Nontraditional/Nonbank Advances in Branded Prepaid Cards

Branded (Visa, MasterCard) payment cards have largely been the domain of traditional retail banks. Following on the successes of branded credit and debit cards, branded prepaid cards are starting to have a considerable market presence. However, from an issuance perspective, these prepaid cards are significantly different from their credit and debit cousins: they are being offered and marketed by nontraditional and nonbanks such as NetSpend, Wal-Mart, and Western Union.

Nonbank players have recognized the attractiveness of these cards to the US unbanked, underbanked, and immigrant populations historically of little interest to traditional retail banks. Recognizing the potential of a 36 million person, $192 billion market, nontraditional players have taken a strategic approach in supplanting bank accounts with prepaid card accounts while offering the same ancillary services as retail banks (e.g., direct deposit, ATM access, overdraft protection, remittance services, and mobile features).

In a highly competitive retail banking environment, banks should be looking for ways to reach out to the unbanked. According to Red Gillen, senior analyst at Celent, "Branded prepaid card programs constitute 'gateway' financial products that could support the conversion of the unbanked population to become bank customers. Banks have a lot to learn from the nontraditional/nonbanks."

This report spotlights some of the main players in the branded prepaid card space and suggests models that banks could pursue to participate in this market.