load my tax refund....Others use them as pockets for specific purposes or in order to guarantee that a set amount remains available for a set-aside spend. Are these significant game-changers to our understanding? Perhaps not, but still they are worth remembering.

7) Some still want credit. I hate to hear this and so will many other people, but more than one in three said that they would like a linked line of credit to their prepaid card. A minority (27 percent) said that they would like overdraft.  Interestingly, the price of the overdraft mattered. When the overdraft fee was $15 - more than NetSpend's - 32 percent thought they would be amenable to the service. Consumers are clear about the alternative. Most said that they would be OK with having a purchase declined.

There is a lot more of significance in Pew's prepaid research. There are several more reports appended to their main document.