News:
Prepaid Card Use Rising As Credit Cards Stutter
Like swapping a Lamborghini for a Ford Fiesta, some credit card users are switching to the safer, less expensive payment vehicle of prepaid cards as the economy continues to travel downhill.
They're known as general purpose reloaded cards, and they serve as budgeting tools for those looking to trim spending, and as mobile bank accounts for those just needing a card-based way to spend. The cards are convenient: They can be used at any merchant that accepts the Visa, Discover, American Express or MasterCard logo on the card, and they are growing in use: About $7.1 billion will be loaded on them in 2009, up from $2.1 billion in 2007, according to the Mercator Advisory Group, a research and advisory firm for the payment industry.
"Because of the economy, there is a shift with more consumers going from credit to debit and prepaid," Brent Watters, director of marketing for Mercator Advisory Group says. "People are reluctant to use credit, and it's pushing them to another payment vehicle."
Three companies, Green Dot Corporation, the NetSpend Corporation and nFinanSe Inc., are helping with that push by managing and distributing the prepaid cards to a large number of supermarkets, drug stores and check-cashing services. The companies also provide the software, hardware and customer support needed to control all the cards, according to a New York Times article.
It works like this: Say you are spending too much on dinner every week and you need a way to budget that money. Instead of allotting some cash in an envelope for dinner, you go to Walgreens, Dollar General, Albertsons or another retailer and pick out a prepaid card. You buy the card for about $6 and load whatever amount of money on it you'll need for a week of dinner.The company that distributed the card, whether it be nFinanSe Inc. or another, gets some of that $6, plus maintenance, reload and other fees, and you get a well balanced dinner.
"Even folks that already have a debit card are using a prepaid card to control spending or to budget," Watters says.
Other than consumers who need to plug their spending, folks without a bank account are also looking at prepaid cards because they don't include the credit checks and minimum account balances banks require. They're convenient for large purchases, too, which is nice for someone who can't get or doesn't want a credit card.
No one can seem to agree as to how many Americans are without a bank account, so the statistic varies greatly -- somewhere between 10 and 56 million. Determining that number is difficult because some researchers count users of prepaid cards as having a bank account, and some don't. And the diverse banking regulatory system, with some banks federally regulated and some regulated by states, makes it tricky to sum up how many accounts there are and how many there aren't.
Regardless what that number might be, it's certain the companies providing prepaid cards are growing. Green Dot started selling general purpose reloaded cards in 2001 to chains such as Kroger and Walgreens. Today, they are selling to the retail giant Wal-Mart and pulling in $350 million in annual revenue, according to their Web site. Austin, Texas-based Netspend has about $180 million in annual revenue and 300 employees. And nFinanSe, which was founded in 2000, now has 80,000 cards distributed through Dollar General and Winn-Dixie supermarkets.
So whether you're looking to reduce spending or just a new way to spend, be on the lookout for these payment vehicles to take off in the next couple years.
Cards Continue to Replace Cash
Consumers’ use of cash is declining as they continue to embrace a range of card-based payment options, according to the 2008 Study of Consumer Payment Preferences, a nationwide study conducted by BAI Research and Hitachi Consulting, and sponsored by First Data, MasterCard Worldwide, Metavante, and PULSE.
Traditional card-based payment methods already have whittled away the base of check transactions in the United States, and are now impacting consumers’ use of cash, with 41 percent of consumers indicating they use cash less often today than they did two years ago.
“More and more consumers are substituting card-based payments in place of cash,” said Ajay Nagarkatte, managing director of BAI Research. “Of those who have reduced their cash use, 97 percent are shifting to credit, debit, or gift/prepaid cards instead.”
Credit Cards
Consumers carry an average of four credit cards in their wallets. However, only 2.2 of those cards are used to make purchases in any given month, underscoring how competitive the credit card market has become. Study findings reflected the consolidation that has occurred in the credit card industry, with 75 percent of consumers’ Visa and MasterCard credit cards coming from 10 issuers.
According to the study, nearly half of all active cardholders revolve at least a portion of their total credit card balance each month. Although a slight majority of cardholders (54 percent) reported they pay all credit card balances in full, 46 percent carry a balance on one or more cards.
A significant driver of credit card use is rewards programs. More than 75 percent of cardholders report having rewards attached to at least one card. Overall, 58 percent of cards earn rewards. For 51 percent of rewards cardholders, rewards have a strong impact on their use of the card.
Debit Cards
Debit cards have enjoyed phenomenal growth over the past few years, and according to the study, signature and PIN debit now account for a combined 37 percent of consumers’ in-store payments. PIN debit is preferred by 45 percent of consumers, while 35 percent prefer signature (20 percent have no preference). Those preferring PIN debit consider it more secure, faster, and easier to use than signature. Consumers preferring signature debit do so for the security, lack of fees, their inability to remember a PIN, and, in some cases, rewards programs.
Gift/Prepaid Cards
Growth of gift/prepaid cards was not as robust as some analysts anticipated. Gift/prepaid cards accounted for only four percent of consumers’ in-store purchases, the same as in 2005. Study findings suggest, however, that the market for open-loop gift/prepaid cards is increasing. Retailer-specific cards continue to dominate the gift card space, but more than twice as many gift card purchasers/receivers bought or were given a general purpose gift card in 2008 as were in 2005.
“Today’s card-based payments have done much to erode the base of paper transactions in the U.S.,” said Chris Allen, director, Consulting Services, Financial Services Practice at Hitachi Consulting. “And emerging payment methods like contactless and mobile are likely to take it further still.”
About the Study The 2008 Study of Consumer Payment Preferences is based on a nationally representative sample of 3,308 U.S. consumers in June 2008. For more information or to inquire about purchasing the study, contact Chris Allen, director, Payment Strategy Group, Hitachi Consulting, at 617-753-9250 or Ajay Nagarkatte, managing director, Syndicated Research, BAI, at 312-683-2486.
Fourth quarter 2008 ACH payments grew by 4.5 percent over the same period in 2007, topping 3.8 billion, according to statistics released by NACHA – The Electronic Payments Association.
Internet-initiated ACH payments (known as “WEB” entries) experienced robust growth, increasing 16.5 percent over 4th quarter 2007 volumes. Strong growth also occurred with certain business-to-business payments (known as “CTX” entries) in which remittance information is exchanged electronically.
“The continued growth of ACH transactions during a period of intense economic pressures speaks to the fundamental value that financial institutions, businesses, governments, and consumers recognize in the ACH Network,” said Janet O. Estep, NACHA president and chief executive officer. “The inherent safety, security, and efficiency of the ACH Network are resonating, as seen through the growth in specific market segments.”
The newest check conversion transaction – back-office conversion (known as “BOC”) - grew to over 39 million payments in 4th quarter 2008, from 3 million payments a year ago, as several national retailers are implementing BOC programs. BOC volume increased 49 percent from 3rd to 4th quarter 2008. Other ACH payment types tied directly to consumer check writing have leveled off as the use of checks continues to decline.
Electronic Payments Surpass Checks
For the first time, consumers in Internet-connected households are paying more of their bills online than by paper check, according to a new study conducted by Harris Interactive and the Marketing Workshop.
The 2007 Consumer Bill Payment Survey showed that, for the first time, online bill payments exceeded bill payments made by paper check among online households. Online payments made up 39 percent of the total volume of bill payments among online households, an increase of 4percent over the previous December 2005 survey. In contrast, the volume of checks sent through the mail fell 4 percent to 34 percent of the overall volume. The Consumer Bill Payment Survey - the seventh conducted since 2002 and sponsored by CheckFree Corporation (Nasdaq: CKFR) - highlights consumers' growing use of online banking and electronic billing and payment services to help them manage their household finances. The January 2007 survey polled 2,018 online respondents who were at least partly responsible for household bill payments. Respondents are representative of the estimated 82.5 million U.S. households using the Internet, and the margin of error is plus or minus 2 percent. The survey findings include:
A growing number of consumers are turning to their computers, rather than their checkbooks, to pay household bills. Paying bills online has become a mainstream activity among U.S. households.
Western states, followed by the South, have embraced online bill payment faster than other regions, which may be driven in part by higher broadband penetration rates and online banking use in these regions.
Paperless bills appear to be catching on as consumers recognize their convenience, security and environmental benefits.
"The fact that online bill payment has overtaken paper checks shows that people feel secure managing their finances online," said Gwenn Bezard, research director with Aite Group. "Once considered a nice-to-have add-on, online bill payment is now the foundation of the Web banking user experience. I expect further growth in this area due to Generation Y's greater reliance on technology in their everyday lives as they move into early adulthood, and the increasing adoption of electronic bills, especially as the environment becomes a mainstream issue."
Consumers paying at least one bill online per month rose to 74 percent, compared to 69 percent of respondents in the previous December 2005 survey. Consumer adoption of online bill payment has more than doubled since January 2002, when only 37 percent of online households reported paying at least one bill online.
The West ranks first in overall adoption of electronic billing and payment, with 78 percent of online households paying their bills online, according to the survey. The South ranks second, with 76 percent. The Northeast ranked third in online bill payment, with 72 percent, and the Midwest trailed, with 71 percent. Factors helping drive regional differences included higher broadband penetration rates, greater online banking use and technology-savvy populations in the West and South.
In the West, 80 percent of surveyed households receive their Internet service through a broadband connection and 83 percent use online banking to check their account activity or transfer funds. By contrast, the Midwest, which trailed in EBP adoption, 70 percent of households have broadband Internet connections and 76 percent use online banking, according to the survey.
Consumers in Western states also were more likely to pay bills at online banking sites (42 percent), than those in the South (38 percent), Northeast (37 percent) and Midwest (33 percent). Among the survey's six consumer bill-payer personality segments, there were more E-Savvy Planners living in the West (11 percent) and South (15 percent) than in other regions. This consumer segment enjoys trying the latest technology products and using financial management tools to organize their finances. E-Savvy Planners pay bills online because it's safer than mailing a check, they regularly check their credit reports and are more likely to use online banking (94 percent) and online bill payment (91 percent) services than other consumer segments.
What to Tell Your Merchants About Payment System Safety
Recent financial system turmoil has created great uncertainty in the business community. This uncertainty has been compounded by an increasing number of bank failures or federal "bail-outs”. For many merchants, the largest percentage of sales occur on payment cards processed through a system that, while familiar to us, is confusing to many of our customers. Our goal in this article is to provide our members with sound and accurate answers to some of the most common payment system questions coming from concerned customers.
At the Electronic Transactions Association, we believe that the payment system is secure and well protected. Appropriately, we have been receiving calls from merchants with questions about how these uncertain times might impact the payment of their sales proceeds. We would like to illustrate the security of the payment system in general and the parts played in it by banks and credit card companies.
Some useful terms to know:
Issuing Bank: The financial institution member of the card companies that has the responsibility for issuing credit, prepaid, corporate, charge and debit cards to a consumer.
Acquiring Bank: The bank that contracts with a merchant, as required by card association rules enabling the merchant to accept the association-branded bank cards. These cards may be consumer and/or corporate and credit and/or debit or prepaid. The merchant has an account with this bank and each day deposits the value of the day's credit card sales. Acquirers buy (acquire) the merchant's sales slips and credit the tickets' value to the merchant's account.
Merchant's bank: See Acquiring Bank.
For a chart illustrating payments system flow, click here.
Q: What happens if an Issuing Bank fails before it has paid the card company for the sales transacted by its cardholders?
A: There are, in fact, two backstops at work in this scenario. First, the credit card company serves as the ultimate payment guarantee via its credit rating and balance sheet. Second, if a bank fails and is taken over by the Federal Deposit Insurance Corporation (FDIC), the FDIC has an obligation to employ a “least cost resolution” approach to the workout. An ongoing issuing card account has value to the bank and is an asset that the FDIC could use to mitigate losses on the bank takeover. If the bank failed to honor the credit card payment, then the value of the ongoing issuing card account would be reduced to zero. Thus, failure to honor a credit card payment (even by a failed bank) is highly unlikely. Furthermore, the FDIC has paramount interest in making sure that public confidence in the U.S. payments system is scrupulously maintained.
Q: What happens if an Acquiring Bank fails before it has credited the sales proceeds received from the card company to the merchant's account, or transferred it to the ultimate depository bank via the ACH system?
A: If the failed bank has been taken over by the FDIC, then the FDIC will ensure that the proper accounts are credited as part of taking over the bank. Essentially, the money is already sitting in the bank and only needs to be assigned to the proper account. In some cases, money may go through several banks before ending up in the ultimate depository account. A business should know all of the financial institutions through which their payments flow and determine if these institutions are in or have opted out of the FDIC’s Transaction Account Guarantee Program.
http://www.fdic.gov/news/news/press/2008/pr08122.html. This program provides full guarantee of non-interest bearing deposit transaction accounts, regardless of dollar amount. If, at any point during the payment flow, funds pass through interest-bearing accounts or institutions that have opted-out of the Transaction Account Guarantee Program, then the business should seek to determine if funds in those institutions would be guaranteed by some other means. The FDIC will maintain and post on its web site www.fdic.gov a list of those entities that have opted out of the Transaction Account Guarantee Program. In addition, some credit card companies employ active capital monitoring programs for their member financial institutions. A financial institution must remain in good standing in order to continue as a participating organization with the credit card company.
Q: What happens if the Merchant's depository bank fails with sales proceeds in the account?
A: Once funds are in a bank, then the FDIC guarantees on deposits apply to them. The maximum level of federal deposit insurance is $250,000 per depositor through December 31, 2009. For more information on FDIC Deposit Insurance levels and categories, visit: http://www.fdic.gov/news/news/financial/2008/fil08102a.html If the account is non-interest bearing (as most are), then it is guaranteed in an unlimited amount if the bank has not opted-out of the Transaction Account Guarantee Program (see above) and the account is a qualifying one.
The payment system in which we operate is replete with multiple safety systems. The combination of the strength of the individual banks, the card companies, the federal regulatory system, and the security provided by the FDIC is more than a match for the current economic situation. The combination of capital and regulation, combined with a pragmatic approach to maintaining confidence in a payment system that is critical to the U.S. economy, is the best guarantee that a merchant could want. Merchants and ISOs should ask questions of their bank partners, processors, sponsors, and depository institutions to determine which financial institutions are involved in their flow of payments. Merchants and ISOs should review public documents about the banks with which they do business -- the easiest to review are the "Call Reports" issued quarterly for all banks and available here: https://cdr.ffiec.gov/public/. Merchants and ISOs should read the disclosures associated with their accounts. It is essential that merchants and ISOs determine the guarantee status of all banks with counterparty risk in their payment stream. The FDIC will maintain on its web site www.fdic.gov a list of those entities that have opted out of the Transaction Account Guarantee Program. An unlimited guarantee for funds in certain transaction accounts is not useful if "your" bank opted out of the Transaction Account Guarantee Program -- or if the bank stayed in, but the account in which your money resides is only qualified for $250,000 of insurance rather than the total amount on deposit.