By Bryan Yurcan, Reporter for The Financial Brand
To many, the idea of prepaid financial services still conjures up images of single-use gift cards given as birthday presents or perhaps a financial tool used by the unbanked.
Banks and credit unions, however, should start tapping into the potential to use prepaid technology in order to innovate digitally and quickly bring new products to market.
“Prepaid today is more versatile and prevalent than ever before,” says Francisco Alvarez-Evangelista, an advisor in the retail banking and payments practice at Aite-Novarica group in an interview with The Financial Brand. “Yet it is often this unassuming player that gets little attention for its role in today’s top trends.”
Prepaid is still largely looked at as a high risk, low reward market by many traditional financial institutions, says Alvarez-Evangelista, yet it plays a large role in how many fintechs and digital challenger banks have rolled out new products.
Hidden in Plain Sight:
The rapid innovation in payments in general has obscured the fact that prepaid card technology has seen significant changes.
“Prepaid cards are an important payment mechanism that have seen renewed interest in recent years, as well as several developments in terms of capabilities,” observes Juniper Research.
Fintechs have been leveraging prepaid technologies and existing prepaid payment rails for several years now in order to innovate and speed new products to market quickly, says Alvarez-Evangelista.
One example is buy now, pay later. Many people don’t realize that today most BNPL transactions are handled on the back end by prepaid program managers and utilize existing prepaid payment rails to facilitate the settlement between the BNPL company and the merchant, Alvarez-Evangelista notes. Major firms such as Klarna, Affirm and others rely on prepaid infrastructure to power their platforms.
“This enables the merchant to get paid immediately and the BNPL company to get some level of interchange fee from the processor,” he adds.
Overall, it is a “far more efficient way” to conduct such transactions, as opposed to using other settlement processes on the back end, such as sending an ACH, he states. Everything is settled immediately.
Innovation Tool:
Fintechs realized that existing prepaid infrastructure was a more efficient approach to settling BNPL transactions.
Another way fintechs are using prepaid technology and infrastructure to innovate is in the creation of new banking products. When digital challenger banks such as Chime and Varo first offered “checking accounts” these were in fact not true checking accounts, but used prepaid payments rails, and the associated cards issued to customer were prepaid cards, Alvarez-Evangelista points out.
“It was the quickest way to go to market,” he says. (Chime and Varo, he adds, now both offer true checking accounts with associated debit cards.)
Use of prepaid products is also becoming increasingly popular among consumers. Aite-Novarica research from Q2 2021 catalogued many different types of prepaid products used by consumers, and the frequency with which they are used.
range of prepaid payment cards in use by consumers
“We are seeing a transition of the prepaid card from something that would be on a J-hook at a local retailer, to something that is being reimagined, especially by digital challenger banks,” says Alvarez-Evangelista.
