The Decade’s 12 Greatest Developments in Payments: #5 Innovation Driven by Prepaid Cards

The use of prepaid cards has exploded during the first decade of this century and they have enabled many types of payment innovation from whipping through transit lines to helping disaster victims to transferring money to mom in Mumbai.

They were invented long ago. The basic idea goes back to the telephone prepaid card that was introduced in the mid 1970s in the United States and Europe. Consumers could pay for a card with a magnetic strip that allowed them to pay for landline phone calls. But they really came into their own in the last decade. As far as I can tell there are no reliable statistics on prepaid volume out there. The Federal Reserve’s 2007 Electronic Payments Study estimated $50 billion in the U.S. but noted how difficult it was to obtain reliable data; it has a quite scary discussion of how payment consulting firms have come up with estimates four times as high. But it is clear from just surveying what’s being done with these cards, from paying for rides on the Hong Kong subway system, to stoking caffeine habits at Starbucks around the world that the volume dollars paid for with prepaid cards around the world is humongous.

The real story here, and the reason prepaid is in my top 12 developments of the decade, is the variety and importance of the innovations that this product has enabled. All of these innovations are built off of a simple card technology: the availability of funds from a financial institution is either directly programmed into a card or a link is established to an account that confirms the availability of those funds.

Merchants latched onto these cards as a way for consumers to give gifts. Of course this makes no sense in so many ways and is a tribute to human quirkiness. Our friends and loved ones would be deeply offended if we gave them wad of cash or a check for a present. Even though that would enable them to buy exactly what they want. The gift card turned out to be an extraordinarily innovative way out of this conundrum. For some reason people (lovers excepted) aren’t so offended when they get a gift card and then they do get to buy what they want. The gift giver doesn’t have to spend a lot of effort figuring out what to give and the gift receiver gets to buy something tailored to her own preference.

At a more practical level there are transit cards. Octopus in Hong Kong is one of the premier innovators here. Transit riders can load money onto their contactless cards (or other form factors — I have a watch) at the kiosks or at participating merchants and just wave these cards as they pass through the turnstiles. That’s also true for Oyster in London. The Charley Card (named after the famous rider who got lost forever in the Boston subway system) that I use in Boston is still the antique cardboard mag swipe card but it does the trick.

The government has really gotten into the act. Many states use prepaid cards to distribute benefits such as foodstamps. Visa alone runs 70 state prepaid programs in 38 states. They load child support, workers comp and unemployment insurance payments on these cards. Famously, the American Red Cross provided massive assistance to the Hurricane Katrina victims on prepaid debit cards from MasterCard and JPMorgan Chase and is using these cards as part of its general relief efforts.

Payroll cards are another major innovation. Many people in the U.S. don’t have bank accounts often because they don’t want one or can’t get one for a variety of reasons. Prepaid cards have turned out to be a really efficient way to pay people for employers because they don’t have to incur the expense of issuing checks, and it is great for the employees because they don’t have to pay hefty fees to check cashing services to get their money. A new booming area of prepaid health cards which are being used to control health spending (which will be the subject of an upcoming briefing room here on PYMNTS in January 2010). Then there’s money transfer. It used to be that Western Union pretty much had this business to themselves. And in a lot of ways they deserved it. By providing lots of physical points around the world where people could send and receive funds they made it extremely convenient for people. And people have found their local Western Union branch a trusted source. Prepaid cards turn out to be a lot cheaper. The family member who wants to send money back home can get a prepaid card to his family by mail and load up the card remotely at various points (retailers, ATM machines, etc. depending on the system). The family can then take the money out of ATM machines back home, at the bank, or in some cases at participating retail locations.

I’m sure there are a lot of prepaid innovations that I’ve missed. Please feel free to add them.

Prepaid cards have improved the lives of probably hundreds of millions of people around the globe in the last decade. Many of them have helped the unbanked and underserved people in the U.S. and other countries.

Previous Great Developments in Payments During the Last Decade:


#6 What Has a Bigger Head and Longer Tail? Card Issuing

#7 How the ACH System in the U.S. is Encouraging Electronic Payments Innovation

#8 The Magstripe Lives On

#9 Shanghai Surprise

#10 Collateral Damage from the Financial Crisis – Consolidation and Regulation

#11 How the World War on Interchange Fees Transformed the Card Industry

#12 American Express Goes Global

David S. Evans bio