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Prepaid cards are one of the fastest growing segments of the payment cards industry. This rapidly growing and increasingly dynamic payments sector has become an area of active inquiry within the Payment Cards Center. What follows is a brief review of several recent research initiatives that illustrate the evolving scope of our interests and our partnerships with industry representatives, policymakers, and researchers.
In June 2004, after a year or so of independent analysis of the subject, the Payment Cards Center hosted a conference on prepaid cards titled Prepaid Cards: How Do They Function? How Are They Regulated? This event brought together a wide range of expert perspectives related to developments and challenges facing this new payments category. The conference discussion confirmed the rapid growth of prepaid payment volumes and highlighted a number of emerging applications. As is the case with most payment innovations, applicable regulation in the prepaid segment was seen to be lagging market developments. While noting the need for greater clarity, conference participants also cautioned policymakers that care must be taken so as not to stifle innovation.
Following this event, the PCC invited Gary Palmer, chief operating officer and co-founder of WildCard Systems, to lead a workshop discussing the developing market for prepaid card products and the infrastructure required to support the breadth of emerging business models. WildCard Systems plays an important role as a transaction processor supporting various types of prepaid programs, and Palmer used his many customer-based experiences to review the similarities and differences among emerging prepaid card applications. In his analysis, he focused on how these variations affect the operational structure, the economics, and the regulation of these programs.
Palmer highlighted the differences between prepaid operating environments and traditional credit and debit card programs. Specifically, he focused on the roles of distributors and sponsors as keys to executing many of the new prepaid card programs. Essentially, these roles facilitate linkages between the bank card issuer and the end-user in cases where the issuer may not have a direct relationship with that consumer. For example, prepaid payroll card programs often incorporate the participation of an employer to sponsor the program with its employees and a payroll processor to interface with the bank card issuer, the employer, and the employee-recipients of the cards. In another example, Palmer described a prepaid travel program where a bank serves as the issuer of a bankcard association branded prepaid card, but the cards themselves are sold and distributed through the offices of an automobile travel association. In a more general sense, Palmer emphasized that the role of third-party partners will vary depending on the program’s underlying business proposition. This prepaid value chain creates processing and customer service requirements unique to the particular prepaid environment, and it is in this area where WildCard and other specialized processors play important roles. For more on this topic, see the PCC’s discussion paper, Prepaid Card Models: A Study in Diversity.
The initial 2004 prepaid conference and Gary Palmer’s insights led to another emerging thread related to the use of prepaid card technology: the application to the unbanked and underbanked segments of our society. A number of new prepaid card applications are being developed to facilitate payment and other financial transaction services to this market segment. Recognition of this fact led us to work being done on this topic by colleagues from the New York Fed. Following several informal meetings on the issue, two researchers, Sherrie L.W. Rhine and Sabrina Su, visited the Bank and led a workshop focusing on their work. Highlights from that event have been published as a PCC discussion paper, The Cost Effectiveness of Stored-Value Products for Unbanked Consumers.
These various initiatives have led to our organizing a major conference on the subject later this summer that will bring together a wide range of interested parties to consider how prepaid and other forms of electronic payments might be suited to serving the needs of unbanked and underbanked consumers. The questions to be examined over the course of the conference will focus on this particular market segment and will include discussion of such applications as payroll and remittance cards and the role of merchants and other nonbank entities in serving these consumers’ financial needs. In addition, the conference will consider whether electronic payment mechanisms such as prepaid cards can replace higher cost financial services available to this population or whether these products might more beneficially act as transitional steps toward more traditional banking relationships.
The conference will open with a keynote address by Professor Michael S. Barr of the University of Michigan Law School, who will set the stage by reviewing his research on bringing low-income Americans into the financial mainstream. The conference will include panel discussions to address relevant product, market, and regulatory issues associated with electronic payments and the unbanked. The conference will especially benefit from the variety of diverse perspectives, including those of banks, credit reporting agencies, nonbank processors and payments innovators, merchants, economists, policymakers, and community development organizations. Following the event, we will publish conference proceedings to highlight key issues discussed and those insights gained during the conference.