Here’s something the makers of cigarettes and sugary cereal know that banks might learn from — get ’em while they’re young, and you’ll have them for life. Fortunately for the banking industry, the products they sell are less damaging, sort of. We suppose this depends on how you feel about prepaid cards.

Derek Gavey/flickr source

But regardless of how you feel, the prepaid industry is maturing. And as this happens, its target audience might get younger. Instead of bringing little Timmy down to the local branch to open his first passbook savings account, you might find yourself at the bank setting your tween up with a reloadable prepaid card. That’s what new a new study from Javelin Strategy Research suggests, anyway.

The study, released Wednesday, takes a close look at how prepaid cards are extending financial services. Because prepaid cards are perhaps the only growth product in finance right now, Javelin Research took a closer look at who uses them and how they are used, honing in on two of its biggest target demographics: Gen Y and the underbanked.

In a strange synchronicity, 18 percent of both Gen Y and underbanked consumers reported prepaid-card ownership, compared to 13 percent of consumers across the board. These two groups are the key demographics that banks ought to consider when developing these products — but one isn’t any more promising than the other.

“There’s nothing to indicate that [Gen Y] will be a better consumer than the underbanked,” said Beth Robertson, director of payments research at Javelin. That said, there’s likely more potential for growth with the Gen Y demographic than there is with those who have been underbanked for some time — a cynical thought, but likely true.

One of the report’s key takeaways was that “banks can leverage prepaid cards as building blocks to help young consumers transition to a deeper and more profitable banking relationship.”

Banks, not nonbanks

Until recently, the prepaid space was dominated by nonbank players, many of whom don’t have this long-term outlook for their customers. Say what you will about big banks’ behavior — and it’s all been said — at least the borrow-short/lend-long business model necessitates that banks have future loan customers in the pipeline, as checking customers.

Brand loyalty can be determined at a very young age, and there is a certain inertia to products that customers buy habitually. Banking has a lot of potential for this sort of return business, which isn’t necessarily a result of brand loyalty per se, but rather a result of the sheer difficulty of switching banks.

Due to new federal regulations, it is more difficult for banks to offer certain services to young people. The CARD Act made it illegal to market credit cards to minors, and the Durbin amendment made it difficult for banks to offer free checking accounts profitably, especially for low-net-worth individuals like, well, kids. Enter prepaid cards.

According to Javelin’s report, banks support just 27 percent of prepaid cards and products. For merchants and retailers this figure was 37 percent. While nearly half of the underbanked consumers in the survey reported getting their prepaid cards from merchants or retailers, 31 percent of Gen Y consumers reported that they got theirs from a bank — slightly above trend.

Banks ought to capitalize on this, argues Javelin. By offering prepaid products as an entry-level banking relationship, banks can gain lifetime customers. Regions Bank has already started with a similar strategy. MyBankTracker has advocated for wider adoption of the practice.

“Prepaid will never be a replacement for the full suite of services you’ll get from a bank,” said Robertson. Auto loans, mortgages, and really any form of credit, “that’s not going to be something you’re gonna get through your prepaid card.”

To start extending real lines of credit to people brought up on prepaid will be the one hurtle of this strategy. They’ll have no credit history with FICO, meaning they’re worthy of very little credit, but Robertson thinks there will need to be a shift in the way banks underwrite credit.

“I think these organizations will expand the [risk assessment] tools that they use,” she said, citing products like Suze Orman’s Approved Card and American Express’ Make Your Move program. The former reports customers’ card usage to TransUnion, the credit rating agency, in a sort of experiment to see if the agency will consider prepaid habits in determining creditworthiness. The latter is a bit more heartening. American Express will let responsible users of its prepaid cards graduate to one of their charge cards.

And if banks get into this game of using their own prepaid data to assess customer creditworthiness, as the sole party with access to this data, they’ll have even more captive customers than the credit-card industry does. That might be a frightening thought, actually. But it might look pretty appetizing to any bank worried about how to capture the business of a whole generation of kids disgusted by the excesses of the generation prior.

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