Consumers’ Use of Prepaid Cards: A Transaction-Based Analysis

Abstract:     
Open-loop prepaid cards are becoming a mainstream payment instrument in the United States. In addition, businesses and governments increasingly view them as a less expensive alternative to checks for disbursing payroll and benefits.

There are few studies that examine how consumers actually use prepaid cards, the revenues generated, and the resulting costs cardholders incur. This information gap poses a challenge for an industry in the early stages of refining its business models. It also poses a challenge for policymakers seeking to design cost-effective consumer protections for these products.

We analyze an anonymized data set of more than 280 million transactions made on more than 3 million cards issued by Meta Payment Systems. While the data have limitations and are not necessarily representative of the entire market, they can be used to establish a number of important stylized facts about the life cycle of prepaid cards.

We report detailed statistics on the longevity of prepaid cards and the intensity of their use, including the frequency and value of spending, the composition of spending at merchants, ATM withdrawals, and reloading of value onto cards. We identify cards that are likely enrolled in direct deposit and contrast usage of those cards with other cards in the data. We calculate statistics on revenues earned via consumer fees and the composition of those fees. We also estimate interchange revenues earned and thus quantify the significance of this funding source to the prepaid business model.

Number of Pages in PDF File: 76

Keywords: General-purpose reloadable prepaid cards, payroll cards, direct deposit

JEL Classification: D12, D14, D18, E42

working papers series