Global open loop prepaid card market size expected to reach USD 1.1 trillion

Posted by paynxt360 on November 8th, 2016

Global open loop prepaid cards are the fastest growing prepaid categories, driven by increased adoption across businesses. Banks, financial institutions and payment solution providers are currently targeting this segment as it offers a huge pool of untapped opportunities. By 2020, global open loop prepaid card industry is expected to reach USD 1.1 trillion owing to widespread adoption across retail, corporate and government segments.

Payroll cards form a significant sub segment of this sector. Employers have used this system to pay wages to its employees who do not have access to bank accounts or qualify for banking services. This has proved beneficial for employers in terms of reducing the cost of paper checks and opening up a new aspect of business for service providers. However, since it is linked to wages, it involves higher regulatory scrutiny, resulting in lower margins. Recent quarters have proven to be critical for the industry in the US where regulators have stepped in to prevent charging of fee on payroll cards.

Players such as The Olive Garden, Longhorn Steakhouse and Darden Restaurants chains reportedly forced their employees to accept payroll cards instead of pay checks. This helped them to cut down on costs due to investor pressure. In case of Darden restaurant, each card saved approximately USD 2.75 per period pay off on company overhead saving USD 5 million for the restaurant chain. However, it took a toll on employees due to fee structure. 99 cents were charged for paying utility bills, 50 cents for card decline at cash register, USD 1.75 for withdrawing money at ATM and 75 cents for balance enquiry. The fees from payroll cards are accessed by partnering banks or payroll card providers. All these led to major dissatisfaction among employees as in many cases fee structure of these cards violated state labor laws.

In 2013, a McDonald employee was forced to accept a payroll card for receiving wages and she filled an official complaint regarding the same. It later resulted in class action lawsuit involving more than 2000 employees.

Finally, U.S. Consumer Financial Protection Bureau (CFPB) stepped in during beginning of October 2016 and laid out final set of regulations on payroll cards, which are to be implemented by 1st October 2017. Major highlights of this regulation included detailed information sharing regarding fee structure, interest rates, and credit features not to exceed 25% of credit limit for accounts less than one year old. Restriction in increasing interest rates have also been implemented which states that it can be done only when a consumer has missed out multiple repayment installments and can be done with 45 day prior notice.

Events in the US have been watched very closely globally, and these regulations are expected to influence regulatory norms around payroll cards worldwide. PayNXT360’s research report suggests that adoption of payroll cards is indeed happening across developed and emerging markets, especially in the Asia Pacific region. More importantly, they are being adopted by businesses of all sizes. This segment is characterized by low margins, which has been one of the reasons for low rate of innovation and lesser number of players getting interested in targeting. However, volume is significant and key to success would be to view this as an opportunity to build relationship with consumers and attach future cross-selling prospects.

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