Youri Bebic Aug 19, 2016

Banking on the future with prepaid mobile apps

Born between 1980 and 2000, Millennials, at 83 million strong, are now the largest generation in American history. These individuals are poised on the receiving end of what is expected to be the largest ever inter-generational transfer of wealth: an estimated $30 trillion from their Baby Boomer parents and grandparents. They’re already spending as a generation about $600 billion a year, according to Accenture. The typical Millennial with a college degree earned $45,500 in 2013, the Pew Research Center reports.

One big challenge for financial institutions in pursuing this market will be how to win over a demographic that has little interest in the banking status quo.

Millennials live, work and play in the fast lane, their mobile devices always at the ready. In fact, research by Pew reveals that four out of five Millennials sleep with or next to their smartphones. If you want to know how Millennials feel about something, don’t bother asking, just check out what they’re posting to social media. What you discover may seem surprising. As a generation Millennials are very cost conscious, for example, and they’re not particularly keen on banks. In fact Millennials are more likely to be unbanked than any other adult demographic. Among Americans between the ages of 25 and 35, for example, one in eight was unbanked in 2013, according to the FDIC.

Millennials see banks as stodgy, costly purveyors of 20th century products such as high-rate credit cards, checking account overdrafts and mortgage-backed securities. One recent study by Scratch, a division of the media giant Viacom, reveals that most Millennials would rather go to the dentist than sit down to talk with a banker. More than two-thirds of Millennials believe that in five years the way they access money will be totally different, Scratch reports; one-third believe they won’t need banks at all by then.

Prepaid and Mobile: A Winning Combination

Prepaid debit cards are the fastest growing method of payment in the United States, and Millennials are big fans of prepaid cards, regardless of income level or banking status. According to a study published in 2014 by the Federal Reserve Bank of Philadelphia, 45% of Millennials own general purpose reloadable prepaid cards, including large numbers of Millennials with bank accounts. This preference for prepaid debit is especially noteworthy given that experience indicates financial habits adopted at a young age tend to continue throughout a consumer’s lifetime.

Many Millennials say they use prepaid cards as budgeting tools. Mobile access is a big draw; so, too, are low-cost and transparent fee structures. (The low-cost feature may be only perception in some cases as prepaid debit cards issued by several nonbanks are loaded with hidden fees. The Consumer Financial Protection Bureau recently addressed this in a controversial proposed rulemaking that would extend to prepaid debit cards the Regulation E consumer protections that now cover bank-issued debit cards.) Prepaid companies have responded with cards that leverage smartphones to support mobile check deposit and money management tools that leverage sophisticated analytics. A handful have integrated mobile check deposit approval and guarantee services that provide fee-based funds availability options.

For younger Millennials, especially those in school, there are prepaid card programs available such as the Navy Federal Credit Union (NFCU) Visa Buxx, designed to assist parents in doling out allowances and teaching their children money management skills. Mobile money apps have been added to several of these programs with great success. The programs let cardholders check balances, request funds from their parents using SMS and email, locate nearby ATMs and engage in other routines that support their mobile, and social, lifestyles. Parents can easily fund the cards with existing accounts, and get the added control of being able to suspend a child’s account, if and when it’s necessary. NFCU reports making significant inroads with their Visa Buxx program; for example, 45% of its cardholders downloaded the mobile app during the first six months it was available.

Traditional banking wisdom suggests prepaid cardholders are unlikely prospects for much beyond transactional business. The market for banking services is changing, however, and Millennials are at the forefront of this change, their smartphones in hand. Innovative prepaid issuers and program managers are discovering that adoption rates soar when prepaid debit cards join other critical apps on Millennials’ smartphones. Conversely, costs to those organizations can be minimized since the underlying technologies are readily available from solution providers with software-as-a-service pricing models.

Prepaid debit has been available for years, but the appeal to financial institutions has been limited by costly factors such as low usage and high rates of abandonment. Prepaid mobile apps change that dynamic. They offer a cost-effective strategy for financial institutions to build out product sets and promote credibility with Millennials. The combination of mobile and prepaid offers a foundation for long-term profitable relationships with Millennials as that generation matures, building and inheriting wealth.

Mr. Bebic is a senior vice president, mobile innovations, at Minneapolis-based Cachet Financial Solutions. He can be reached at ybebic@cachetfinancial.com.

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