2021 outlook prepaid - mercator advisory group

2018 Outlook: Prepaid

2021 OUTLOOK : PREPAID

COVID changes everything, with the government and EWA leading the way.

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While the effects of the CFPB’s Prepaid Rules in 2019 in no

way constitute a minor event, their overall impacts have been

buffered by the advent of the COVID-19 virus, impacting each

segment of the prepaid business in the U.S. This report gauges

those effects and seeks to explore the prepaid landscape post-

pandemic.

by Theodore Iacobuzio, Director, Prepaid Advisory Service

January 2021


2 © 2021 Mercator Advisory Group, Inc.

What to Anticipate in Prepaid for the U.S. in 2021

Prepaid debit cards are financial tools used to store and move money in a number of segments within the U.S.

economy. Most consumers recognize prepaid debit cards as “gift cards,” as a “reloadable” form of payment known

as general purpose reloadable (GPR) prepaid cards, or as payroll cards. Regulations, laws, and economic conditions

always influence the open- and closed-loop prepaid debit card markets in the United States.

The last regulatory earthquake to rattle the prepaid business was the issuance of over 1,000 pages of a new

regulatory regime to cover prepaid cards on the part of Consumer Financial Protection Bureau (CFPB) in April 2019.

More recent regulatory activity, most notably in the form of a question from The Clearing House in the opening

days of the current year, and a new White House and CFPB director bids fair to have far reaching changes on the

business, and will be explored below.

Nevertheless in 2020 these factors were joined by the COVID pandemic, an exogenous event foreseen by nobody,

and which affected not only prepaid but all forms of payment and indeed all financial services. Prepaid program

managers in 2019 adjusted their product offerings to comply with the Consumer Financial Protection Bureau’s

changes to prepaid regulations. In 2020, prepaid program managers struggled to respond to grim health and

economic events, but as was true throughout financial services, the pandemic presented opportunity as much as it

did calamity. Scarcely a category of the U.S. prepaid business, closed loop or open loop, was unaffected by effects

of the virus. The following report will seek to highlight those categories that by sheer size and importance merit

attention, as well as those areas of innovation that bear watching as the industry continues to develop along the

lines of the taxonomy set forth by Mercator Advisory Group:


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© 2021 Mercator Advisory Group, Inc.

Figure 1: Mercator Advisory Group’s Taxonomy of Prepaid Cards: 11 Categories, 26 Market Segments

Source: Mercator Advisory Group

A good example of this kind of innovation is the rise of the Earned Wage Access (EWA) cards. Already in use before

the pandemic, EWA cards are experiencing robust growth, both as a result of the concept and because of the kinds

of advantages afforded to employers and employees during the pandemic and indeed beyond. The target market

for EWA functionality is precisely that which is most severely impacted by the effects of the pandemic:

unemployment, uncertainty and lack of household liquidity. These instruments permit employees to access funds

they have already earned on an hourly basis for day-to-day and extraordinary expenses that are sure to occur. The

result is a happier, more stable workforce and better retention rates for employers. While not all EWA deposits are

directed to a prepaid card, these instruments can be confidently said to have “taken off” under the pressure of the

pandemic, as the 1099 economy becomes more and more important to workers of all kinds in the U.S.

Another example of the importance of prepaid in the new normal is the outflow of government funds in the form

of stimulus aimed to cushion the blow of pandemic-induced hardship. With stimulus payments and innovations

such as Earned Wage Access prepaid cards, Mercator Advisory Group predicts a continued upward trajectory for

prepaid, especially as the plastic form factor is joined by digital access to pay-before funds.


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Figure 2: Total Load on U.S. Open-Loop Prepaid Cards, 2015-2024

Mercator Advisory Group

Major Issues

Stimulus Payments

New in 2020, the federal government entered into the COVID environment in the form of direct economic stimulus

payments to U.S. citizens. The change of administration will, if anything, ensure that the stimulus payments will

continue in 2021 and indeed as long the pandemic is a fact of life. Given the propensity of the Biden administration

to up the ante on the amount per person as compared with its predecessor, increased government payments to

consumers in the current year are a sure bet.

By August of last year, the federal government had delivered 140 million Economic Impact Payments (EIP) worth

$239 billion to Americans, mostly through direct deposits at financial institutions, Direct Express benefit cards, and

paper checks. Distribution began on April 24, 2020, and was materially completed in less than a full month’s time

by May 22. For many citizens without a bank account on file, the Treasury Department opted to distribute benefits

via prepaid cards. The Bureau of Fiscal Service, a sub-agency of the U.S. Department of the Treasury, administered

the program on behalf of the government and was responsible for the nearly 4 million cards delivered.

$287.1 $295.0$323.8 $329.3

$374.0$397.0 $407.8 $426.7

$445.8$466.2

$-

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

2015 2016 2017 2018 2019 2020 (f) 2021 (f) 2022 (f) 2023 (f) 2024 (f)

Amount Loaded onto Cards($Billions)

Grand Total


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Three leading payment industry providers played a role in the rapid deployment of EIP cards. MetaBank delivered

prepaid cards and program administration; Fiserv’s Money Network provided the technology, processing platform,

and servicing for the portfolio; and Visa was the selected payment network brand.

Figure 3: The 2020 EIP card fee schedule provides low-cost consumer options.


The third round of stimulus payments is currently in negotiation after five million cards went out in January 2021 in

the second round. The administration and its allies in Congress seem determined to make the distribution as

widespread as possible. Whatever the cut-off for receipt of the benefit, using the metrics of the 2020 payout, we

can expect as many as 8 million U.S. consumers to receive additional stimulus payments on prepaid cards. That

number could at least double if the pandemic proceeds into the second half the year and the Biden administration

is called upon to shoot more government funded liquidity into the economy’s bloodstream.

All indications are that these programs run efficiently, as evidenced by $136.2 billion distributed on prepaid cards

versus $152.69 million in service fees and costs, a very low cost percentage as measured in basis points.


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Other Government Benefits Delivered on Prepaid Cards to Rise

The Office of the Comptroller of the Currency (OCC) adopted a new set of standards that took effect on Oct. 1,

2020. In a shift from the original Community Reinvestment Act (CRA) of 1977, credit card lending no longer

benefits lenders in their Community Reinvestment Act responsibilities.

What does this mean for prepaid cards? It means that 2021 will witness an increase in the number and in the

feature/functionality array of banking “lite” programs that financial institutions will offer on prepaid cards to fulfill

their CRA responsibilities and keep their names sweet with the regulator.

For instant needs, the cost and effectiveness of prepaid cards far outweigh the benefits of returning to paper

checks. Associated costs of paper, risk of theft, and consumer inconvenience and loss are too great. When

measured by volume and costs, the prepaid card distribution programs enable users to access the payment

network and provide government entities with an effective channel to meet household budget requirements with

the distribution of entitled benefits as well as emergency relief programs such as those directed by the Coronavirus

Aid, Relief, and Economic Security (CARES) Act.

Nor should the sheer volume of Social Security payments issued on prepaid cards be underestimated in assessing

the power and size of the segment in U.S. payments.

Figure 4: Social Security Prepaid Loads, 2015-2024(f)


$33.2 $32.2

$34.7$36.2 $36.2 $37.1

$37.8 $38.4$39.1 $39.8

$-

$5

$10

$15

$20

$25

$30

$35

$40

$45

2015 2016 2017 2018 2019 2020 (f) 2021 (f) 2022 (f) 2023 (f) 2024 (f)


Social Security


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Earned Wage Access

A new category of payment solutions not unrelated to the resurgence or revivification of government payments on

prepaid cards as a result of the COVID-19 pandemic has ignited recently and could upend the status quo of wage

payment in the gig economy and beyond.

On-demand earned wage access and wage advance solutions address the difficulty many workers have in meeting

day-to-day expenses that come due between traditional paydays. Paying employees every two weeks, twice a

month, or monthly is a decision that an employer makes based on long-established practice that takes into

consideration the employer’s costs to process payroll and the impact to the company’s cash flow, not the needs of

employees.

An employer could choose to run its employee payroll every day if desired, but the cost of processing, the tax

implications, the funding needs, and the support needed to implement daily payroll would be burdensome. From

the employees’ perspective, they have fulfilled their work obligations and are owed the wages they have accrued,

but these funds are out of reach until payday.

The number of wage access and wage advance providers is growing and the number of employers offering the

benefit is also expanding, particularly in the general retail sector, call centers, quick service restaurants (QSRs),

health care facilities, and transportation. It is easy to envision these products extending beyond low-income

workers into the solidly middle class, who also face occasional cash-flow shortfalls when unexpected expenses

arise, and are likely to continue to do so and with increasing severity as the pandemic continues.

Mercator believes that the emergence of earned wage access will materially affect payroll and employees’

expectations that their employers will offer these wage payment options. The availability of these solutions will

have consequences for the current solutions that people turn to when money is tight—namely credit cards,

account overdraft services, pawn shops, and payday lending.

These new solutions are already having an impact on the launch of real-time payments (RTP) in the United States.

The Clearing House notes that one of the RTP network’s most frequent uses is immediate payroll transactions,

including earned wage access.

Commercial Prepaid Cards

Commercial prepaid products are sold through a corporate or a business banking arm of a commercial bank (which

typically also includes government clients at all levels) rather than through a retail or wealth management business

unit. A business or government entity provides a particular prepaid payment product as a service for its

employees, citizens, business partners, or consumers (as in the case of incentives).

Commercial cards across all product types, systems, and business sectors account for a growing proportion of

business-to-business (B2B) spend, thanks partly to the decline in checks. Mercator Advisory Group estimates that

about $1.56 trillion of business spending was transacted through various card-based products in North America


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during 2019. This includes commercial credit cards, small business cards, fleet (fuel) cards, business debit and

prepaid cards. In the present report, we update trends and forecasts in the U.S. and Canadian open-loop prepaid

markets.

Figure 5: U.S. Commercial Prepaid Share of Combined Commercial Card Products, 2019


Open-Loop Gift Cards

Loads in this segment grew over 15% in 2019 to $25.7 billion. As the market matures and continues to grow from a

steep base, the growth rate will continue. Mercator Advisory Group forecasts that loads in this segment will have a

compound annual growth rate (CAGR) of 3.5% through 2024, when loads will total $31.4 billion. Retailer

bankruptcies, some due directly or indirectly to COVID, and a desire for greater choice in gift card redemption

likely have driven some growth away from closed-loop gift cards to this segment. In addition, both gift giving and

self-use of gift cards for online shopping and other transactions are expected to support continued growth in the

COVID-19 era.


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Figure 6: Open-Loop Gift Cards Segment of U.S. Open-Loop Prepaid Market: Forecast Through 2024


Open-Loop Consumer Incentives

The Consumer Incentives segment measures the dollars loaded onto prepaid cards by companies to influence or

reward customers for a particular behavior. This segment consists of both open-loop and closed-loop versions, but

this report covers only the open-loop market. Loads in this segment were up 5.6% in 2019, to $13.2 billion. We

believe there will be a dramatic decline in 2020 due to reduced consumer spending during the pandemic, although

there will be renewed growth in this segment as retailers try multiple methods to build back overall retail sales.

Mercator Advisory Group forecasts that loads in this segment will return to 2019 levels in 2022 and continue their

growth to $15.4 billion in 2024.

One potential area of growth brought on by the pandemic is the use of prepaid as an incentive for individuals to

receive the vaccine for COVID-19. These initiatives are being considered by employers as well as public entities,

particularly regarding individuals on the fence about the vaccine’s effectiveness.

$18.3

$19.8 $20.3

$22.3

$25.7

$27.3$28.2 $29.2 $30.2

$31.4

$-

$5

$10

$15

$20

$25

$30

$35

2015 2016 2017 2018 2019 2020 (f) 2021 (f) 2022 (f) 2023 (f) 2024 (f)


Open Gift


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Figure 7: Consumer Incentives Card Segment of U.S. Open-Loop Prepaid Market: Forecast Through 2024


Mercator Advisory Group believes that as companies fine-tune their incentives programs, prepaid cards may

become more popular as incentives, but will always face competition from other types of incentives, including

merchandise and cash.

Closed-Loop Cards

The closed-loop prepaid market will be shaped by what happens in the economy and in the political sphere, as

both are affected by the pandemic. These three forces operating in different ways will exert pressure on prepaid

segments while reshaping the closed-loop market.

For example, we are seeing the rise of a new segment, Health Benefit Cards, which are prepaid cards loaded by

Medicaid, Medicare, and major insurers like Aetna and United Health. These cards are similar to incentive cards in

that cardholders are rewarded for performing certain healthy actions. If you are a cardholder and get your blood

pressure checked or have your annual physical, for example, you will be awarded dollars to be spent on

healthcare-related items purchased over the counter.

Whatever happens over the next few years, the inherent value of closed-loop prepaid cards will ensure that they

continue to be used by individuals and companies for gifts, commuting, and buying cellular service and digital

content. While the size of individual segments may rise and fall, the industry will still have plenty of opportunity to

provide much-needed payments tools to consumers, corporations, and the government.

$12.7 $12.7$12.2

$12.5$13.2

$10.8

$12.0

$13.1

$14.2

$15.4

$-

$2

$4

$6

$8

$10

$12

$14

$16

$18

2015 2016 2017 2018 2019 2020 (f) 2021 (f) 2022 (f) 2023 (f) 2024 (f)


Consumer Incentives


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Regulation or Revolution?

As noted above, a not-so-simple question on the part of The Clearing House may have as much impact on the

prepaid business as a whole as the pandemic itself, and its effects could be permanent. In the short to mid-terms,

this issue could produce considerable anxiety and shuffling in the fintech and neobank space.

The Clearing House (TCH) met with members of the Federal Reserve Board early this year to convey what they

believe to be an unfair application of the small issuer exemption to the debit card interchange caps as applied

under Regulation II, the outcome of the Durbin Amendment to the CARD Act.

Most prepaid debit cards in the U.S. are issued by smaller banks with less than $10 billion in assets. Most Banking-

as-a-Service (BaaS) providers that supply fintech organizations with bank account functionality are likewise in the

small bank category. This asset level allows the issuer and in turn the third-party organizations using and selling

prepaid or banking accounts to earn the higher, market-set interchange rate for dual-message debit card

transactions (formerly called signature debit), approximately 140 basis points of the transaction value.

Debit cards issued by banks with greater than $10 billion in assets will earn on average 54 basis points, or 61% less

interchange revenue. Most of the third parties depend on interchange as a large revenue component.

The letter from TCH asserts that those banks that sponsor prepaid card programs for large organizations with high

asset values are miscategorized and should only earn the regulated level of interchange.

If the Fed agrees with the assertions of TCH, potential outcomes could include:

Revenue will drop for nearly all non-government prepaid programs and BaaS relationships regardless of type,

as most issuers have a least one large client, or a combination of several clients with significant assets that

would put them over the $10 billion market and in the regulated interchange category.

Those programs that are particularly dependent on interchange as opposed to fees or unclaimed balances will

need to introduce new revenue channels. This will be particularly difficult for challenger banks using prepaid

who count on interchange for nearly 80% of their revenue.

There may be some banks with less than $10 billion in assets that decide to enter the market and specialize in

supporting third parties with low assets, or attract program managers away from banks established in the

prepaid/ BaaS market that need to shed some clients to stay below $10 billion in assets.

This is a topic which Mercator will continue to watch as it unfolds.

Conclusion

Regulation can hardly be called an exogenous event, and no regulator has yet ruled on TCH’s request for

clarification. Nevertheless, whether the result is “nuclear winter” or a more buffered effect as described above,

TCH’s question has grave consequences for the prepaid business, especially in the financial services sector.

But the immediate challenge facing the industry remains the effects of the virus on the economy. As noted, this

dire event can present opportunity as well as cause widespread dismay and disorder. The prepaid market will

https://www.axios.com/chime-fee-income-atm-revenue-14572e20-7397-4cb2-96e8-425126850363.html


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endure, whether the pandemic lasts another six months or another year, but it will likely never be quite the same

in its wake.

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For more information about this report, please contact:

Theodore Iacobuzio, Vice President and Managing Director, Research [email protected]

1-781-419-1700

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