Economics of Prepaid Cards · reload fees (corporate paid), and interchange Non-sales employees,...
Transcript of Economics of Prepaid Cards · reload fees (corporate paid), and interchange Non-sales employees,...
Economics of Prepaid CardsEconomics of Prepaid Cards
ATM, Debit & Prepaid ForumATM, Debit & Prepaid ForumOctober 3October 3--5, 20075, 2007
Matt Matt ““AnilAnil”” KerperKerperVP of Prepaid ServicesVP of Prepaid Services
Parago, Inc.Parago, Inc.
Credit, Debit, & PrepaidCredit, Debit, & Prepaid
Pay NowPay Later
Pay Before
Prepaid Prepaid
Credit Credit Debit Debit
Credit, Debit, & Prepaid Credit, Debit, & Prepaid -- FeaturesFeaturesPay Later Pay Now Pay Before
1. Qualification tied to extension of credit
2. Longer life span
3. Used for purchases requiring extended financing
4. Often comes with generous reward programs
5. Generates most revenue from Interest & Interchange
1. Quasi-qualification based issuance tied to DDA account
2. May include overdraft protection
3. Includes PIN debit & traditional credit functionality
4. Primary payment tool for many banked consumers
5. Generates revenue from Interchange, Fees, & peripheral bank services
1. OFAC and CIP required. Typically no credit check
2. May include limited overdraft protection
3. Usually includes PIN based debit & traditional credit functionality
4. Often a limited lifespan due to product use
5. Primary financial tool for self banked while specific use product for others
6. Revenue generated from Interchange & fees
Pay Before Market SizePay Before Market Size
4.739.04
14.63
26.76
0.00
5.00
10.00
15.00
20.00
25.00
30.00
Open 2003 Open 2004 Open 2005 Open 2006
US Open Branded Prepaid Market Growth(in Billion $'s Loaded)
Source: Mercator Advisor Group
Current Prepaid SegmentsCurrent Prepaid Segments
Source: Mercator Advisor Group
The Prepaid Supply ChainThe Prepaid Supply Chain
ProgramProgram
ManagerManager
CardAssociation
Processor
Transaction feesIntegration / developmentMinimums
ReceiveReceiveInterchangeFloat (negotiated)Card holder feesProgram management fees from third party
PayPayTransaction feesMinimumsRisk / fraudFront loaded costs
Bank
InterchangeFloatTransaction feesMinimums
Interchange
Payroll CardsPayroll Cards
Payroll
Cards
Payroll
Cards
Typically low/no fees to consumer
Can be costly to administer due to complex sales process, heavy CS/IVR usage, low offsetting fees, high expectation of customer service
Usually solid, cyclical loading patterns yield profitable consumers once critical mass is reached
Revenue generated through interchange, fees to cardholder, fees to corporation (load, issuance, CS), interest on float
Government benefits, contract workers, short term staff, unbanked / self banked, immigrant centric work pools with high rates of money transfer
General Purpose ReloadableGeneral Purpose Reloadable
GPR
Cards
GPR
Cards
Typically higher fees to the consumer
Widespread distribution and competition from small operators through the largest players
Revenue mostly from card fees, initial purchase and reload fees, and interchange
Short term customer lifespan due to lack of loyalty, stickiness, and fierce price based competition
Wide reaching category including retail based product, online, direct mail
Promotions & IncentivesPromotions & Incentives
P&I
Cards
P&I
Cards
Revenue mostly from card fees, initial and reload fees (corporate paid), and interchange
Non-sales employees, especially effective for hourly employees where high turnover exists to measure and recognize performance
Typically no fees to consumer or participant
Becoming the leading payment vehicle for channel and sales incentive programs
Increasingly used in consumer promotions such as rebates, test drives, and other give away promotions
Other Prepaid UsesOther Prepaid Uses
FSA / HSA
CorporateSpending
Travel/per diem/expense management
Use based products designed to deliver efficient reconciliation, ease the burden of employees reimbursement, & provide accountability
Typically no cardholder fees
Revenue from interchange, float, and card program management fees
Life span usually tied to particular employer or in some cases per project
Typically offered as part of a larger treasury management service from company’s banking partner
Benefit based cards designed around flexible spending accounts
Further transition from traditionally check based product to plastic to reduce cost and increase convenience for consumers
Typically no cardholder fees
Revenue from interchange, float, investment of benefit funds, and corporate paid card program management fees
Life span usually tied to particular employer
NOTES
Prepaid Economics: WhatPrepaid Economics: What’’s real s real and whatand what’’s Not!s Not!
Varies between 60bps to 150bps on average
FEES
Blend of credit/debitInterchange
ITEM
Varies between 25bps-35bps of GDV on averageSystem & Network Fees
Less than 15bps is excellent Budget more until you model the portfolio
Negative balance reconciliation and fraud
prevention
Plastics range from $0.14 through $1.50 base upon volume and card stock Entirely volume driven
Materials production (plastics, collateral, web
development)
Varies between $0.40 to $1.00+ for mail/emboss/fulfillment
ID Verification and OFAC average cost varies from $0.25 to $0.75
Both should be volume driven
Emboss, fulfillment and ID verification
Prepaid EconomicsPrepaid Economics
Expect $135-$200 per hour for custom IT development through your processor
FEES
Custom Development
ITEM
Processor minimums typically start at $5,000 to $7,500 per monthand escalate as high as $50,000 monthly in 5+ year agreements. Bank minimums can vary from $0 to $5,000 per month or may be
based upon a per program/per BIN minimum
Bank and Processor Minimums
Program Managers should expect to a pay between $50k and $100K for initial integrationIntegration Fees
Varies, but expect to pay at least $5,000 per monthOngoing Support Fees
Expect to pay 10%-25% of monthly revenues for the remainder of the term if you terminate
Conversion is very difficult, costly, and often leaves cardholders with a bad taste in their mouth.
Termination and/or conversion costs and
penalties
Future Prepaid UsageFuture Prepaid Usage
The Future of Prepaid
A
B
C
D
Aggressive Incentive Reward Adoption
Prepaid Offered To Credit/Checking Declines
Reward of Choice For Referral /
Loyalty Programs
GPR & Credit Converge
Thank YouThank YouMatt KerperMatt Kerper
VP of Prepaid ServicesVP of Prepaid ServicesParago, Inc.Parago, Inc.
[email protected]@parago.com972972--538538--39803980