Study: Most Prepaid Cards Live a Short Life

Credit Card Pieces and Scissors

Don't look for prepaid cards to replace checking accounts anytime soon. While the cards can work as a stand-in for traditional bank accounts, a new study finds most cards are short-lived.

The study, conducted by the Federal Reserve Bank of Philadelphia, provides a snapshot of how consumers are using prepaid cards. The findings indicate most people use them only temporarily, and ATM fees are a significant source of the charges associated with the cards.

Trends in prepaid card use

The Federal Reserve Bank looked at 280 million transactions spread across 3 million cards nationwide. Consumers purchased the cards through a variety of means such as online and through retail locations. Other cards were provided by the government or employers as part of payroll or benefit distribution programs.

While usage varied considerably, the study came to the following conclusions:

  • Most prepaid cards are used for less than 6 months.
  • Cards used for direct deposit are used for twice as long and have 10 times the activity of other prepaid cards.
  • Only 20% of cards are used intensively.
  • Grocery stores, fast food restaurants and gas stations are where consumers are most likely to make a purchase with a prepaid card.
  • Use of general purpose reloadable cards, such as those available for purchase in stores, is concentrated in the West and Florida.
  • Prepaid cards used for payroll purposes seem to be concentrated in the South and Southeast.

General purpose reloadable cards and payroll cards are used most frequently, with only 20% having dormancy periods longer than 90 days. However, 45% of cards distributed by financial institutions and 80% of those associated with flexible spending accounts had dormancy periods of this length.

Card fees traced to the ATM

Overall, the Federal Reserve Bank of Philadelphia concluded that prepaid cards are not a major moneymaker for card issuers. For a typical card, issuer revenues and cardholder costs were $12 per month or less. Even on the most active cards, issuer revenue and cardholder costs were generally $20 per month or less.

ATMs accounted for a significant portion of a cardholder's monthly fees. The study determined 15-40% of monthly fees could be attributed to ATM surcharges. The high proportion of ATM fees may be linked to the number of cash withdrawals made by cardholders. Of money loaded on the card, 30-50% is typically removed via cash withdrawals rather than purchases.

The latest data from the Federal Reserve System found there were 6 billion prepaid card transactions in 2009 valued at more than $140 billion. However, despite the popularity of these cards, this study suggests most consumers are using them only temporarily instead of as a permanent replacement for their checking accounts.

The original article can be found at Most prepaid cards live a short life