Stored value and prepaid cards are a fast growing segment of the credit/debit card market. They allow credit unions to offer a new service to their members with the potential of simultaneously diversifying their non-interest income portfolio and capping delinquency risks.
Most of the cards in the market today are ‘prepaid’ in that their pre-funded value is stored on a remote database that must be accessed to authorize and release payment. More funds can be periodically added to these cards to maintain their value. ‘Stored value’ cards or ‘gift cards’ pre-funded value is recorded on the card itself and the cards usually become worthless once that value has been redeemed.
Both these cards can operate on closed or open loop system, depending upon whether their full value can be redeemed only thru particular retailers (closed loop) or anywhere (open loop).
HOW FAST IS THIS MARKET GROWING?
Source: Aite Group, 2005
According to research by Aite group, the total estimated value of all U.S. prepaid card transactions could top $104 billion in 2006 and reach $185 billion by 2008. While closed loop cards are more popular today, the growing popularity of open loop cards is estimated to allow them an equal market share by 2008.
Thirty states are already disbursing child-support funds, unemployment, and other benefits using Visa-branded prepaid cards; California will introduce a similar program this summer.
WHAT’S IN IT FOR CREDIT UNIONS?
While there is typically no interest income from these cards, there is a huge potential for generating fees and service charges. In today’s rising interest rate environment where credit unions’ net interest margin is no longer covering their operating expenses, fee income is becoming very important for a healthy income statement.
(Actual fee structure of a credit union)
Dormancy fees, latency fees, administrative fees, servicing fees, replacement fees for lost or stolen cards, conversion (to check or cash) fees are some of the fees typically associated with these cards. Some credit unions also charge a fee when purchasing money orders or traveler’s check using a prepaid card. All fees are typically over and above the $3 ~ $8 initial purchase fees.
To learn from credit unions that have been successful with these programs, Callahan & Associates is hosting “5 Steps to Building a Successful Prepaid and Gift Card Program” a webinar sponsored by PSCU Financial Services.