Banks Move into Prepaid Market
Seeking New Customers and Fee Income
The emergence of a new type of consumer and the growing acceptance of prepaid are two factors driving banking institutions into the prepaid card market.
Over the last few years, prepaid products and services have moved into the mainstream. The total prepaid market grew by 15.4 percent (from $355 billion in 2009 to $409.7 billion) in 2010, an increase of $54.7 billion, according to Mercator Advisory Group.
Figures like this tell us that prepaid services are serving more consumers in every walk of life. Banks are realizing that high-income customers are not the only demographic market to target.
A lower-income customer is still an opportunity for future profitability. As the prepaid account rolls out, deposit services may be applied. Every day, financial services on a prepaid card are including online bill pay, debit, disbursements, loyalty and incentive. Prepaid is no longer just basic ATM and POS access. It’s a natural for banks to see prepaid as an opportunity as a revenue-generating product.
“The number one reason that banks are getting into prepaid is because of new customer acquisition,” said T. Jack Williams, president of Paymentcard Services. “Regulations, like the Durbin Amendment, have cost banks revenues, so they are focusing more on a new type of customer.”
The “I used to be banked” Consumer
The same individual that used to have a wallet full of credit cards now may only carry two debit cards; owns a house with little or no equity; and has a 401k that has depreciated. His bank might have even severed ties with him or tacked on too many fees. This consumer tells his friends, “I used to be banked.”
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That’s why the opportunities for prepaid keeps getting wider. Let’s take a quick look at the past relative to prepaid.
Historically, some big banks, including Comerica, Chase, Bank of America, and US Bank, have been in the prepaid space, but primarily for government disbursements, such as social security payments, disaster relief, government payroll, and tax refunds.
For the most part, banks typically concentrated on soliciting new customers through credit card offerings and let GreenDot and NetSpend carry the prepaid market, with a focus on the unbanked and underbanked customer.
Until the economy started to collapse in 2008, this de facto arrangement worked out fine. Then, as housing values sank with financial markets, many average Americans experienced the dwindling of their assets and the decline of their credit scores. Credit worthy customers became harder to find, meaning less customers for the bank.
“The world of credit card worthy people has shrunk, so banks have to draw customers from other groups,” said Williams. “What’s changing is the prepaid constituency. Besides the unbanked and the underbanked, we have those who used to be banked.”
Tapping into the Lower-Income Market
For some time now, bank executives have understood that they have to diversify their customer base. The customer with direct deposit, high balance checking and saving accounts, and credit cards is a profitable customer, but there are other potential customers that deserve service.
Hank Israel, partner, Novantas Consulting, said that banks are looking for incremental fee income and to find it they are getting into prepaid, positioning for lower-income and lower-profitability accounts. “Banks are thinking about how they can leverage their network by tapping into the lower-income market,” said Israel. “Banks believe that they can offer a continuum of services, convenience and flexibility of services, whereas the Green Dot and Netspend model are seeking ubiquity.”
“You have to envision the customer standing at the grocery store point of sale and seeing a marketing insert from Green Dot and another marketing offer from a bank. Which will the consumer feel safer with?” Israel suggests.
Consultant Jim Wells, president, Wellspring Consulting international, who works with credit unions to set up card programs, said, “Prepaid cards have become an opportunity to turn unprofitable customers into profitable customers and to attract new customers from amongst consumers who eschew traditional deposit-base accounts – an opportunity banks have consistently ignored, in favor of having their sycophants try to drive the so-called ‘unbanked’ into bank accounts.
The majority of banks in the US are just now rising to the occasion and are beginning to pay attention to prepaid opportunity. Jim Angleton, CEO of Aegis FinServ Corp, suggested that banks believe that because they are on Fiserv that they can merely add prepaid to their business model. But rolling out prepaid takes research and understanding what a BIN is, processing, and regulations.
“That is why banks are likely to partner with program managers that know how to run and merchandise card programs,” said Angleton. “The good news is: banks are all in the debit industry just not confirmed into the prepaid space.” He expects that the next 18 months will see more community banks embracing prepaid for payroll, gift and student cards. Mid-sized banks will use their constituent business base to move into retail, payroll and travel expenditure card programs, resulting in more fee income and growth.
Who’s Buying Prepaid? Where Do They Get Them?
New research from The Payments Report, a syndicated research report published by the Auriemma Consulting Group (ACG), revealed that a slight majority, (54 percent), of consumers have actually purchased prepaid cards, and the demographic profile spans virtually every age and income band.
By far, most (79 percent) prepaid card purchasers acquired their prepaid cards at brick-and-mortar retail stores, while just over half (53 percent) received a prepaid card as a rebate for another purchase. Recently, several major financial institutions, including JPMorgan Chase & Co. have launched reloadable cards. Chase Liquid, a new reloadable card offers customers financial control and flexibility with the convenience of Chase’s extensive 5000-plus branches and ATM network.
“Consumers are looking for an affordable and predictable way to manage their money,” said Ryan McInerney, CEO of Consumer Banking, in a press release from Chase.
While some consumers still have questions about prepaid card fees, that is becoming less of an issue since federal regulations have been put in place to protect consumers. In May 2012, the Consumer Financial Protection Bureau (CFPB) took the first step in looking at consumer protections for the fast-growing prepaid card market.
According to ACG, banks already comply with a variety of regulations that mandate pricing disclosure, including Federal Reserve Board Regulations Z and E. Dr. Patricia Sahm, managing director at ACG, says that banks offering prepaid card products make perfect sense. She said, “Banks introduced the payment card to the world, so this is a logical extension of a business banks already know about.” She added that banks may be able to bring some much-needed disclosure transparency to prepaid cards that have been largely missing from this space so far.
The Cost of Durbin
With new regulations affecting the revenue streams of financial institutions, there is another reason to move into the prepaid space. The Durbin amendment, which took effect last October, cut nearly in half the amount of fees big banks like Chase and Bank of America can charge merchants every time a consumer swipes a debit card. The rules included an exemption for many types of prepaid cards. These products can still earn higher fees from merchants. Banks are also losing out on fees for overdraft protection because separate rules require banks to get customers to opt in to overdraft protection.
According to Javelin Strategy & Research, those two rules are expected to wipe out more than $12 billion in annual revenue for banks. So it’s no wonder that banks are trying to get a leg up on gaining incremental fees through prepaid cards.
Williams said the third reason why banks will get into prepaid is “cash deposits.” Prepaid cards are accounted for differently on a bank’s books as opposed to deposit accounts. “Having cash deposits on hand from prepaid debit cards will affect the interest rate they pay when they borrow money from the Treasury for liquidity,” said Williams. “These cash deposits can reduce how much banks have to borrow each night from the Treasury.”
Growth in Prepaid
“Growth in prepaid will come from smaller non-Durbin impacted banks,” Williams thinks. “Without in-house expertise of prepaid, they will be hiring a program manager who can offer a turn-key solution.”
One program manager and processor focusing on small banks throughout the country is TransCard, a prepaid specialist that has developed a turn-key system for banks into prepaid.
“Banks are looking for fee income and want to service different types of customers,” said Craig Fuller, CEO, Transcard. “But offering prepaid is different than deposit products. Banks need a marketing strategy and a whole customer acquisition strategy.”
Chattanooga, TN-based TransCard recently launched a marketing campaign for the Unlimited Access reloadable prepaid card with First Bethany Bank in Oklahoma. With only one fee—a monthly fee of $9.95 (set by the bank)—TransCard said the card is designed to appeal to consumers looking for a simple, transparent and fair pricing structure. The card comes with a suite of online bill-pay and money management tools, 24/7 live, bilingual customer service and other features.
The marketing pilot will include branch, field and experiential marketing promotions, working with local soccer leagues and food trucks to reach their target audience. All efforts will be supported by a grass roots financial literacy campaign.
Fuller said his company is working with 63 banks throughout the country that want to roll out prepaid cards, including GPR, payroll and gift cards.
Marrying Prepaid and ATM
Prepaid cards, including gift cards, are readily available in big box and convenience stores. Why not banks?
“When banks turn away customers they are setting a dangerous precedent,” said Todd Nuttall, CEO and chairman of Better ATM Services. “They are teaching customers to go down the street to Walmart.” Nuttall suggests automating prepaid through bank ATM machines.
Better ATM Services is building a bridge between prepaid and ATM, marrying ATM transactions with prepaid cards. The idea is that ATM machines are part of everyday business, trusted and convenient, and secure.
Although still early in development, Better ATM Services is offering banks a card package with ATM linkage. They are working with Visa to run live in test markets.
“The ATM is already there and connected to financial networks,” said Nuttall. He explained how ATM cassettes can be adjusted to dispense prepaid reloadable cards that can be delivered and loaded into ATMs by the same people in armored cars that load cash. The form factor is a large sheet of plastic, thinner than a regular debit or credit card, which can pass through the ATM slot. The plastic sheet snaps apart, the way loyalty cards do. The customer gets three cards, including one Visa prepaid card, one customer service card, and one rewards card.
It certainly appears that banks are recognizing the value and functionality of prepaid and are gradually getting into the space, with the help of program managers and processors. Prepaid card programs will continue to be a launching pad for a broad array of financial services, meaning profitability for institutions and independence for individuals. •