Prepaid debit cards have earned a bad reputation within financial circles. But that hasn't stopped the flood of new prepaid card offerings. With the latest entry from major drugstore chain Walgreen (NASDAQ:WBA), all signs point to even more major retailers joining the craze.
Walgreen announced earlier this week that it would offer a new suite of financial services, centered on its new Balance Financial prepaid card. The Walgreen card, on which the retailer is collaborating with MasterCard (NYSE: MA) for its card network services, will give customers the same benefits as any other prepaid card, allowing users to spend money just as they would with a debit card but without the fear of overdrawing an associated checking account. But even though the Balance Financial card might not seem like anything special, it marks what could become a new trend in retail to serve a portion of the population that banks tend to ignore.
Reaching out to customers
In its press release, Walgreen cited the same figures that we've seen from past prepaid-card offerings. One out of every four American households doesn't have a full-service relationship with a bank or other financial institution, leaving 60 million adults without an easy way to do basic financial management such as paying bills or depositing paychecks.
As part of its broader financial offerings, Walgreen will have in-store kiosks, as well as online and mobile access to allow Balance Financial cardholders to check balances and move money between related cards. Next year, the retailer expects to add even more capabilities, such as direct access to Western Union's Money Transfer service and expedited bill-payment options.
Walgreen isn't the first major retailer to jump on the prepaid-card bandwagon. Last year, Wal-Mart (NYSE:WMT) teamed up with American Express (NYSE:AXP) to offer an expanded version of their Bluebird prepaid card. The low-fee prepaid option gave AmEx exposure to a new set of customers, complementing its high-end membership-based card business with the underbanked, lower-income clientele that use prepaid cards. At the same time, Bluebird advanced Wal-Mart's foray into the financial-services industry, adding to check cashing and other existing services designed to make it easier for underbanked customers to spend their money at Wal-Mart locations.
The real genius of the Walgreen offering is its link to the retailer's Balance Rewards loyalty program. Such programs have been a huge success for Walgreen and its competitors. Rite Aid (NYSE:RAD) specifically noted the success of the recent launch of its wellness65+ loyalty program aimed at seniors, with the goal of encouraging repeat visits and deterring customers from switching prescriptions to competing chains. Walgreen will offer additional rewards points for using the Balance Financial prepaid card, helping to create an even larger network effect for the offering. Additional moves like linking discounts and rebates to the card could go even further in making the card an essential part of the Walgreen's customer experience.
Of course, the Walgreen card will include many of the fees that make prepaid cards a questionable deal for a significant number of customers. Initial purchase and in-store reload fees will be $2.95, with a monthly fee of $2.95 if customers don't add at least $1,000 to the card in a given month. ATM cash withdrawals will be free inside Walgreen stores, but other ATMs will charge $2.95.
Still, the point for Walgreen and other retailers isn't the fee income they'll generate from their cards. Rather, Walgreen hopes that its card will keep customers coming back to the retailer for more of their shopping needs. If it's successful, then you can expect not only Rite Aid and other direct competitors to follow suit but also a broader set of retailers hoping to cash in on the same trend.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends American Express and MasterCard. The Motley Fool owns shares of MasterCard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.