Where the Banks Aren't: Advances in Branded Prepaid Cards
The 20 June 2007 may eventually be known as the day that payment network-branded general purpose reloadable (GPR) prepaid cards went mainstream. On that day, Wal-Mart announced the launch of its Wal-Mart Money Card, a reverberating recognition by America’s largest retailer and commercial employer that reloadable prepaid cards offer a highly attractive value proposition to its shoppers. With this announcement and ensuing public relations campaign, Wal-Mart also raised awareness of the costs of the alternative financial sector (AFS) and the price that the unbanked and underbanked populations pay to gain access to cash and to conduct everyday financial transactions.
Payment network-branded prepaid cards represent the ‘next big thing’ in consumer payment cards. However, there is one area of branded prepaid card growth where traditional banks have been conspicuously absent: general-purpose reloadable cards for the unbanked population. This population consists of 36 million people with an aggregate income of US$260bn. Extrapolating out the current average load amounts on these cards, there is a US$31bn market to be captured. Should average load amounts rise as this population shifts from the early adoption stage to mainstream acceptance, the market size will become even more immense, with the potential for card spending at US$192bn. By doing little to go after this population, banks have left the door wide open for non-traditional and non-bank competitors to freely pursue this massive market.
Many household names in the US have launched or expanded GPR card programmes, including Wal-Mart, Discover, H&R Block, Home Depot and Western Union. These announcements regarding GPR cards share striking similarities in that the card programmes exclusively target the unbanked, underbanked or immigrant populations.
Along with GPR cards, payroll cards have also historically been issued to the unbanked. However, these cards typically have relatively limited functionality, and in particular lack the ability to reload the card from any source other than a preset employer. Nonetheless, along with GPR cards, payroll cards do offer payment convenience to the population that typically relies on check cashing services and money orders as financial instruments.
Looking at both GPR and payroll cards for the unbanked population, the market is clearly unsaturated. Payroll cards have barely reached the unbanked market, with projections of an 11% saturation rate in 2010. Adding GPR card projections barely moves the needle – there is plenty of room for growth.
Including both GPR cards and payroll cards in unbanked card estimates, Celent projects that the total revenue potential for industry players will be approximately US$339m in 2010. Interchange will be the biggest driver, increasing with card volume. However, given the level of competition in the market, it is expected that fee revenue sources such as activation fees, reload fees, and monthly service fees will be driven downward and that eventually monthly service fees will disappear altogether.
In terms of core transactional functionality, the non-traditional and non-bank branded prepaid cards differ little from those offered by banks. However, the non-traditional/non-banks’ advantages lie in their ability to effectively reach out to the unbanked population, marketing their cards via relevant retail channels, such as pharmacies, supermarkets, corner stores and alternative financial sector (e.g., cheque cashing) locations. In contrast, the banks’ retail reach extends only as far as the front door of their branches.
Network-branded cards (e.g. Visa, MasterCard) have long lived within the domain of retail banks, generating huge revenue streams for such bank card issuers. Even more within the domain of retail banks have been products and services such as ATM cards, direct deposit and international remittances. Unchallenged for decades, retail banks are now facing the reality that a number of non-traditional/non-banks are beginning to offer these very same services, targeting and acclimating the unbanked for future bankability.
Numerous well-known non-traditional/non-banks have had great success with prepaid card programmes targeting the unbanked and under-served populations. Although these non-traditional/non-bank players employ a number of differing strategies and business models, they all share a common grand strategy based upon a careful reconsideration of what exactly a bank account really has to offer.
In particular, the non-traditional/non-banks have come to understand that a bank account can actually be broken down into two major components: one is the actual account, and the other is a wide variety of value-added, potentially fee-based ancillary products (examples include debit cards, bill pay, direct deposit, etc). Unable to offer the actual bank accounts, competitors have supplanted them with a GPR card account, while offering the same ancillary products and services typically offered by banks. In addition to debit cards, bill pay and direct deposit, non-traditional/non-banks also offer ATM withdrawals, mobile account access, international remittance, savings features, and overdraft protection. In some cases, non-traditional/non-banks offer products superior to those of banks, including instant card issuance and P2P payments.
One of the most visible distribution channels for reloadable prepaid card programmes is the general retail channel, including major supermarket, pharmacy and convenience store chains. Another channel approach is to go where the unbanked already go today for their financial needs – the alternative financial sector (AFS). Compared to the general retail channel, the AFS provides a higher level of customer service that the unbanked often require. Importantly, as the unbanked have frequented the AFS channel historically, they are familiar with this environment and feel comfortable going there to meet their financial needs.
The key to the non-traditional/non-banks’ success lies in the knowledge of their customers. The non-traditional/non-banks possess no advantage in terms of card technology and functionality. Their GPR cards work in exactly the same manner as traditional banks’ reloadable prepaid cards. In other words, there is no magic bullet. The non-traditional/non-banks recognize the potential of the unbanked market and are willing to go where the unbanked are. Non-traditional/non-bank business success has been largely determined by being in the right distribution channel, whether through retailers, the alternative financial sector or employers.
However, non-traditional/non-banks also suffer from weaknesses that could be exploited by the traditional banking sector, should banks be interested in pursuing the unbanked with GPR card programmes. The non-traditional/non-banks’ first weakness is a relatively high cost structure. The need to include numerous parties (retailers, distributors, programme managers, processors and BIN sponsor banks) in the GPR card programme value chain results in a multi-layered revenue margin construct, which inherently adds cost to the product at each link in the value chain.
Secondly, due to cost structures and despite some experimentation, the non-traditional/non-banks do not offer ‘aspirational’ financial services. Unlike banks, the overwhelming majority of non-traditional/non-banks do not offer savings accounts or lines of credit. These two products could potentially improve the unbanked population’s income or asset status.
Thirdly, a weakness that may be very difficult for non-traditional/non-banks to overcome is that of lack of trust. Banks’ core value proposition is built upon trust, the assurance that funds deposited in these financial institutions will be safe. Non-traditional/non-banks pale in comparison. Most of the non-traditional/non-banks in the GPR card space didn’t exist a decade ago. Very few are publicly traded. There is little if any brand recognition. Because the unbanked have little money to spare, it would not be surprising if they were apprehensive about leaving their money with a relatively unknown non-traditional/non-bank entity.
Finally, a key non-traditional/non-bank weakness is their fee structure. In particular, monthly service fees are hard to rationalise because they do not reflect any value being delivered. Given that banks do not charge for deposits, in comparison it is also hard for non-traditional/non-banks to justify GPR card reload fees.
As GPR cards all offer the same basic functionality, Celent expects that a number of trends will emerge as programme managers try to find ways to differentiate their products:
Given the level of competition in the marketplace, there is considerable pressure on GPR pricing. Monthly fees, once a mainstay component of GPR fee structures, are rapidly disappearing. Activation fees and reload fees are likely to come down next. If programme managers are to retain cardholders, it is also likely that per-transaction pricing will come down, if not disappear altogether.
By most estimates, there are currently hundreds of GPR card programmes run by various programme managers. Given the price compression mentioned above, many of these players (and their card programs) are expected to exit the market. The players that will remain are those that are able to remain profitable despite price competition. The market winners will be those companies that can achieve economies of scale and of scope.
Currently, reload networks are marketed to consumers under the brands of the companies that have built them. However, this requires cardholders to refer to disparate directories to figure out where to go to reload. Going forward, the entire class of GPR card products will be re-loadable across all reload locations, as part of a payment brand load acceptance network.
In the battle for customer retention, loyalty points will become an important tool alongside direct deposit and bill pay. The need to offer points will only serve to accelerate the industry consolidation trend, as margins are squeezed tighter to fund these loyalty schemes.
As the retail channel reaches saturation, it is likely that GPR card players will begin to reach out to employers to offer GPR cards packaged as portable payroll cards. Given that payroll direct deposit is one of the ‘stickiest’ features of GPR cards, working with employers to offer payroll cards is a highly attractive market strategy that encroaches upon retail banks’ strengths. Players that will succeed will therefore be those non-traditional/non-banks that have existing relationships with employers.