Debit 201 Lesson 3: Prepaid Implications

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

Lesson 3 Discussion Board: What is the most likely outcome for the growth of prepaid in light of Durbin? Will it become a substitute debit vehicle? Who will be marketing and distributing prepaid? Click here to respond.

We’ve discussed how prepaid has grown from a basic closed loop one-time use gift card capability to a general-purpose reloadable platform that can support a host of consumer, business, and government uses. We’ve looked at how growing consumer segments may be served by general purpose reloadable (GPR) prepaid, and we conclude with an overview of how retailers are building businesses around this highly-flexible product platform. In this session, we’ll take a look at the possible evolution of prepaid products and the key questions about the future of each of the major constituencies in the prepaid marketplace.

Is it Possible? Could GPR prepaid evolve from its current status as a debit alternative to the new standard for debit in the US marketplace? Maybe. Let’s start with a hypothesis: Despite their best efforts and well-intentioned approach to implementing a rather challenging piece of legislation, the good folks at the Fed tasked with tackling the Durbin amendment take a strict interpretation of the law and move debit rates to cover truly marginal processing costs, driving down dramatically the debit transaction revenues that underpin most financial institution DDA management P&Ls. In an effort to keep their retail deposit businesses afloat in the face of such a sudden shock, financial institutions of all sizes are forced to reprice their product/service offerings and prune low-balance customer segments, driving a large swath of the current deposit population out into the marketplace in search of a funds management and access solution that will support a $500 average daily balance, deliver anytime access, and doesn’t come with monthly fees. (By the way, that average balance is a bigger share of the population than you’d like to think).

Prepaid Players Are Ready: The prepaid industry anticipates exactly that outcome, and they stand at the ready with prepaid programs and products designed to serve that customer need profitably, taking advantage of what is expected to be a tremendous opportunity in the wake of the financial reform bill. A favorite pastime in the industry is armchair quarterbacking the likely winners in this race. Let’s take a look at the contenders and have you decide who might be best positioned to reap the benefits of a possible mass exodus from banks accounts to prepaid programs. No one type of organization necessarily has all the pieces in place, but some might be in better position than others to take advantage of what many believe will a major period of significant growth in the prepaid business. At the end of the class, we’ll put it to the student body to predict who will come out on top. The contenders are:


The Orchestrators: A number of folks have their bets placed on program managers as the most likely winners. These organizations define products, develop and manage distribution channels, secure processing and network partnerships, package solutions, and customize service offerings for distribution clients. They have evolved from merchandisers to managers of complex prepaid network ecosystems, managing a product and program platform that ties together a host of horizontal competitors in retail, processing, and financial services. Funny enough, they rarely own any processing or network assets, instead customizing the application of established infrastructure and product constructs from other players. As the organizers of others’ activities and assets, program managers have traditionally enjoyed the greatest share of overall revenue generated by prepaid account activity.

The Facilitators: Electronic payments don’t happen without technology companies managing network and account management processing infrastructure. Specialty processors have grown by building customized issuer account processing capabilities, striking advantaged relationships with (or buying into) financial institutions on the back end to hold and manage funds. Unlike issuer processing in other parts of the payments industry, the processor is very much the driver of business direction here over the financial institution holding the account. Some of these processors have also built and managed load networks that provide direct acceptance and reload capability for private label prepaid programs with many of the largest retailers. Some of these networks have been modified to manage GPR prepaid reloads as well. A select few of the prepaid specialty processors are also established in the program management business, capturing a larger share of the revenue from program activity than their processing peers. The major bankcard networks certainly have also built programs capabilities into their processing networks to support the key features — spend controls, acceptance screens, validation check transactions, and load capability — that successful GPR prepaid programs require. However, these networks typically do not see more income from these services than their traditional network processing fees have generated.

The Distributors: There is no doubt that one of the most compelling benefits from the rise of GPR prepaid and its suite flexible services has been the expansion of the traditional payments stakeholder universe to include a host of new companies, bringing new participants to the payments network business model who have in turn brought new segments of consumers into the benefits of electronic payments. Corporations and employers now have a range of cost-effective and convenient options for paying and incentivizing employees. In concert with health plan carriers and administrators, those same employers can also deliver health benefits through prepaid programs, fueling the rise in consumer-directed healthcare while capturing the savings and reporting benefits of electronic access to pre-funded health savings and flexible spending accounts. Governments have found in GPR prepaid a new way to deliver state benefits that is traceable, controllable and cost-effective while highly convenient and immediate for the benefits recipient. Money services businesses and money transfer operators have discovered a product that helps them establish an ongoing relationship with customers, providing a reloadable product that serves as a repeatable destination for funds from sources such as cashed checks and money transfers. In addition to accruing GPR commercial application benefits as employers, retailers may now earn revenues from merchandising and reloading packaged financial services products. Many large retailers have engaged in money services businesses of their own, establishing an equivalent of branch banking in their stores with check cashing, money transfers, and financial account acquisition and management. GPR prepaid has been the foundation for this.


Reading this list of key prepaid participants may lead you to wonder: Where are the banks in all of this? Funnt enough, as the prepaid business evolved, many financial institutions either jumped on board the GPR prepaid bandwagon as their commercial clients began to demand it or took a back seat to the specialists in the space, serving primarily as back-end repositories of the funds held in GPR accounts. And many of those financial institution repositories are not large independent operators but rather smaller organizations who aligned themselves with specialty program managers or processors. If GPR prepaid evolves to become the primary debit vehicle for the consumer mass market, where will traditional deposit banking ultimately live?

As we discussed in the first course, the landscape for retail deposit is set to see significant and fundamental change in the wake of a massive wave of financial reform legislation and regulatory oversight. Might one of the unintended consequences of that regulation be to create a new deposit paradigm with a diverse population of specialty marketers, processors, and distributors with prepaid as the access vehicle? How might mass-market deposit consumers be served by that ecosystem? Is it possible that the same retail industry that pushed for regulation of debit card fees now stands to become the new banking industry for the vast majority of low- to middle-income consumers? Might this be another unintended consequence of the new regulatory construct? Is anyone at the Fed thinking about how it might maintain oversight of consumer finance if the flow of consumer retail deposit funds moves from the traditional financial institutions the Fed has always managed into this model? Hmmmm….

Take the quiz tomorrow and tell us what you think.

Lesson 3 Discussion Board: What is the most likely outcome for the growth of prepaid in light of Durbin? Will it become a substitute debit vehicle? Who will be marketing and distributing prepaid? Click here to respond.

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