Prepaid cards are seen as a product for financially excluded consumers, but they are becoming mainstream. This transition is largely thanks to employers issuing prepaid payroll. It is often young adults who are issued these prepaid cards, and they view them as convenient, and in many ways equal or superior to checking accounts.  As these consumers mature, and prepaid becomes commonplace, what does this mean for the future of DDA?

One class of prepaid, the network-branded, reloadable cards, could be considered a post-modern checking account. The experience is almost the same as with a debit card tied to a bank account, except for paper checks. But, most banks don’t offer boxes of checks as part of the account opening process. The primary instrument is the debit card, and consumers who expect to write checks must take action to order checks and pay for them directly.

Although capabilities are similar, regulatory treatment is much different with prepaid. One important knock against prepaid is fee disclosure. In fact, Pew Research is promoting  a standard for prepaid fee disclosure that would improve price comparisons This is an interesting development, since banks must already disclose their fees, but there is no consistency between banks.

There are few inherent differences between a bank checking account and general purpose, reloadable prepaid card such as Chase Liquid, NetSpend, and America Express Serve. With Durbin though, a fork in the market has been introduced. Under Durbin, if a prepaid account can accept ACH debits, then interchange limits will apply. For this reason large institutions have designed their prepaid card programs without automatic bill payment features – an important feature for many consumers. Banks with greater than $10B in assets cannot participate freely in the prepaid market, or at least without sacrificing interchange fees. As a result, we see some national banks retreating from some prepaid initiatives – both direct to consumer and through employers.

For now, research shows that the prepaid card market is expanding in niches, but it’s easy to see that prepaid could mainstream, and cannibalize DDA customers. This is exactly the approach being taken by U.S. startups Simple (just acquired by BBVA) and Moven. Prepaid card accounts tied to a full-featured digital banking experience meet the transaction needs of most consumers. And although banks offer many more services than transaction banking, that is the day-to-day need they serve for most consumers. With this two tiered market, it is community banks and credit unions who can offer the most fully-featured bank-issued prepaid cards.