Banks Are Grooming Customers With Prepaid Cards

Prepaid debit cards have become wildly popular, both with financial institutions and with consumers. Recent studies have shown that use of prepaid cards jumped by 18% in 2011, and that people look upon them now more as a convenience and less as a financial vehicle used primarily by those with limited funds. Consumers like these cards so well that a report by Market Rates Insight notes that they are willing to pay a monthly fee just to have them -- $4.21 each month, on average. Nearly half of those responding said they would use these cards if their banks offered them.

Prepaid cards are a win for financial institutions
This is great news for banks and card issuers, which have been wearing out their thinking caps trying to come up with new revenue sources since Dodd-Frank put the squeeze on some of their favorite fee-generating activities. Even better, issuers are using these cards with underbanked customers to groom them for other, more traditional banking products such as checking accounts and credit cards.

American Express (NYS: AXP) , for instance, offers a prepaid debit card account called "Make Your Move," in which customers' spending habits are analyzed in an attempt to discern whether they will be good candidates for other products the company sells. If the customer demonstrates that he or she is capable of handling a credit card, AmEx will extend the invitation to apply.

Similarly, Regions Financial (NYS: RF) has many programs that target the underbanked, including "Now Banking," which allows customers to view their prepaid card account on their computer or mobile phone. The idea is to snag consumers who are now using alternative banking products, such as check-cashing services. By letting customers view and therefore manage their accounts in real time, the bank hopes that a relationship will develop that will draw the customer into using more of what Regions has to offer.

Young people are usually unbanked as well, and they're also getting the come-hither treatment from the banking community. BB&T (NYS: BBT) has just unveiled its "LEAP" account for teenagers, which features, of course, a prepaid debit card. The account is much like a checking account minus the checks -- and the bank encourages parents to open joint accounts with their kids. A spokesman for the bank says the account should help teens "learn financial responsibility," no doubt so that they'll eventually partake of other bank offerings.

Fool's take
The popularity of prepaid debit cards makes this method of drawing in new customers a no-brainer for banks. These cards are widely available, but banks should make an effort to offer them to their customers whenever possible. After all, people have demonstrated that they're willing to pay for the privilege of using them, so offering a small incentive to make sure consumers obtain cards from banks rather than other venues would be in the institutions' interests. The biggest benefit for the banks is the ability to screen would-be customers, increasing their creditworthiness for future banking transactions.

As banks start offering customers what they want, rather than what the banks think they should have, they may find that people become less estranged from the banking community. Prepaid debit cards represent a golden opportunity that banks can't afford to miss.

Many consumers who prefer prepaid debit cards also do most of their banking on mobile devices, a phenomenon that is taking over banking as we have always known it. Learn how this shift is quickly becoming wrapped up in The Next Trillion-Dollar Revolution by grabbing our free report.

At the time thisarticle was published Fool contributorAmanda Alixowns no shares in the companies mentioned above.Motley Fool newsletter serviceshave recommended creating a write covered strangle position in American Express. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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