The growth of challenger banks and prepaid cards

One of the greatest shifts in financial services in the past five years has been the emergence of challenger banks. These new competitors to high street incumbents have gained traction in the market through offering the first legitimate alternative to high street financial services for decades, if not longer, and appear to be here to stay.

As the world moves to full adoption of digital and mobile services, there is a prevailing thought in some quarters that digitally native challenger banks already hold an edge over the incumbents when it comes to long term prosperity in the banking industry.

Better user experience, greater flexibility to react to the needs of customers, and a more personal product offering are just some of the reasons that challenger banks are ruffling feathers; so much so that Monzo CEO Tom Blomfield has confidently stated that challenger banks have the potential to make traditional high street banks extinct.

As recently as last week it was announced that HSBC was ramping up its activity with regards to the launch of a digital only bank to compete with the likes of Monzo and Starling Bank, pointing to the fact that even the high street banks are becoming concerned with the assault on their market share.

Challenger banks recognise the value of bank cards

With challenger banks setting the tone for what we can expect the banking of tomorrow to look like, one of the more interesting developments with their adoption is a seemingly dedicated approach to maintaining bank cards; you could be forgiven for assuming that mobile-first banks would be strong advocates of alternatives to the ‘archaic’ method of using bank cards to make payments, but this couldn’t be further from the truth.

It may be that the principal driver for this, as Paysafe revealed in its Lost in Transaction: Payment Trends 2018, is that mobile wallet adoption isn’t extensive. In the UK, only 10% of UK consumers habitually use a mobile wallet such as Apple Pay, and this figure is not bettered in the US.

A second factor is the recognition that cards offer more than purely a method to transact; for challenger banks their bank card is as much a status symbol as it is a payment mechanism. Monzo’s ultra-bright coral card and Starling Bank’s portrait facing card are recognisable accessories that enable users to self-identify as challenger bank customers, and as such financially clued-in. While most challenger bank accounts do now offer Apple Pay as an alternative method of payment to cards, this “invisible” way of making a transaction doesn’t have the same visual impact as making a card payment.

A renewed interested in prepaid cards

The fact that the emergence of digital banks appears to be strengthening rather than weakening consumer appetite for bank cards is clearly a positive for card issuers in general, but beyond this challenger banks are perhaps also introducing a new generation to the benefits of prepaid cards for the first time.  

Using prepaid cards, consumers are able to access funds from other sources than their primary bank account, meaning that the details of their primary account remain secure at all times, including when a payment is being made online or in person. In an era when fear of bank fraud is at an all-time high, being able to protect your bank account details without losing any of the payment functionalities of a bank card is a great advantage.

Prepaid cards also give consumers a greater sense of control over how they manage their money, what their monthly expenditure is, and peace of mind that they are not overspending as is possible on a debit or credit card linked to a traditional bank account.  

Monzo’s initial popularity grew directly off the back of these benefits of its prepaid Mastercard function. Although this has now been replaced by a current account service, for many customers this exposure to prepaid cards was enough to ignite their interest in utilising prepaid cards generally.  

A further area where challenger bank prepaid cards have become extremely popular is for making overseas transactions. New financial services providers such as Starling Bank have introduced a prepaid travel card function, which has familiarised their account holders with the concept of reducing FX and transaction costs when making payments overseas.

How Paysafe Issuing fits into the market landscape

Paysafe Issuing has been present in this space for a considerable period of time, acquiring knowledge and expertise that has enabled us to maintain our market leader position at the forefront of the industry.

Another prepaid card service that offers account holders better than market FX rates and fees is the Skrill prepaid Mastercard, a prepaid card that is directly linked to account holders’ Skrill digital wallet. In addition to offering consumers better value when making payments abroad, the Skrill prepaid Mastercard enables account holders to make payments using their Skrill funds in the physical world, and withdraw funds from their Skrill wallet in cash via an ATM.  

In addition to supporting the Skrill prepaid Mastercard, Paysafe Issuing also supports a similar programme for its other digital wallet offering, NETELLER.

Paysafe provides fully compliant services to organisations that wish to issue prepaid products within the EEA via our e-money licence and our Mastercard principal membership. As consumers become more familiar and comfortable with the benefits of using prepaid cards, growth in the prepaid market will continue to increase; for businesses that wish to expand into this market, partnering with an experienced issuer such as Paysafe will be critical to success.

To discover more about the Paysafe Issuing programme, visit our website.