Prepaid programs have long been criticized for its hidden and excessive fees, the “cost of doing business” with a customer base that is subject to lots of churn and requires a lot of customer service. Patricia McPeak, i2c’s VP of Products, acknowledges that the industry needs to get their revenue model under control if it is ever going to reach its full potential. Listen in on our conversation with McPeak to hear her thoughts and what she says will drive prepaid in the coming years.
The opportunity of the prepaid card services is very large. Industry data predicts $421 billion gross dollar value transactions through open-loop prepaid cards in 2017. However, many players in the prepaid industry fall apart, and many more never reach their full potential. What is your view on the state of the prepaid industry today and what strategies need to be in place to secure a strong foundation in prepaid?
PM: I think prepaid got kind of a rocky start when it started out earlier on. Some of the programs out there were really focused on making a quick buck. There were a couple of celebrity programs that had excessive fees, and I think that turned people off from prepaid. I don’t think there was a real value proposition in terms of what was in it for the consumers, and so because of that, people weren’t using it and it got a bad reputation. The focus wasn’t really there.
But things are changing, and they really need to because there are consumers that really need this product. There are many people that don’t want to get a checking account or can’t get one due to past financial issues. This provides them with a real convenient and safe way to actually transact and make payments for daily necessities.
We are putting on a three-part webinar series that’s explains how organizations can make prepaid an essential product for consumers and at the same time build a profitable, successful business around it.
When you think about debit and credit, they are very mature applications, but when it comes to the management of prepaid programs, it seems like the industry is still struggling to be profitable. So what exactly does it take to make a prepaid program profitable?
PM: One of the things is that prepaid has totally different dynamics from debit and credit. Some companies go into it thinking it’s the same. But profitability in prepaid is about building that strong value proposition – this has to be there for the consumer to want to use the card and then keep using it. That’s when it becomes valuable to them, and profitable to the companies issuing these cards. Companies have to look at what needs they’re trying to fill for the consumer.
Many of these cards are mailed out and never activated, and others are only used once. So companies really want to ensure that there’s that stickiness; because there’s no bank account like with debit and no line of credit like with credit cards, there’s no real stickiness there. Consumers can get a prepaid card, use it once, pay the fee, and throw it away. The key is to get the consumer to actually keep it and continue to use it for everyday necessities, and start building on that.
As prepaid is on the verge of entering the stage of mass adoption, how can success be measured effectively? What is an effective way to measure the success of prepaid programs?
PM: We talk to businesses about key performance indicators that are essential to measure the prepaid programs. People aren’t keeping these cards, so they have to continue to get new consumers in and keep that flow going to be profitable. The things we look at that are important are the total cash cost of the service per card – first to acquire it and then the ongoing cost. Then we look at the average revenue per card, including individual segments. Finally, we look at the average account life. If a business has this acquisition cost, and consumers are leaving before it even recovers from that, that business is already in the hole. This whole churn of bringing new cardholders on board while others are constantly leaving is really causing issues with programs so they’re not profitable and not sustainable. But you really need to pay attention to have these programs be successful for everyone, even for the consumer.
Let’s wrap up by looking into the future a bit. What prepaid trends have you seen this year that you expect to continue in 2014, and which ones do you think will go away?
PM: One of the things we’re happy to see is that there is starting to be more consumer-friendly pricing and transparency into fees. Also, better education on what the prepaid program is because again, some of the issues come from what is said or promised or what consumers think the card is going to do, they find out about fees they didn’t know about, or that they can’t use the card in some places. Putting fees and education up front is key, as well as talking about how to avoid those fees so people can use these cards where they need to and depend on them.
Another thing that we’re seeing more is that these cards are starting to be used for budgeting because you can have multiple purses locked down with an amount for savings, entertainment, household expenses, and more. It’s really helping them segregate money and keep people from overspending.
Finally, we’re seeing a lot growth in mobile. It’s a really wonderful tool for prepaid especially. There’s the engagement piece of it so that businesses can continuously tell consumers what’s going on with an account, and they will always know the balance of that card and will feel comfortable using that card. We have a client with us that has mobile payment, and among cardholders in that portfolio that are using mobile, there was a significant increase in POS transactions. Those right away became more profitable cardholders for this particular client.
One of the trends we’ve seen go away are some of the celebrities in the space that are leaving the market. In some ways, that may be a good thing because some financial institutions and banks are starting to do more with prepaid, and from the consumers’ view, it gives more credibility to the prepaid product. They can look at it as their main financial tool to transact and do things they couldn’t do with cash. This offers them a chance for financial inclusion so that they can transact like everybody else, and that’s a really good thing.
To register for i2c’s 3-part Prepaid Success Webinar Series beginning with Building a Strong Foundation for Growth on August 19th at 11 am PDT, please click the button below.
Vice President of Products, i2c
Patricia brings to i2c more than 20 years of experience in the payments industry, with roles at industry leaders like Visa and Wells Fargo Bank. As Vice President of Products, Patricia develops and delivers compelling go-to-market strategies that build demand and market awareness of i2c’s market-leading solutions. Through engagement with i2c clients in the field, her focus is on developing solutions that help clients drive business results and deepen customer loyalty.
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