Prepaid Transaction Volume Continues to Grow, Even as the Size of the Transactions Gets Smaller

by Ben Jackson 0

Last week, the Federal Reserve released its 2010Federal Reserve Payments Study. The Study found that prepaid cardsrepresented the fastest growing payments segment from 2006 to 2009,with an annual growth rate of transactions at 21.5%. By way ofcomparison, the number of debit card transactions grew at 14.8% andthe number of credit card transactions declined by .2% annuallyover the same time period.

The Fed study found that closed-loop cards were the most often usedtype of card, but electronic benefits and general purpose cardsalso had significant growth. The average value of the transactionswas $33, but 67% of the transactions made with prepaid cards wereless than $25.

The low transaction value could be the sign of a number of consumerbehaviors, but it most likely represents a similar trend as thatseen in debit cards: the move away from cash in small dollarpurchases. Consumers are increasingly comfortable with using cardsfor smaller purchases and are carrying less cash.

The period from 2006 to 2009 includes the recent financial crisisand will set the stage for the payments market going forward. Thequestion is whether or not those trends will continue as consumerfinancial habits change and the regulations and business models forfinancial services companies change.

It is likely that the size of the prepaid market will grow as bankslook to prepaid cards as a turn-down product for low-balancechecking account customers. However, in the wake of the DurbinAmendment and the Dodd-Frank act, we may see a slowing or evenreversal of the electronic payments trends if retailers begin tooffer discounts on cash purchases.