Attitudes of regulators and credit agencies towards prepaid cards finally may be evolving enough to give cardholders the full benefit of prepaid accounts.
For years prepaid cards, and their holders, have been seen as second-class citizens by regulators, consumer advocates, and credit agencies. Despite competitive fee structures and feature sets, open-loop prepaid cards have been viewed as the account you get when you have no options.
Things may be changing, which would benefit many financially struggling individuals. The Federal Deposit Insurance Corp. recently released its 2017 FDIC National Survey of Unbanked and Underbanked Households. The survey does not classify prepaid cards as an alternative financial service. Instead, the FDIC acknowledges that perhaps prepaid cards should be treated as a full account. The report says:
“General purpose reloadable cards may offer many of the same features as checking accounts as well as a relationship with a retail banking institution.
“As a result, unbanked households that use prepaid cards obtained from banks could be considered banked.”
This is a huge step in the recognition of prepaid cards, though "could be considered" stops short of saying that they are accounts. All the same, if prepaid cards can be viewed as a full account, then cardholders will gain options to build wealth and access products in the financial mainstream.
The report alludes to this possibility when it notes that staying “current on bills is one potential indicator of credit worthiness.” The credit scoring industry has taken note of the same possibility.
In late October, FICO announced that it would look at average balances, bill payment histories, and savings as part of its new UltraFICO Score. At Money20/20, FICO representatives said that they were not including prepaid cards at this time, but that it is something they would consider.
Prepaid providers have noted that individuals who use prepaid cards often indirectly improve their credit scores because prepaid cards give them the ability to manage their money better.
Since prepaid cardholders use their cards for receiving direct deposit, staying current on bills, and even saving money, a prepaid account seems a perfect fit for the new UltraFICO program.
It is worth noting that among all unbanked households more than half of them say they do not have an account because they do not have enough money to keep in an account and 34% say it is the main reason they do not have an account.
In addition, the number unbanked households who say they are not at all likely to open a bank account in the next 12 months was 58.7% in 2017. That was up from 40% in 2013.
Prepaid cards offer an account that can be opened with a low balance and that has a transparent fee structure. By treating them as full bank accounts and integrating them into new credit scoring models, it will be possible to put people who have otherwise lost hope of joining the financial mainstream on the path to building better financial lives.
(The opinions expressed here are solely those of the author. Mentions of specific agencies or companies, whether in the text or illustrations should not be construed as an endorsement of or by those companies or agencies for the ideas expressed here.)