Prepaid debit cards compete with savings accounts by offering higher interest rate

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Market Context

Prepaid debit cards have emerged as an alternative method of payment for those who don’t have or use a bank account. Prepaid card users are primarily the unbanked and the underbanked. As these cards don’t let users to spend more than the loaded balance, prepaid cards have been largely accepted by teenagers, people with low or fixed income and those who tend to overspend. Along with convenience of using plastic money, these cards also provide users an opportunity to avoid debt and bank fees. Now card issuers are attempting to enhance prepaid card usage by offering complimentary savings accounts as well.

Market Innovation - Key Insights

US-based Mango prepaid card announced in 2015, that it will offer a complimentary savings account to cardholders with Annual Percentage Yield (APY) of 6%. The maximum amount that can be saved in the account has been capped at US$ 5,000. The rate reduces to a 0.1% for any savings beyond that amount. The interest rate of 6% is available only for customers who make a monthly direct deposit of US$ 500. For customers without a regular direct deposit linked to the account the savings account has an annual percentage yield of 2%, for as much as US$5,000 saved. This provides Mango card a competitive advantage against cash-based savings accounts that typically offer an average savings account rate of less than 1% APY.
However, Mango card charges many different fees from its consumers as well. But a planned approach such as making direct deposit and avoiding ATM usage can help the card owner make significant savings.

Market Opportunity

Prepaid cards in the US have become a mainstream product, with more than 20% of the population estimated to be holding a prepaid card. Prepaid cards in the US are expected to continue their moderate growth over the next five years, achieving a CAGR of about 13%, to reach gross dollar value (GDV) of USD 877 billion by 2020. Over the forecast period, open loop general purpose prepaid card category is expected to record a CAGR of 15.2%. Factors such as providing a viable electronic payment option to the unbanked population and serving as a cost-effective alternative to disbursements through cash and checks are expected to drive growth of the card category.

PayNXT360 View

With prepaid card market in the US poised to achieve high growth, many companies have entered the market with the hope of capitalizing on this growth to earn additional revenues. A prepaid card linked with savings account is an innovative product that is likely to witness high adoption among consumers. Due to the high interest rate being offered it will gain attention of not only the unbanked population but of people who already have savings accounts. PayNXT360 expects more players will start offering similar products, leading to an increased competition in this card category.