For the benefit of the two or three people who have not taken part in the conversation about general prepaid cards during the past year, we offer a few basic statistics below. For everyone else, we offer several less-often mentioned numbers, courtesy of the Mercator Advisory Group:
- By 2015, the total dollar load on open-loop prepaid cards is expected to hit $389 billion, roughly a 28 percent increase from 2011.
- Prime candidates for the use of prepaid cards are the un- and underbanked, who represent more than 25 million households in the United States.
- About 87 percent of prepaid cards in the last year were gifts; 14 percent were used for household expense budgeting, 12 percent and 16 percent of those households, respectively, use a general prepaid card.
- More than 32 percent of consumers have used a prepaid card.
- The average value of a prepaid card transaction, according to a 2010 Fed study, is $33.
- More than two-thirds of general prepaid transactions were less than $25.
In a workshop at the recent ATM, Debit and Prepaid Forum, presenter Ben Jackson, senior analyst at Mercator Advisory Group, and panelists Joan Herman, senior vice president of prepaid card services at University Bank, and Jessica Palmer, director of implementation and operations at Fiserv, looked beyond the numbers to address the larger questions about prepaid: "Are Prepaid Cards the Next Big Thing in Banking?" and "I Want to Launch a Prepaid Card — Now What?"
Quite a few major banks have already checked the Next Big Thing box and rolled out prepaid programs. Non-bank ventures are in the mix, too, from oldsters like NetSpend and Green Dot to brand new Bluebird, the JV hatched up by Wal-mart Stores Inc. and American Express — not to mention big retailers such as Target and Kroger.
The workshop addressed six issues an FI should consider before entering the prepaid market:
1) Service area. Green Dot cards can be bought and reloaded at tens of thousands of retail stores across the country. No bank can match that distribution network. So, an FI must determine whether it can achieve the necessary issuing volume to make prepaids profitable.
2) Customer point of view. A consumer's card choice is not always about price, Jackson said. It can also be about speed to spend. Or convenience of load. "They are making an informed decision," he said. "They are actively, consciously choosing this — because it saves them money or because it saves them time or it saves them some other aggravation."
3) Product mechanics. According to Jackson, any FI thinking about getting into prepaid should do what Fiserv told their employees to do: "Go out and get a prepaid card. Go out and buy some and see how they work."
Palmer recommended trying several cards and comparing the ease of use and quality of service. "Buy a couple of different brands … NetSpend, Green Dot, and see what your experience is," she said.
4) Value chain. Several providers can fill the space between the FI that issues a prepaid and the cardholder who uses it: the issuing processor, service providers (e.g., help desk), program manager, distributor, and the acquisition point where the customer obtains the card. The more functions an FI can perform in-house, the less margin they'll lose along the chain.
Hermann said that her institution used a contracted program manager to take care of the downstream details of the University Bank GPC program. "My program managers do a lot … they kind of developed the card program and the terms, conditions and fees around it," she said.
Hermann's program manager also comes up with the distribution and reload processes, then brings the entire package to her for an OK. "I have to approve all of those vendors that they're using because I have the responsibility for everything that goes on."
5) Program options. There are several ways to approach the prepaid business, Palmer said: build a complete program; assemble a partial program; or simply act as a sales agent for a white-label product.
"There are a couple of things you need to think about," she said. "Are you going to be the issuing bank or are you looking for someone else to be the issuing bank for you, and you just want to offer the solution? Are you going to be a program manager or are you going to be a processor? What level of complexity do you want within your organization?
6) Profitability. Which permutation of the three prepaid card programs can your organization realistically, profitably administer? The program manager model brings in the most revenue — but also requires significant spending on personnel and operations. As a BIN sponsor, an FI can implement the problem with far less outlay, but will bring in only transaction fees and certain sponsorship payments from the program manager. As always, it comes down to numbers.
And even when the numbers work, an FI still needs someone with the muscle to push the project forward. Said Palmer, "You need a senior stakeholder — someone who's going to be championing this."
For more on this topic, visit the transaction processing research center.