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Making prepaid work

By Dave Birch posted Jan 23 2008 at 11:12 AM

[Richard Allen] Why would anyone use a prepaid card? I've been doing a survey of some U.K. products in that space. (You can do your own research at Which prepaid card.) Typically, it costs £10 to get a card, a pound or so just to load some value, 50p minimum to buy something with it, a couple of quid to draw money out of an ATM, 3% currency charges for overseas use, and so on. Many of them charge a monthly fee of around £5 in return for lower charges, but they’re still expensive one way or another. Yet the market is still growing. Some of that growth is explained by the growth in online gaming, but I wonder if remittances might also be a strong growth driver. One of the cards you can get is actually two cards that are specifically designed for remittance purposes. You send one card to your Uncle Eric in Back-of-Beyond and top-up your card with value. You then “text” Uncle Eric some value (that bit is really bonkers and incurs a 2% fee) and he can take it out of any bank or ATM (with a MasterCard logo).

How much does it cost? If you ignore the cost of the card, sending £100 to USA will actually cost you about £107 and will yield approx $190 at the other end (based on $1.96=£1 exchange rate). Expensive? Well, compare it with Western Union, the market leader. It charges £114 to send a £100 that appears to yield $185. I made similar comparisons for India, Poland and Argentina. Shopping around, there are some good alternatives. I could just get a normal pre-paid card, send it to Uncle Eric (with the PIN, of course!), then add value at a UK Post Office thereby skipping the nutty “text” bit and save another £2. Some cards, such as the sensational, soar-away Sun pre-paid card, do not charge for foreign currency transactions, thus saving another 3% or so, and some come with a paying-in book and second card (for Auntie Ethel). I reckon that we can now get $195 to Uncle Eric at a cost of less than £103. That’s better than using your average credit card! We can do all that without a single bank account or credit record between us: the infrastructure is already there - it’s called MasterCard (most of the pre-paid cards I looked at were MasterCard/Maestro-branded). We just need to find ways of using it more effectively.

[Dave Birch] It's interesting to see organisations like The Sun expanding the market rather than bank brands. In the U.S., the arrival of the the Wal-Mart MoneyCard, a prepaid Visa debit card, was expected to drive the market on, largely because the unbanked go to Walmart far more than they go to banks. But a recent survey by Synergistics Research found that about 20% of consumers were aware of the card, but only about 10% likely would use it. Moreover, only 1% of those surveyed had purchased the card. Wal-Mart introduced the card as part of its plan to roll out 1,000 MoneyCenters inside Wal-Mart stores. The card can be reloaded at any of these and also at 40,000 Green Dot Financial Network outlets. So how do the charges compare to the U.K. examples? Well, Wal-Mart charges $8.94 to obtain a card and waives the $4.95 monthly maintenance fee when a cardholder loads at least $1,000 that month onto the card. Wal-Mart also waives the $4.64 loading fee for customers who cash checks at Wal-Mart. ATM transactions cost $1.95 and operated-assisted telephone calls are $2 each. According to Steve Verdier, the senior VP of congressional affairs at Independent Community Bankers of America, this makes it more expensive that most banks' offerings:

If unbanked consumers want to keep their financial lives simple, the fees and complexities of Wal-Mart’s MoneyCard do not meet that objective... The survey results show only a fraction of consumers have purchased a Wal-Mart MoneyCard, but banks should not discount its threat yet. The MoneyCard still has the potential to divert a lot of transactions away from traditional banks.

[From CardForum | FEW CONSUMERS REPORT BUYING A WAL-MART MONEYCARD]
It's market worth fighting for. The total for load volume including all "open" (ie, Visa/MasterCard/Amex etc) and "closed" schemes will reach $421.5 billion by 2010. The closed market will represent $240 billion of that with open solutions around $182 billion. The growth in open solutions is significant: a couple of years ago they were a seventh of the market but they are growing at more than 50% per annum (closed solutions are growing at less than 10% per annum). With this vigorous growth and competition, one might reasonably hope for more innovation as well.
Yet as Richard's introduction indicates, and as has been discussed here once or twice, the potential for the prepaid "cards" market looks terrific but the implementation of prepaid cards has been a little patchy. This is because the open products are built on top of the systems developed for credit and debit cards. This leads to problems from time to time. Step by step, the terminals, networks and hosts need to be improved to deliver better service for prepaid products and therefore help the sector to grow. That's not to stay that the schemes aren't already taking steps in this direction. One of these steps in the U.S. is sorting out authorisation problems, so the news that Shell Oil and its 6,000 stations committed to Visa's "partial authorisation service" is welcome. The service is designed for customers making a purchase that is larger than the balance remaining in the prepaid account. Instead of declining the transaction (which is unpopular with retailers as it may mean a lost sale and confuses consumers) pumps will be programmed to dispense petrol or diesel to the value remaining. So instead of doing a standard (let's say) $50 authorisation -- which is what they do with credit cards -- the terminal recognises that prepaid products need to be treated differently.

I still think, however, that the most important step forward for prepaid products is integration with mobiles. Javelin highlight the example of SMS alerts, but I'm sure there are other possibilities (such as targetting better services for remittances). The reason I'm so sure about this is that knowing the balance on a prepaid product is absolutely critical to its use and the mobile screen provides no better place to show the customer that balance, either because the card is integrated into the phone (eg, through NFC) or because the account is (eg, through SMS).

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

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Comments

Great analysis by Dave Birch. I recently blogged about making acquirer implementations more prepaid paid-savvy. See:

http://www.andyorrock.com/2008/01/partial-auth-an.html

Like Dave, I mentioned that the big thing is tackling the partial auth scenario. In my post, I talk about the implementation specifics of that, using FDR North and AMEX as real-life examples.

I actually blogged about the Wal-Mart MoneyCard this past summer. It is possible for you to use the card with no fees... Here's the link: http://bankingkismet.wordpress.com/2007/07/31/how-to-get-a-no-fee-wal-mart-moneycard/

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