Prepaid cards will likely drive banks’ revenue spike

Many banks have turned to issuing prepaid cards in an attempt to recover profits lost to heavier federal regulation on what fees and rates they can charge on credit card debt in recent years, and one of the largest customers has been government agencies.

A large and growing number of state governments now use prepaid cards to distribute funds to those collecting benefits for problems such as disability and unemployment, and banks are now reaping the benefit of this widespread adoption, according to a report from Bloomberg Businessweek. Last year, consumers made purchases on prepaid cards worth $65 billion, up from $48 billion in 2009. Those transactions also spelled $1 billion in fees for card issuers, which have lost an estimated $25 billion to federal regulation.

The accounts have been widely adopted by government agencies because issuing funds through them, rather than by mailing paper checks, cuts distribution costs by about 75 percent, the report said.

Prepaid cards are also popular with underbanked consumers who cannot afford other financial services or obtain credit cards due for a variety of reasons.