The largest driver of the commercial prepaid market in future years will likely be employee benefits like health savings accounts (HSAs) and flexible spending accounts (FSAs).
The incentives for employees and the organizations they work for are aligned with these programs and bolstered by legislative policy, says Jordan Hirschfield, Director of Prepaid Payments for Javelin Strategy & Research in his new study, 2024 State of the Industry: Commercial Prepaid Cards.
After wild pandemic-related fluctuations, the commercial prepaid market stabilized in 2022. Ever since, it has shown a positive but moderate outlook, with no single area providing a compounded annual growth rate above 9%. Most prepaid commercial segments have been hovering just above inflationary growth, putting the whole of the market at a CAGR of 4%.
Overall, Hirschfield expects that moderate growth to continue for this category in coming years. But there may be an increased opportunity for non-governmental products such as employee and health incentives in open-loop and closed-loop networks.
A Benefit for Employees and Employers
As high-deductible health care plans become more popular, HSAs provide several benefits for employers.
“Those are enormous programs that are growing at substantial increases,” Hirschfield said. “Much of that is driven that is by the government continuing to raise the spending limits, because they want to encourage growth. I think we’ll continue to see legislative actions that increase these limits.”
There are also significant tax benefits to FSAs and HSAs, which generally are considered pre-tax benefits. As federal tax policy encourages consumers to use those accounts and their affiliated cards more, the buyer, which in this case is the employer, is encouraged to invest in these programs.
One key difference to keep in mind is that FSA deposits are “use it or lose it” each year. They tend to get more traction toward the end of the year as consumers are focused on redeeming their benefit. HSA cards, on the other hand, don’t expire. They represent a long-term, tax-advantaged method that allows users to be prepared for sizable medical expenses or to pay for expensive medications. That’s especially valuable for consumers with health insurance that comes with high deductibles.
“With consumers starting to see the benefits and employers pushing high-deductible health care plans, it’s a huge growth opportunity,” Hirschfield said. “It’s the benefit that employers want to push, and thus it’s the benefit that the consumer needs to utilize to maximize their employer-provided healthcare plans. It just requires some education to the end user.”
Although employee incentive programs made up only 14% of the total value of the commercial prepaid market in 2023, Hirschfield said that they are growing at about twice the rate of the overall market. Employers can see a direct effect on employee morale, and businesses can provide custom opportunities to connect with their customers or clients.
“Incentives are not just one of the leading growth areas for commercial purchases, but they are probably the best way to engage the individual end user,” Hirschfield said. “When you have free money in your pocket, in your mind, you’re going to treat yourself. Employers are seeing better results in terms of employee satisfaction from incentive programs, and consumer brands understand that incentive programs result in consumers spending more money with them, often buying more expensive items. An incentive program encourages upward spending in a crowded consumer spending environment.”
A Significant Role for Government
Governments retain an outsized portion of the prepaid market, especially in the closed-loop environment. The growth rates for these programs will always be tied to trends in government spending. During the pandemic, for instance, those growth rates soared.
In areas like nutritional assistance, a closed-loop government program that provides for grocery shopping, there will probably be a reliance on prepaid for the foreseeable future. The growth rate will always be determined to a certain extent by how many people are eligible and increases in the cost of living. But the sector also represents an incredibly stable environment for the prepaid providers.
“What we’ll see in the government spending is not necessarily increases in how much money people are getting, but rather enhancements to how the programs are executed,” Hirschfield said. “We’re seeing some government programs that are being digitized, where recipients are getting virtual cards. That gives people the ability to put that card in their mobile wallet. These developments need to keep up in order to allow the market to be as useful as possible.
“That’s where the growth is going to come from. It’s not necessarily from the amount going up. It’s how these cards are utilized and whether they can continue to catch up to the market environment.”
