The prepaid cards have recently emerged seemingly as an ideal combination of the classic credit cards and the debit cards. With the prepaid cards, the users can take advantage of the benefits of the credit cards, while spending only the resources available in their accounts, feature specific to debit cards. This being said, how did such a product appear?
The prepaid cards have emerged from innovation in banking industry
To facilitate the way their customers handle payments, over time the banks have developed electronic payment instruments. In essence two mainstream products have emerged: debit cards and credit cards. The former allow the customers to pay in shops or on-line, or withdraw money from ATMs, but only by using the resources available in customers' accounts. The later offer the same paying functionalities, but give access to the customers to a short-term credit, offered, in principle, by the issuing bank. Since this kind of credit is rarely secured, the interest is higher than a credit obtained under regular commercial conditions. The debit cards are also cheaper than the credit cards and often free of charge, but the later give access to a wide range of benefits, negotiated by the banks with various partners, feature which is not available in the case of debit cards.
A whole industry has emerged to handle these electronic transactions. The electronic transactions have become more and more sophisticated, since the transfers of money do take place, in principle, in real time and they are subject to a clearing process between banks. When a customer buys an item from a merchant, a whole system needs to ensure not only the proper transfer of money between customer's bank and merchant's one, but they also have to be processed in full security, in order to avoid potential bad surprises for both customers and banks. In collaboration with credit card associations, such as Visa or MasterCard, the banking industry was able to offer more and more complex products in full security.
The banking industry has evolved over time and managed to occupy an important part in our societies. The success of this industry was very often associated with high standards. Impressive buildings became the norm, along with numerous personnel to take care of banks' business. In financial terms, the buildings and the personnel stand for fix costs and represent one of the most important budgetary line in banks' financial statements.
The advent of internet and the democratization of technology have opened the room for innovative products and the entrepreneurs have seen opportunities to start disrupting old business models in the banking industry. Fixed assets, such as the buildings, appeared not to be an essential element of the value proposition to customers and the opportunity to use internet to introduce the customers the bank's offer, limited at minimum the need for personnel.
The new "challenger banks" have seen the light. Via getting rid of non-essential assets to operate, the new banks could free up costs which are transferred in more value and benefits for the customers. Such banks still operate under strict national regulations set by central banks, they trade and have to comply with the highest security standards, but they are just based on a different business model, where most of historical fixed assets which differentiated one bank from another have virtually disappeared and the value created is essentially marketed to attract customers.
Under these circumstances, the prepaid cards appear to be the perfect product that the new banks could offer. On one hand the customers will spend only available resources in their accounts and thus, will limit the exposure of the new banks to potentially non-performing credits. On the other hand, the banks can rapidly attract more customers, since the freed resources from the investment in fixed assets translate in benefits to the customers similar to credit cards'. On top, the customers can even take advantage of products of new economy, such as cryptocurrencies, or new innovative ways to transfer money such as Transferwise.
These new "challenger banks", with their new business models, have enormously evolved in the last years and tools such as social media have been successfully used to promote them. One does not need any more to visit banks offices and ask a bank's clerk to open account, she/he can open accounts or ask for prepaid cards on-line in full transparency of costs and benefits. The prepaid card offer the customers the whole range of benefits of the credit cards at the cost of the debit card, which makes the product a win-win story.
What are the prepaid cards’ advantages?
The biggest differentiator and advantage of the prepaid cards is that with one card the customers have access to the various benefits offered already by the credit cards, but they spend only money they have in their accounts. Since the prepaid cards don’t give access to a short term credit, the consumers avoid the payment of potential interest.
This may help to develop a less consumerist behaviour, which on a long run may be beneficial twofold for the cardholders. On one hand the consumers will acquire things only with their (own) resources and thus, may increase the perception of utility of the items bought, diminishing potential long term waste of resources. On the other hand, they will limit the unnecessary burden of repaying expensive credits for items bought on credit, freeing up resources for other purposes.
The prepaid cards are a very good companion when you travel abroad. Via a very sophisticated system setup by these new banks with local partners, they offer cheaper exchange rates when you buy items in the local currency, usually with no extra foreign exchange rate fees, since they are offered at the central bank exchange rate. In a similar manner, they offer very competitive rates when you withdraw money in the ATMs while abroad.
Nowadays, with the prepaid cards you can also access a wide range of insurances offered by the issuing banks. These range from online transactions insurances to purchased products insurances to travel insurances.
Who do the prepaid cards address to?
The prepaid cards address both physical persons and business. In general they are offered by the banks of the latest generation, such as N26, Bunq or Revolut and from this perspective, the costs are in principle smaller compared to the classic payments cards offered by the classic banks, since the former have less fixed costs to bear.
Personal prepaid cards
On top of the usual advantages, the personal prepaid cards offer benefits such as multiple accounts, a functionality which allows the customers to manage their accounts together with relatives or family. The cards may also give access to exquisite shopping platforms, to a wide range of insurances such as medical, damage of rented scooters of bikes from sharing platforms, or mobile phone theft or destruction. They also offer customer support in multiple languages.
Business prepaid cards
The business prepaid cards come with a wide range of benefits which help business owners to easily run their business. Through additional functionalities compared to the classic credit or debit-cards, they offer the businesses tools to easily run payments rights in relation with employees, manage administrative tasks such as payments of invoices via smart applications, share sub-accounts with multiple users, download transactions for faster tax returns, cashback, free payments in any currency with no extra foreign exchange rate fees or access to the highest interest rates on all the accounts of the company. In a similar manner as the personal prepaid cards, they also offer customer support in multiple languages.
Conclusions
Internet and smart technologies have recently also opened new horizons to innovation within the rather conservative banking industry. By getting rid of non-essential assets for the core business, the "challenger banks" created a new business model and managed to transfer more value to customers. The prepaid cards become therefore the perfect mix between the old world of debit cards and the world of the benefits of the credit cards.
