Alert August 21, 2012

Federal Reserve of Philadelphia Issues Report on Prepaid Cards

The Payment Cards Center of the Federal Reserve Bank of Philadelphia and the Center for Financial Services Innovation released a joint discussion paper, Consumers’ Use of Prepaid Cards: A Transaction-Based Analysis, on the use of open-loop prepaid cards. The study on which the report is based analyzed an anonymized data set of more than 280 million transactions made on more than 3 million cards issued by Meta Payment Systems. The report notes that although prepaid cards currently account for a small share of all consumer payments in the U.S., prepaid transactions are growing substantially faster than transactions on debit and credit cards. The report focuses on open-loop reloadable prepaid cards, accounting for 30 percent of prepaid transactions, which are prepaid cards that carry one of the major payment card network brands, can be used to make purchases at any merchant that accepts that card brand and can also be used to obtain cash at an ATM or as part of a PIN debit purchase at the point of sale.

Findings from the study include:

  • Prepaid cards are typically active for six months or less.
  • Typical issuer revenues and cardholder costs per active card month are at most $12 and even among the most actively used prepaid cards, issuer revenues and cardholder costs are generally less than $20 per month.
  • Prepaid cards with repeated value loads (e.g., direct deposits) remain active more than twice as long and have 10 times or more purchase and other activity than other cards in the same program category.
  • The majority of purchase transactions occur at grocery stores, fast food restaurants, and gas stations, suggesting that prepaid cards are used primarily to purchase nondurable goods. Additionally, many prepaid cards in the data set are also used to pay bills.
  • ATM surcharges account for about 15 to 40 percent of the cardholder costs.
The report concludes by noting the variety of limitations of the data used and provides suggestions for further research.