IESE Research Papers,
IESE Business School

Abstract: Prepaid products can become an effective instrument for banking the poor, as they can be used for collecting microdeposits and so operate as a low-cost account. Prepaid platforms have characteristics that make them especially useful for developing low-cost microfinance business models. Indeed, customers using prepaid systems do not need bank accounts or debit or credit cards. Prepaid issuers do not need to develop or invest in new technologies, as this mechanism can be used on a range of platforms, including PCs, mobile phones, hand-held and set-top boxes. Furthermore, prepaid products are specially designed for offering services demanded by the poor, such as micropayments, microdeposits and even microcredits. Lastly, they allow users to monitor their cash flow by receiving statements (some providers offer this feature online, others provide physical statements) or accessing balances through PCs, mobile phones, hand-held and set-top boxes. Besides collecting microdeposits, prepaid products (or SVCs as they are called in the United States) offer other services that can be very valuable for serving the unbanked population. As explained in this paper, prepaid products generally lack the identification and credit requirements that effectively bar millions of individuals from opening traditional bank accounts, especially in the United States. Moreover, prepaid products can be purchased and reloaded at a growing number of locations other than bank branches, such as check cashers, convenience stores and other retailers. Prepaid instruments can also provide immediate availability of funds at a cost that, in some cases, is lower than other alternatives for unbanked consumers. Also, prepaid products are difficult to overdraw, thus reducing the likelihood of unexpected fees. Lastly, many prepaid issuers offer some sort of bill pay option, especially branded cards that enable signature-based transactions, and a significant number of them offer remittances.

Keywords: Prepaid card; microdeposits; mobile phone; store value card; e-money; banking the poor

34 pages, May 5, 2008

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