As Canada's big banks become increasingly interested in the way consumers make purchases, they are ramping up their attention to a payment product that shows promising growth: prepaid cards.
Four of the Big Five now offer a prepaid card, and Bank of Montreal, Bank of Nova Scotia and Royal Bank of Canada will be part of the launch on Tuesday of the Canadian Prepaid Providers Organization (CPPO), which is designed to raise awareness of the industry and increase its share of the payments market.
"Prepaid cards have been in Canada for over 10 years, but for most of that time it has been the domain of smaller, more niche players," said Tom McTague, vice-president of prepaid at MasterCard.
"But now we're definitely seeing the bigger financial institutions getting into the game."
The cards work in the opposite way to traditional credit cards: Rather than spending first and paying later, customers load money onto a card and then spend it anywhere credit cards are accepted. (They are different from closed-loop cards, or typical gift cards, which are for specific retailers.)
The upside for consumers – some of the marketing is directed at the parents of teens – is that they can save themselves from debt and the hefty interest charges levied on unpaid credit card balances. But prepaid cards are also pitched at businesses and governments as alternatives to cheques and cash when forwarding a set amount of money and tracking how it is spent.
The cards introduce the banks to new customers. Since prepaid cards do not require a credit application, they can be a gateway to young people and new Canadians.
Oh, and there are fees: a fee to buy the card, an annual service charge, foreign currency conversion fees, a fee to refund unused balances and a fee if you do not spend money that is left on the card after its expiry date.
Despite these limitations, the market for prepaid cards is growing, albeit from a small base. MasterCard estimates that Canadians will use prepaid cards to spend $4.9-billion this year, with percentage growth rising at a double-digit pace.
That is tiny compared to the estimated $200-billion being loaded onto prepaid cards in the United States, where CPPO said prepaid cards are the fastest-growing form of electronic payment. But Canadian banks and others in the CPPO are keen to narrow that lead.
Their interest is being driven partly by a steady move among consumers away from cash. According to a recent report from the Bank of Canada, Canadians used cash in just 44 per cent of their transactions in 2013, down from 54 per cent in 2009.
A survey by the CPPO of 1,003 Canadians found a similar disdain for physical money. According to the survey, 74 per cent of Canadians preferred not to carry a lot of cash and 78 per cent use cash less than they used to.
"There's a demand for a new product that kind of fills the gap that was there when credit and debit were the only two alternatives," said David Eason, chairman of the CPPO and also chairman of Berkeley Payment Solutions, which delivers prepaid card programs for businesses, governments and financial institutions.
"This is a great product for millennials, it's a great product for new Canadians and it's a great product for government disbursements, and it is a cost-effective product for businesses. I think that's why the major institutions are looking at this," Mr. Eason said.