The future is prepaid

Irish consumers continue to fall out of love with the credit card. End of June figures released by the Central Bank show that outstanding indebtedness on credit cards fell by 9.1% year-on-year as people elect to pay down balances and save on punitive interest rates.

Since the beginning of 2009 Irish people have steadily paid off their balances but the Central Bank figures show that the rate of decrease in outstandings is accelerating all the time. At the end of June there was some €2.4 billion outstanding on Irish credit cards: this compares with over €3.1 billion at the end of 2008.

This trend has been mirrored in most of the developed economies: a function not just of consumers’ new-found averseness to credit but also to issuers’ reluctance to underwrite customer balances. Regulators have also been active, with countries in South-East Asia leading the way in insisting on minimum income qualifications for credit card applicants as they seek to avoid a disastrous credit boom experienced in that part of the world in the early part of the last decade.

While the credit card continues to be a considerable status symbol in many countries (no to say a highly convenient payment tool) it is increasingly being eclipsed by debit an, more intriguingly, prepaid cards.

Prepaid is taking off globally for a host of reasons apart from the poor perception of credit.

While prepaid has been traditionally associated with individuals lacking the financial credentials to qualify for credit cards, growing budget consciousness has driven up its popularity across all classes. It is proving particularly useful in the youth market where parents might wish to issue spend limits.

Prepaid is also a natural medium for the growing e-commerce market. Because prepaid is not linked with a bank account, users take comfort in the fact that exposure is limited to monies loaded on the card. This contrasts with credit cards and, even more pointedly, debit cards, where the fraudster in theory has recourse to all funds contained in the current account.

For merchants, prepaid opens up a much bigger market as credit card co-brands are limited to those customers with access to credit.

The momentum behind prepaid is also being increased by national governments that are adopting prepaid as a safe medium for state payments.

Prepaid is also emerging as a key weapon in driving financial inclusion. There are some 2.5 billion adults remain outside of mainstream financial services, according to MasterCard. Even in the emerging economies of Eastern Europe, there are some 50-60 percent unbanked. Prepaid has become the answer for banks looking to bring in the unbanked and underbanked into the banking system.

Nowhere has this been see to better effect than with Bluebird, the “alternative to debit and checking accounts” launched last autumn in the U.S. by Walmart in association with American Express. According to Amex, Bluebird "developed for the tens of millions of Americans who are looking for advanced capabilities such as deposits by smartphone and mobile bill pay, fee transparency, and no minimum balance, monthly, annual or overdraft fees."

One thing Bluebird will not be giving, however, is credit. But as consumers continue to pick up the pieces from the financial crash, credit is the last thing on the minds of many.

Rise of e-money

A close relative to prepaid, e-money, is rapidly becoming a fixture in peoples’ financial lives.

Facilitated by legislators, particularly in the EU, e-money is expanding the payments options for consumers. In Europe, laws such as the EU Payment Services Directive and E-Money Directive is allowing a host of non-traditional players into a market that has until now been dominated by banks.

E-money is effectively digitized cash. In the words of the E-money directive:

‘Electronic money is an electronic surrogate of cash (coins and banknotes) which is stored on an electronic device. It enables cashless payments of smaller amounts in diverse environments such as points of sale (POS) or through mobile or Internet communication.’

Under that definition a prepaid card – once the card is “open loop”, or acceptable by persons other than the issuer (this disqualifies store cards, phone cards and gift cards), this qualifies as e-money. The same applies to e-purses, a stored-value card typically used for making low-value payments at retailers, transit systems, toll roads, vending machines and car parks. Internet stored-value payments, facilitated by services such as PayPal, also qualify as e-money for the purpose of the Directive.

But the impact of e-money has been in the area of mobile money, where the value is stored in a mobile money scheme account such as M-Pesa in Kenya. E-money, in conjunction with the mobile phone, is providing the technological platform for developing markets to bypass the traditional staging posts of development of financial services infrastructure, greatly extending financial access and providing a cheaper form of remittance services.