A recent report from the Philadelphia Federal Reserve indicates that prepaid cards might not be the useful financial tools that they claim to be. Like fruitflies, their lifespans are incredibly short. Also, they’re used in situations when cash would work just as well — supermarkets and fast food joints — not for online billpay and the like. There is one bright spot, however, in the form of prepaid cards issued by financial institutions. These are used longer, cost users less, and mimic checking accounts in their usage patterns.

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By parsing about 280 million transactions’ worth of data from more than 3 million prepaid cards, the Philly Fed got a better look at how these cards are used, how much they cost, and what sorts of revenues they generate. There has been plenty of speculation and normative postulations made about the cards, but this might be the first in-depth descriptive study we’ve seen on how these relatively new financial products are used.

Surprisingly, the study found that the average “life span” of a prepaid card is quite brief: “often less than six months.” This is a bad omen for a financial product that frequently has high start-up costs, when compared to a checking account. All costs associated with opening a prepaid account, the report notes, must be amortized in a time span “only 5 to 15 percent [the life span] of a typical checking account.”

The Fed also took a look at the composition of payments made on prepaid cards. Frequently, it is assumed that prepaid cards offer the underbanked an opportunity to make electronic payments in situations where they otherwise might have been forced into using money orders or other more burdensome forms of payment — paying bills online, for instance. The Fed’s data suggest that, actually, these cards get used just like any other card. Of retailer-issued cards, nearly 13 percent of purchases were made at grocery stores, 17 percent at gas stations, and nearly 12 percent at fast food restaurants.

As far as fees are concerned, however, financial institutions offer the best deals for consumers when it comes to prepaid. The Fed broke prepaid cards up into a number of categories: those sold online, those sold in retail locations, and those offered by financial institutions. Web prepaid carried average monthly user fees of $8. Retail cards cost about $7 a month. Financial institutions’ prepaid cards, by contrast, cost just $2.50 a month in fees.

The study also showed that users who make direct deposits to their prepaid accounts tend to use the cards for longer, and in ways that closely imitate a checking account. To wit:

The transaction activity depicted for prepaid cards with apparent direct deposit in… looks something like the transaction behavior we might expect in a consumer’s basic checking account. These cards are clearly important for the consumers who obtain them, and they are almost certainly the most profitable accounts in these programs.

Over the life of a prepaid card issued by a financial institution, the issuer will earn $11.45 on a card without direct deposit. With direct deposit, the bank will earn $93.75 in revenue — nearly nine times more. By contrast, a web-issued prepaid card with direct deposit will yield $133 in revenue, and a similar retailer-issued card will yield $152 in revenue.

This is a small bright spot in an otherwise disheartening report. Consumers’ and banks’ best interests line up with checking account-like prepaid products. They’re cheaper for consumers and they drive revenues for banks. Maybe that’s why they’re picking up speed.

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