Millennials' Take on Budgeting is Fueling Prepaid Innovation

Cohort Is More Likely to Give Themselves Allowance, Hide Money

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Millennials -- wary of amassing debt and overdrafting their accounts -- think about budgeting differently than previous generations and are turning to tools, like prepaid cards, to manage their spending.

The cohort is more likely than the general population to give themselves an allowance, for example, or hide cash from themselves to avoid overspending, on top of more common savings techniques like using coupons and shopping at discount stores, according to a study by TD Bank that surveyed 1,300 people from various age groups.

"Millennials have different financial needs than other consumer bases," said Tami Farrow, senior VP-head of retail deposit payments at TD Bank. "The younger you are, the more the likelihood that you have emerging financial needs that require a different set of tools."

The shift, in part, is driving more millennials to use prepaid cards. According to the study, 56% of millennials surveyed said the ability to track spending is one of the main benefits of reloadable prepaid cards, as opposed to 46% of people overall.

The cohort also uses prepaid cards to shop and pay bills online more than other age groups, which speaks to the way the generation compartmentalizes their funds. For example, millennials are using prepaid cards solely for bills or as "fun money," Ms. Farrow said. "In the old days, it was putting cash in an envelope," she said. "Think of prepaid cards as electronic envelopes."

Millennials are taking prepaid cards mainstream and fueling innovation in the space from issuers like American Express and Visa. Forget the bank-branded gift cards from the CVS checkout aisle, often gifted from relatives to hard-to-shop-for teens. Like the generation they appeal to, prepaid cards are growing up. They're reloadable, more secure online, digital and mobile-friendly, and some even function like full-service bank accounts.

One-third of millennials either currently use or have used a reloadable prepaid card in the past two to three years compared with one-quarter of the general population, according to the study. And 60% of millennials would consider using one.

"We are now seeing the next evolution of prepaid," said Tony Chang, VP-U.S. product and client marketing at Visa, which has been in the prepaid space since 1994. "Prepaid is mainstreaming, and it provides such a great opportunity to be thinking about how prepaid services fit a diverse set of consumers."

AmEx, which broke into the prepaid space in 2011 with the digital banking product Serve, recently added tools that allow consumers to categorize their spending, set budgets and put aside money for a rainy day or upcoming expense. After it was relaunched 18 months ago, Serve began functioning like a full-fledged digital bank account with other features that appeal to millennials, like person-to-person payments, direct deposit and the ability to withdraw money from ATMs. Like other prepaid products, it doesn't require a credit check or minimum balance.

Serve customers, along with Bluebird, AmEx and Walmart's co-branded prepaid card, have loaded more than $7 billion in funds since fall 2012, representing 300% growth, according to AmEx. The company also said 54% of Serve users are under the age of 35.

Visa, which has a slew of co-branded prepaid cards in addition to its own offerings, is working to make online bill pay easier and help consumers better manage their money on mobile, according to Mr. Chang at Visa. In 2012, the company introduced a virtual prepaid account called Visa Mobile Prepaid where customers can check their accounts, transfer funds and deposit checks remotely, along with other services.

Prepaid cards, which are also used by parents to teach their children financial responsibility, allow issuers to connect with teens early on, whether they stick with prepaid, like their millennial siblings, or move on to credit or debit card products. "We are seeing it as not only an entry to staying with prepaid, but also as a door that opens to traditional banking products," said Mr. Chang.

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