Debit 201 Lesson 2: Prepaid Evolution

Debit 201(Required. Debit 101 prerequisite): Is Prepaid “Debit-Lite?”

Lesson 2 Discussion Board: Which customer segments are the most attracted to prepaid programs? And for what reasons? Click here to respond.

In the last class we reviewed how prepaid evolved from rudimentary closed-loop cash displacement in retail environments into a full-blown multi-party business with the application of general purpose reloadable (GPR) products. When combined with central funds disbursement, reload networks, spend controls, and diverse distribution, GPR products create a wealth of opportunity for expansion of electronic payments transactions for networks and processors, increase of marketing revenues for program managers, and diversification of customers and services for product distributors – most notable major retailers.  In this class we will review the current evolutionary trends that influence the growth of GPR prepaid cards and their potential for growth in light of the coming regulatory change in traditional debit cards and the impact that may have on the growth of prepaid products.

Consumer Segment Challenge: As we learned in the first section, GPR prepaid products have found their way to a broad array of consumer segments. Through the application of a combination of central disbursement, diversified distribution, reload capability, and spend controls, prepaid processors and marketers have created a healthy business from a modest stored value vehicle  known as prepaid. For many consumers, GPR prepaid has become an integral part of how they manage and access deposit funds. Let’s take a typical hourly employee as a case study: A young single mother of two working a weekly job in a quick-service restaurant without a deposit account at a financial institution — whether for reasons of low daily balance, poor credit, or other factors — faces numerous challenges in navigating her daily access to funds. 

She is paid by check at the end of every week. To access the funds on that check, she travels to a money services center, perhaps in a shady part of town, and pays 10-15% off the face value of her paycheck to turn those funds into cash, which she now has to carry home with her and hide somewhere in her apartment. On Saturday morning, after paying the landlord, she collects her paper bills from the power and cable companies, gathers her two children with her, and hops on a bus to make face-to-face visits to billing offices to pay her bills. With her children in tow, she pays a visit to the neighborhood where she earns part-time income cleaning another family’s house. When she’s finished she stops off at a clothing store to buy new shoes for the kids, paying in cash. Lastly, she visits the grocery store to buy the week’s essentials with a government subsidy check before heading back home. This odyssey may take her the better part of the day before she and her children are finally back home.

The new debit card: It is not an exaggeration to say that GPR prepaid products have the potential to fundamentally transform this single mother’s life. Suppose her employer signs up with a prepaid program manager to offer a payroll card program to all hourly employees, promoting their participation in the workplace and distributing GPR payroll cards at work to those who register. She signs up for the program and is now paid through an automatic deposit into a master account accessible from her payroll card for payment anywhere Visa and MasterCard are accepted and for cash at any ATM. Now at the end of the week the funds that shed used to receive by check and convert to cash are available immediately when the payroll system processes her wages. If she’d like cash she can get it at any ATM convenient to her trip home from work. Her funds are held securely on deposit in a financial institution with whom she did not have to establish an independent relationship. And on Saturday morning, it’s truly a new day for her. Instead of bundling up her children for a bill-paying bus odyssey, she takes them instead down to the local library. There, while they read books in the children’s section, she sits at one of the public access internet terminals and pays her bills online using her prepaid card. She also finds shoes for the kids at an online shoe site. She buys them for nearly 40% less than she would have paid at the local shoe store in her neighborhood, saving valuable money for other essentials. The kids still go with her to the house-cleaning session. However, after she’s done she takes the cash, she’s earned and heads to the grocery store with her payroll card to make a deposit. She pays for her groceries with another prepaid card provided by the local government, with the same automatic funding and traceability — no checks to get lost in the mail here. While in the checkout line, she hands the cash from her cleaning job to the clerk, swipes her payroll card, and the funds are automatically added to her account.

Sounds a lot like banking, doesn’t it?

Retail Banking: One of the most important developments in this deposit relationship game is the role of the retailer in managing and facilitating the unbanked consumer’s access to electronic financial services. Retailers certainly serve their traditional role as acceptance points for our single mother to access funds held on deposit securely and conveniently through an electronic network. With the implementation of load network capabilities, often provided by prepaid processors or through transaction processing upgrades to existing general purpose payment networks, retailers provide access points for consumers to add cash to existing GPR prepaid cards, driving more foot traffic into their stores. And increasingly, consumers are finding retail money services businesses — including access to bill payment, money transfer, check cashing, and more — in kiosks and service counters at those same load network retailers. Many of these retailer money services centers provide access to a range of GPR prepaid cards for consumers who may not receive them from an employer or government, expanding the population of users. Most importantly, the retailer can realize a new revenue stream from the distribution of cards, from the fees earned from loads, and from a share in the transaction revenues from the use of the cards. 

In our final lesson, we’ll look at how retailers are well on their way to becoming the equivalent of the local community bank for a growing segment of consumers. Is it possible that the regulation of debit acceptance sponsored by the retailer associations will serve to grow their banking businesses?

Lesson 2 Discussion Board: Which customer segments are the most attracted to prepaid programs? And for what reasons? Click here to respond.

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