The prepaid industry has come a long way since open-loop prepaid gift cards–supported initially by Visa and Mastercard–first made their appearance in the United States in 1999 and shortly afterwards in Canada. With technological advancements and shifting customer behaviors keeping the payments industry in a constant state of dynamic change, prepaid has evolved over the years into an essential part of the financial services ecosystem and a $4.3 billion-dollar market in Canada today.
Historically, prepaid has been primarily used as a bank account replacement or alternative–a first touchpoint into the financial ecosystem for underserved consumers. Over the years, prepaid has transformed into a broader digital banking tool used by consumers of all income levels because it offers a better user experience on a digital platform. Today’s prepaid “cards” may not be a card at all, but an online payment made from a digital wallet or a savings option.
While the prepaid industry has seen steady growth over the years in Canada, it is still nascent compared to the US$324 billion prepaid industry in the US market. With more than three-quarters of Canadians using digital channels–both online and mobile–to conduct most of their banking transactions, significant opportunities exist in the continuous development of innovative, user-centric capabilities and digital solutions. Prepaid has the deepest tech stack and track record to make those solutions a reality for Canadian consumers.
As it continues to evolve, prepaid benefits Canadians in the following ways:
An enhanced payroll solution
In a survey of 2,700 Americans, Netspend found approximately one in five individuals deal with monthly income fluctuations yet only 6 per cent of respondents said their employers provide tools to help mitigate financial instability. In Canada, a CPA study shows that almost a third of Canadians face some kind of income volatility, whether it’s the source of the money, the amount they’ll be receiving, or both. As more North Americans grapple with income instability without much support from the financial services industry at large, offering a fixed payment structure is mutually beneficial for both business owners and employees.
Prepaid payroll cards were introduced in the US decades ago to replace paper cheques for the unbanked and underbanked worker. They have evolved since; Goodwill’s Skylight PayOptions Program is an example of how prepaid payroll cards today offer a user interface that makes it easy for consumers to track spending and the ability to use them like any other debit card product. Using prepaid payroll cards to ease the burden of income volatility gives businesses a competitive advantage in the acquisition and retention of workers in an increasingly crowded gig economy space. Additionally, the rich information bundled in an electronically generated and transported message can tie in all the data rendered through traditional payments.
Given that the application of prepaid cards in contract worker payments is beneficial from both the worker and business standpoint, over the last few years, innovators have been building instant pay products on top of card network debit rails. For instance, Payfare uses prepaid cards to ensure that gig workers are paid faster. It enables transportation and ride sharing companies to pay drivers by loading their earnings onto a prepaid Mastercard, giving drivers the ability to shop in-store or online anywhere Mastercard is accepted. These solutions get workers paid safer and faster and help businesses retain workers.
A strong foundation for fintech innovation
Prepaid’s tech stack provides a rich and nimble platform for innovation in financial services. Consequently, it is providing financial institutions and fintech players, including challenger banks, a foundation to bring new products and services to market quickly with all the supporting regulatory understanding, market awareness and risk/security framework required for successful propositions.
In the US, businesses have found prepaid to be a viable mechanism for disbursement and funds management, with usage found across use cases such as expense management. Bank of America introduced business expense prepaid cards with sponsor-controlled spending functionality. In Canada, prominent fintech players such as KOHO, STACK, and Payment Source are already adding innovative capabilities to traditional prepaid products to create a more robust financial service products for consumers including micro loans, personal financial management, rewards programs and peer-to-peer transfers.
Prepaid verticals though are still more advanced in the US, which has at least 8 additional categories compared to Canada, according to research by Mercator Advisory Group. For example, the rise of online and mobile gambling is providing benefits to reloadable and store-value cards, and driving innovation. Sports affinity, gamification and travel are three additional segments that are expected to see the highest growth in the US, but also have a lot of opportunity in Canada in the near future and where practical innovation is occurring. Removing impediments to this growth will continue to bring consumer-friendly innovations to market and give Canadians access to the most cutting edge products and services.
Prepaid growth in the US was up 17 percent over the past 10 years, supporting billions in transactions and strong economic growth. Canada should ensure a good climate for prepaid to flourish and to support fintech innovation as well as new ways for consumer to pay and get paid that fit their changing desire for digital products.