General-Use Prepaid Cards: The Path to Gaining Mainstream Acceptance
The Payment Cards Center of the Federal Reserve Bank of Philadelphia has published a discussion paper by James C. McGrath titled "General-Use Prepaid Cards: The Path to Gaining Mainstream Acceptance" (PDF). According to the author, "this paper argues that the increased flexibility and more complete functionality [of "open loop" prepaid cards] carry with them substantial new costs, resulting in a “cost hurdle” that must be overcome in order to create economically viable business models."
From the abstract:
Following the rapid proliferation of merchant-issued prepaid gift cards, some people assumed that the added functionality available in network-branded prepaid cards would lead to similar early success for these payment vehicles. While a number of emerging applications are gaining traction, others are struggling to reach viable scale. This paper argues that the rich functionality creates a significant “cost hurdle” that must be overcome with economically viable solutions. The paper identifies two emerging strategies that hold particular promise: 1) developing applications that efficiently displace high-cost legacy structures, and 2) creating financial services solutions for consumers outside the traditional banking framework. Both strategies rely on defining large markets to target and creating longer term relationships with cardholders.
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