The Banks And Prepaid – Round 2

At the risk of stepping into a hornet’s nest, I’m following up my first commentary on JPMorgan Chase & Co.’s commercial prepaid exit with another related article. This time it is prompted by Fitch’s recent analysis of the general purpose reloadable (GPR) prepaid market and the implications for banks.

I found Fitch’s commentary interesting and mostly on target, with a couple of revisions and expansions. First of all, as of the most recent public disclosures, Chase isn’t exiting the consumer-prepaid business – specifically GPR cards. The bank only announced the planned sale of the commercial prepaid unit, including payroll and government applications. Exiting one business does not necessarily mean you would be exiting the other.

Secondly, there are many reasons why the GPR card business is strategic, important and useful for banks to go after. If regulatory oversight becomes greater, including pressure on fees and disclosures, it could affect many of the players in the industry, not just banks. At the same time, the GPR business can present challenges for traditional financial institutions, but not for regulatory reasons.

The Advantages For Banks

First, dispel the notion that GPR cardholders are primarily unbanked consumers who have never had a relationship with a financial institution. They are not. Data supported by the recent studyconducted by Pew Charitable Trusts found 59% of prepaid card users have a checking account. Twenty nine percent don’t have one, but did previously.

Additionally, 66% of cardholders in the Pew survey either have or had at one time a credit card. They aren’t “new” to the world of financial services. This is not an introductory product.

But they are struggling to get their financial situation back on track, and they are struggling to manage fees that occurred through their regular checking account. Twenty one percent have used a payday loan facility, and 38% have used a check-cashing store.

It is possible that BOTH checking accounts and prepaid cards can provide unique roles for a select group of consumers. Given the already large amount of overlap and willingness to use both products, prepaid cards are a helpful budgeting tool for controlling spending, avoiding high overdraft fees and credit card debt. Plus they allow consumers the ability to make online purchases in a safe, secure manner.

At the same time, traditional checking accounts still provide benefits that most GPRs don’t have, or have difficulty providing if the issuer wants to receive the benefit of higher interchange rates. This includes paying bills electronically and check-writing privileges. Further, the demand deposit account can provide access to move money to/from prepaid card(s) to control spending. The majority of consumers still view checking accounts as aspirational and desire to have one in the future, if they don’t have one today.

The Challenges

Acquiring customers is critical, and non-bank competitors have been honing their skills at this for nearly a decade. Comparison-shopping is not the norm, and communication needs to be targeted. Cards are most frequently purchased in a store (54%, Pew found), most notably in a store they frequent for everyday items. Advantage: Walmart, 7-Eleven and other stores offering everyday merchandise.

Banks are far behind by a long shot, as only 9% of cards were obtained through this channel, according to Pew. With fewer and fewer consumers actually using a branch channel, it would seem that this percentage would decline even further unless banks can figure out a way to make their digital and mobile channels productive.

Second, many consumers are disenfranchised. They either lost their account due to overdrafts or left voluntarily, given rising fees. They are seeking other ways to manage their financial needs without getting into trouble. Brand issues may still get in the way of “embracing” a relationship. Despite some marginal gains since the depths of the recession, banks still rank at the very bottom of the trust ranking based on Edelman’s Global Trust Survey in 2013.

Finally, there are executional challenges. Similarly to commercial prepaid, GPR cards are not like any other processing platform within a bank. Yes, there are knowledge areas, which can be leveraged, such as risk management. But some of the most successful companies to date have thrived by building from scratch – new processing platform, new rules and procedures, new distribution methods and communication tools, and new intersections with mobile and digital platforms that allow the consumer to maximize the way they access their money – such as loading and reloading funds at their convenience. Most importantly, they have spent years specifically trying to understand this consumer, what she needs, and why.

Final Implications

If banks are going to be successful in this market, it takes rethinking how they interact with their customer. It’s not just a higher-interchange and potentially lower-cost product. It’s fundamentally different. It’s both a substitute and compliment for traditional banking products.

Traditional financial institutions must understand these consumers and what makes them tick, inside and out. They are younger and have less income but not uneducated. They are employed, mostly full time, and renting. They are highly digital and use these products a lot. The traditional financial-services products do not work any more, so they have found alternatives. Non-banks are serving them. The banks that are capable of understanding these dynamics and how to attract and retain this consumer may do quite well. The others, well, … regulations or not, they will struggle.