Amid the global economic challenges brought on by the COVID-19 pandemic, opportunities for prepaid’s future have surfaced as part of larger conversations around financial accessibility, digitization and innovation. Leading the charge is the rapid acceleration toward the highly anticipated digital payments transformation that industry pundits have been predicting for years. Prepaid is very much part of that storyline.
The push for greater inclusion across the entire financial ecosystem for all Canadian consumers was ripe for deeper discussions. 2020 hit, and a sense of urgency set a new tone. The need for faster, more secure digital payment accessibility grew greater than ever. Finavator CEO Michelle Beyo believes this is what defines 2020 as “the year of innovation.”
An influx of partnerships, greater collaboration across the industry and outside-the-box thinking paved the way for payments ecosystem leaders to pivot into discussions about where prepaid plays a larger role in connecting consumers, businesses, and financial services. These conversations spurred the Canadian government to better understand the impact and functionality of prepaid as a catalyst for financial inclusion into the digital payments market, Beyo said. In 2021, prepaid solutions will set the tone for what being an inclusive and innovative payment method truly means.
“Canada should ensure a good climate for prepaid to flourish and to support fintech innovation as well as new ways for consumers to pay and get paid that fit their changing desire for digital products,” Jennifer Tramontana, Co-Founder and Executive Director of CPPO, wrote in June. Six months later, the industry is more prepared than ever to continue innovating through digital.
Given the rise in the number of players launching and engaging with prepaid solutions, and the sheer volume of annual loads (currently topping $4.8 billion annually), the prepaid market is poised to make its mark in 2021 as the world looks to continue navigating pandemic-induced financial uncertainties. Looking ahead to 2021, we’ve broken down five trends in 2020 that define the future of Canada’s prepaid market.
The COVID-19 pandemic caused a drastic shift in how consumers pay for goods and services. Prepaid is a key part of that equation. Data from Payments Canada showed consumers were using cash, cheques and prepaid less, but contactless payments were up significantly; 53 percent of Canadians reported using card or mobile tap payment for in-store purchases than before the pandemic. Trends occurring long before the pandemic hit are now accelerating, paving way for innovative and inclusive digital payment methods.
While data indicates some consumers might be turning to prepaid less, this is likely to be a result of consumers who might prefer, but might not have access to, digital payments, which has been a larger conversation in the prepaid ecosystem. As prepaid continues to get integrated deeper into the digital payments ecosystem, these figures are likely to shift with consumer payment preference and usage. 2020 consumer payment preferences show the need for larger conversations around accessibility and digital payments, and evaluating what populations might be being left behind.
Even more telling is data from Interac, which operates the national switch in Canada for electronic payments, on digital payments. During the early period of the pandemic in April, the company reached a record level at 61.3 million e-Transfer transactions. Payments adoption of new technology can lag because shifting consumer habits is hard. You’ll see this in adoption of digital wallets and mobile payment methods. But once a new payment method becomes a habit — out of choice, or necessity — there’s a greater chance it becomes the norm.
“This digital shift isn’t unexpected, but crisis situations compress timelines and Canadians are quickly seeking out secure and convenient digital payment options adhering to physical-distancing recommendations,” William Keliehor, chief commercial officer at Interac, wrote in a statement in May. “COVID-19 is accelerating a new era in payments driven by the changing needs of Canadians and Canadian businesses, and for many, these convenient ways to pay will have a stickiness factor that will influence a long-term shift in behavior.”
A 2020 survey by Mastercard shows 76% of Canadians say contactless payments are now their preferred way to pay. Prepaid’s ability to provide funds that are immediately available through more mobile devices — and be used via contactless payment methods — to a wide range of recipients is more important than ever as consumers grapple to navigate the ongoing economic effects of the pandemic.
Philip Cormier, a strategic partnership executive for Galileo Financial Technologies, told us their data points toward a strong uptick in contactless cards and digital wallet payments — a trend he expects to continue into 2021 and beyond. This is particularly true for mechanisms that do not require a touch of a POS device by human hand or by card.
“I think the biggest change in 2020, that will carry over to 2021 is the significant growth of "no touch" payments. We have seen a sharp increase in the requests for dual interface contactless cards,” Cormier said.
The path to real-time payments in Canada has been a slow burn. Jan Pilbauer, Payments Canada’s Executive Director has underscored the importance of real-time capabilities in Canada's payment clearing and settlement infrastructure as part of its modernization efforts. Real-time payments to deliver a faster payments rail in 2021 and beyond also has a significant impact on where prepaid fits into the digital payments ecosystem.
IT World Canada reported in June that Payments Canada was making progress toward its goal of achieving a real-time payments platform — or Real-Time Rail (RTR) by 2022. This would put the Canadian payments market on the map of the 50+ real-time networks that operate around the world. The adoption of a widespread real-time payments platform would supplement the push toward faster, more secure payments that are already being executed across the fintech and prepaid markets. While the RTR conversations span far beyond prepaid’s impact, prepaid is and will continue playing a role in the discussions
"Prepaid is driving market innovation with products that most financial institutions don't offer, such as real-time pay for gig workers and expense management for SMEs,” Tramontana said in July. This success should be embraced and accelerated through an appropriate regulatory environment so Canada can be a global leader in digital banking transformation."
Consumers expect faster settlement periods, instant notifications and better reporting of their financial activity. Prepaid’s digital transformation aligns with where the real-time payments movement in Canada is headed. Any opportunity to help consumers gain faster access to funds, and the ability to use those funds for what they need — particularly in the COVID-19 era — will get attention from payments players. Conversations around speed, security and inclusion will dominate payments news headlines in 2021.
Pre-pandemic figures indicate that a majority (76%) of Canadians already had an affinity for online and mobile for their banking transactions, and this figure is only rising each year. The rise in adoption of more open banking protocols, the floodgates have opened for the fintech-driven challenger bank market that is growing as more and more consumers turn online for their banking needs.
“Prepaid’s tech stack provides a rich and nimble platform for innovation in financial services,” Tramontana wrote. “Consequently, it is providing financial institutions and fintech players, including challenger banks, a foundation to bring new products and services to market quickly with all the supporting regulatory understanding, market awareness and risk/security framework required for successful propositions.”
The growth of challenger banks, and the convergence of prepaid and digital payments is even more evident with the news in November that Mogo, a fintech company focused on digital financial solutions, entered into an agreement to acquire Carta Worldwide, a next-gen digital payments solutions provider.
This acquisition is geared at accelerating Mogo’s push into the broader digital wallet and payments technology business. This will include the integration of Carta’s transaction processing technology with MogoSpend, a digital spending account that comes with a Mogo Visa Platinum Prepaid Card, which launched in July.
The emergence of more fintechs in the market will continue propelling the challenger bank industry. As consumers rely on ATMs and cash less, and turn toward more innovative digital payment solutions, the fintech market will continue propelling the challenger bank industry forward, presenting significant opportunities in the development of user-centric capabilities and digital solutions.
"The Canadian Fintech ecosystem is constantly evolving and its impacts on the prepaid space will only continue to grow," Sue Britton, founder and CEO of FGS, told CPPO in July. "New entrants and services such as Challenger Banks, Payroll on Demand, and the Gig Economy will be offering increased choices and benefits to Canadian consumers and businesses where a prepaid card will be the primary payment method.”
Challenger banks, Beyo said, have been a major driver behind accessibility to digital payments solutions, and the rise of prepaid solutions. Still, for growth to continue, there must be a continued push between major banks and government organizations to support prepaid as part of the larger digital payments infrastructure in order for all consumers to be part of the financial fold. CPPO will continue to heavily track these discussions throughout 2021.
“2020 was the year of digitization more than anything. For prepaid, that’s meant being the gateways for inclusion. There’s a lot of Canadians that still don’t have access to digital payments. They might have a debit card, but they can’t always shop online. There’s a lack of digital access” Beyo said. “There’s been a lot of work dispelling some really old ideas of prepaid. The pandemic has given the opportunity for the discussions to be started. ...There are a lot of people who are banked, but they don’t have access. It’s not about enabling consumers, it’s about access.”
Where prepaid plays a role is being a catalyst for these discussions is around accessibility and inclusion, including how prepaid can bridge the gaps across the financial ecosystem between challenger banks, fintechs and traditional financial institutions. Cormier agreed the rise of prepaid will be driven by underbanked consumers.
“I also expect the demand for prepaid cards in general will increase as underbanked consumers move away from cash. And those underbanked who already have prepaid cards will use them more, with an increase in direct deposit enrollment to eliminate paper checks and the need to cash checks and load cards,” Cormier said.
Prepaid has made great strides in recent years, showing continued, steady growth as more companies across the fintech and finserv ecosystem work to bridge the financial gaps among the underserved. Still, Canada’s prepaid market is in its infancy compared to the well-developed, $424 billion prepaid market in the U.S. There are lessons from investments in faster payments, and digital payment platforms that the Canadian payments market can learn from.
Despite 2020’s challenges, which will trickle into 2021, there are opportunities for prepaid to make its mark as an innovative, inclusive payments solution that can better connect consumers, businesses and the financial services companies and institutions that serve them both. 2020’s prepaid growth is on pace to remain steady, but is likely to ramp up quickly over the next few years.
“2020 will be double-digit growth, but the next few years will have a higher growth path as prepaid becomes widely accepted and open banking infrastructure gets widely accepted. Prepaid will have great gains in the next 5 years,” Beyo said. “There are good signs that Canada can get back on the map. It’s a good sign for all Canadians and prepaid. Prepaid has been on a trajectory of about double-digit growth for the past 5 years. That’s now the story of prepaid.”