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Study shows prepaid debit cards represent the largest growth of all electronic payment types

September 2011

The 2010 Federal Reserve Payments Study (PDF) reveals that we continue to experience extraordinary changes in the utilization of payment instruments, as this nation’s propensity for all things electronic continues to grow. The study, which is the fourth in a series of studies of noncash payments in the United States, estimates the total number and value of payments made by check, debit card, credit card, automated clearing house (ACH), as well as prepaid cards. 

While all noncash electronic payments continued to grow over the previous three-year period, debit card usage spiked in the most recent study, growing at double-digit annual rates from 2006 to 2009, up by 14.8 percent since 2006.  Personal Identification Number (PIN) debit card payments increased more rapidly, at 15.6 percent per year, than signature debit payments, at 14.3 percent per year. At the same time, prepaid card usage has exploded and represents the fastest growing instrument included in this study.

While prepaid debit cards represent only a small portion of the total electronic payment pie, they represent the largest growth of all electronic payment types. This rapid growth can be attributed to prepaid cards being an excellent alternative for cash, as well as the security features they offer and the ability to meet a range of market needs.

 

Prepaid card usage is fastest growing payment type

The total number of prepaid card payments increased by approximately 22 percent per year from 2006 through 2009, and the value of prepaid transactions increased nearly 23 percent per year. Additionally, all types of prepaid cards showed substantial increases from 2006 to 2009. 

With 2.7 billion transactions in 2009, Private Label (closed-loop)  prepaid cards, such as those issued by and used only at specific retail stores, are still the most commonly used type of prepaid card, as was the case in 2006.  The number of prepaid cards increased from 3.3 billion in 2006 to 6 billion prepaid cards in 2009.  “This is probably related to people going back to more of a cash economy,” commented Rich Oliver, former executive vice president at the Federal Reserve Bank of Atlanta, who retired August 31, 2011, in a recent Federal Reserve Bank of Atlanta's Financial Update podcast (Off-site Link). 

 

A safe and flexible alternative to cash

Prepaid cards are a good substitute for carrying cash.  The cards work like traditional credit cards and offer a safe and secure way to send money, while often offering the same fraud and loss protections. Additionally, since prepaid cards are a non-credit payment type, they are useful in helping users control their budget without the risk of running up debt. This payment method is also an alternative for recipients of government benefits who need an efficient way to receive their child support payments, food stamps or unemployment benefits.

 

Prepaid cards meet a wide range of market needs

Prepaid cards are extremely versatile because the funds are prepaid by the consumer, business or government and can be used to pay bills or buy merchandise in the same places a bank-issued debit card can be used. In fact, this year, the Internal Revenue Service (IRS) issued tax refunds to unbanked households using prepaid cards.  So,it is no wonder prepaid has been the fastest growing payment method over the last five years. 

“But also, recent studies done by the FDIC have indicated that as many as 20 percent of the population of this country is now unbanked or underbanked. Around the world, prepaid card usage has become a major payment vehicle for people that are unbanked and underbanked,” noted Oliver. Prepaid cards are popular with a wide range of American consumers, including the estimated 40 million unbanked or underbanked who would not otherwise have a way to participate in our card-based economy.   

Prepaid cards, including single-use and reloadable cards, represent a prominent part of the payments landscape. By providing a safe option to cash, while offering security options to its holder and meeting a range of market needs, use of prepaid debit cards are anticipated to continue to grow at a rapid pace as we continue to explore new opportunities for this method of electronic payments. As such, the payments landscape will continue to shift as new electronic payment options become increasingly prevalent, requiring a need to think more deeply about future investments in payments technology. 

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