May 21, 2013
Prepaid Customers Are Your Customers
Another in an ongoing series of white papers on topics of interest to the prepaid community. This white paper is based on the webinar delivered by Cathy Corby Parker, Chief Revenue Officer of TransCard, in partnership with the American Bankers Association. Here we are in 2013 with prepaid being the fastest growing product in financial services, and yet only a small fraction of U.S. financial institutions are offering the product. In discussions with financial services executives, it appears that old views of prepaid are holding financial institutions back. We believe it’s time to take a fresh look at the prepaid market and challenge some outdated views. Challenging Conventional Wisdom Conventional wisdom has it that reloadable prepaid cards are for unbanked and underbanked consumers. In 2013, is that true? Not according to Aite Group, who last year reported that one-‐third of prepaid cardholders earn more than $45,000 a year, and 34-‐ percent have a college degree or higher. Does this sound like an underbanked population to you? The Wall Street Journal affirmed this study in September 2012 when it profiled Green Dot, a leading provider of reloadable prepaid cards. “Today, Green Dot says the median income for customers is about $45,000, or nearly double what it was seven years ago.”1 The same article looked at the income distribution of prepaid cardholders based on a 2012 study by Javelin Strategy and Research. Javelin found that prepaid card ownership exceeded 10-‐percent of the population across all income segments. The deepest penetration of prepaid cards was in the under $15,000 a year segment, clearly the underserved segment. But the second greatest penetration, nearly equal to the largest, was in the $75-‐$100,000 a year income segment. This is middle America! Another piece of conventional wisdom we come across is, “My customers are not interested in prepaid.” To challenge that thinking, we pulled up some views of executives from major financial institutions to see if their thinking was aligned. Here is what Whitney Bright, a US Bank executive had to say: “With something like 35 million households carrying a reloadable prepaid product today and only about 5 percent of those having gotten them [directly] from a financial institution, [it’s clear that] our own customers have a financial 1
The Wall Street Journal, Sept., 12, 2012, “Footnote to Financial Crisis: More People Shun the Bank”
need that is not being met by us as a bank.”2 Over at Discover, Beth Horowitz shared how Discover is finding prepaid cards utilized by consumers at all age and income levels. She went on to explain how the drivers of usage vary by demographic group:3 According to Horowitz, prepaid card users include: • 80 million Millennials, ages 21-‐31, who tend to be transient and need prepaid cards for alternative banking; • 55 million Generation X consumers, ages 36-‐47, who use prepaid cards for family budgeting; and • 40 million “Tail-‐end Baby Boomers” ages 55-‐65, who increasingly rely on prepaid cards for specific types of purchases. So, if your financial institution believes that its customers are not interested in prepaid, you may find yourself sailing against the wind relative to financial institutions who are capitalizing upon sale of prepaid cards. Another piece of conventional wisdom we hear – often from front-‐line staff in banking offices – is that: “My customers would prefer a checking account.” For many customers, that is true. But would it surprise you to know that 21-‐percent of 28 to 24 year-‐olds used to own a checking account, but no longer do? And if you move to the 25-‐34 year-‐old age bracket that number rises to 40-‐percent.4 For some reason, a big chunk of the younger population is abandoning checking accounts, many presumably for reloadable prepaid cards. Why? The number one reason consumers prefer a reloadable prepaid card to a checking account is that it cannot be overdrawn and the consumer cannot overspend.5 In fact, the CFSI study found the preference so strong for prepaid cards in the younger population that 45-‐percent of 18-‐ 24 year-‐olds would prefer a prepaid account to a checking account if the costs were comparable. But, of course, the costs are NOT comparable. Prepaid accounts costs less for many consumers because they cannot be overdrawn and thus have no “surprise” fees. So if your customer-‐facing staff is projecting their own views about prepaid vs. checking onto your customer base, it may be time to update their perspectives. We also hear from bankers who say they are not interested in prepaid that, “We don’t have those customers in our branches.” It is the underserved market they are referencing, which we proved above was no longer an adequate description of the prepaid customer. But let’s pretend it is as we address this piece of conventional wisdom. We can dispel this notion with three questions: • How many applicants for checking accounts do you turn-‐down each month? • How many accounts do you close because of excessive overdrafts? • How many checks do you cash for employees of commercial clients each month? Checking accounts are not a good fit for any of the individuals above. Yet, a reloadable prepaid card is. Rather than turning these customers away, or treating visitors to your 2
PayBefore Magazine, March 2013 PayBefore Magazine, March 2013 4 Center for Financial Services Innovation (CFSI), Dec. 2010, “Financial First Encounters” 5 Paybefore Magazine, Fall 2012, Aite Group study 3
branches like a transaction on payday, why not use prepaid to retain and build the relationship? Extending beyond the view that “these customers are not in our branches” is the view we sometimes hear that, “We don’t have those customers in our markets.” To debunk that view, we thought it could be effective to size the unbanked population in one of the wealthiest markets in the country. We chose Greenwich, Connecticut. Connecticut has a mean household income about 30% higher than the US average, and Greenwich is double Connecticut’s average. So it’s a center of wealth. We found the address of a community bank in Greenwich and used TransCard’s proprietary Insights® data mining tool to size the unbanked market in Greenwich. We found that within a 10 minute drive of the bank there was a population of 87,000 individuals. Importantly, 16% of this population was in the unbanked demographic. Think about that. One in six residents of one of the wealthiest areas of the country is unbanked. What does that imply about the unbanked population in your market? The information above is only a fraction of what is available to demonstrate that prepaid cards have become a mainstream financial product. While conventional wisdom has not kept up, the market has changed. And it has changed fast. The next section of this White Paper explores the drivers of this change. Drivers of Change in the Prepaid Market There were several forces that converged over the last few years to drive rapid consumer adoption of reloadable prepaid cards. These include: • The financial crisis; • Increased fraud; • Regulatory changes; and, • Demographics We’ll start with the financial crisis, a period during which many consumers experienced diminished access to credit. They either maxed-‐out on existing credit, had lenders reduce their credit lines, or became concerned about taking on any more debt. Many consumers who had previously used credit cards for everyday purchases quit doing so and relied more upon their debit cards for purchases and payments. With a lot more purchases now hitting their checking accounts, consumers had problems keeping track of their checking account balance. And, accounting for the difference between authorized and settled dollar amounts only added to the complexity. Consumers either gave up on trying to accurately track their balance – risking overdrafts – or invested a lot of administrative time to do so. In response, more and more consumers have found reloadable prepaid cards as a better payment vehicle for everyday spending. They have more control over their spending and budgets. They have an easier time managing their checking account by moving some funds to a prepaid card and using that prepaid card for everyday spend. Fraud has become so pervasive that it’s hard to find someone who hasn’t had a credit or debit card compromised, or at least knows someone who has. When a consumer uses a payment card in a higher risk environment – say for online shopping, or handing the card to a server in
a restaurant – there is a difference in the perceived risk when it’s a bank debit card rather than a credit card. If the credit card is compromised, the consumer will be inconvenienced and lose access to some of the credit line for a while, but it’s not the consumer’s money that was at risk. Now if it’s a debit card that was compromised, it’s a different story: it’s the customer’s money. In fact, it’s all of the funds in the customer’s checking account that are at risk. While the consumer will be made whole in the end, the consumer’s ability to make important recurring payments – such as mortgage or car payments – could be jeopardized while the situation is being resolved. That’s why a lot of consumers turned to reloadable prepaid cards. They segregate a portion of their funds onto the prepaid card and use the card for those higher risk purchases. Regulatory changes also were a factor in driving consumer adoption of prepaid cards. Student access to credit cards was restricted by card regulations, and yet students needed a way to pay with plastic. Fewer free checking accounts became available after the double-‐ whammy of overdraft regulations and interchange caps. Prepaid cards proved a lower cost alternative for many consumers. And at the same time, more states were allowing employers and government agencies to mandate direct deposit for payment of payment of wages and benefits. Consumer awareness of the prepaid product category grew tremendously as a result. Demographics, too, played a factor. By 2012 there were 73 million consumers in the 18-‐34 year-‐old Gen Y population…nearly one-‐third of the US population. As was referenced earlier, these are the consumers who had checking accounts but no longer do, and prefer prepaid to checking accounts. Implications for Prepaid Industry and Financial Institutions The rapid migration of prepaid from a niche product for the underserved to a mainstream financial product has changed the face of the prepaid industry. When the relatively young prepaid industry started at the turn of the century, the emphasis was on category marketing – in other words, explaining to everyone what the product was. As the industry matured and there was more awareness of what prepaid cards were and how they worked, the focus turned to brand and product marketing. As the product grew rapidly, competition intensified and we find ourselves today in a period of product proliferation.
Invention
Prepaid Circa:
2000
Category Marketing
2005
Brand & Product Marketing
2010
Product Proliferation
2013
There are literally hundreds of prepaid cards on the market today, sold by retailers, check cashers, internet marketers, celebrities, and, oh yes, even some financial institutions. The good news for financial institutions is that with product proliferation comes a value shift from product to distribution. As the cards themselves become more commoditized, or at least differentiation becomes more challenging, the role the distributor plays in making the sale rises in value. For reloadable prepaid cards, financial institutions represent a superior distribution network to most of the other distribution channels for prepaid cards today. Here is how things work today for many prepaid cards sold outside of financial institution channels: • Reloadable prepaid cards hang on racks in grocery, retail and big box stores. The packaging is shrink-‐wrapped for security reasons, providing the consumer with little information about the prepaid card or how to compare it to other cards. • When the consumer needs to load money to a prepaid card other than by direct deposit, they either buy a money pack and go online to register it, or stand at the service counter and fill out a form for a clerk who is also selling Lotto tickets and exchanging spoiled meat. • When service is needed by a cardholder, it’s always provided through a 1-‐800 number to a call center – a call often not answered in this country. Financial institutions offering prepaid cards can and do so much better. Knowledgeable banking office personnel help customers select the right prepaid card based on their need. These staff perform basic servicing functions in branches, like loading money onto cards, checking balances or ordering secondary cards. The consumer gets the information they need to buy the right prepaid product and the service to stay happy with it. Summary It’s time more financial institutions took a fresh look at the prepaid market. When they do so, they will find conventional wisdom replaced with the fact that prepaid cards have become a mainstream financial product. Moreover, they will see that they enjoy a competitive advantage in delivery of prepaid cards through the bank channel relative to the retailers and marketers who typified the industry in the past. * * * * * If your financial institution is interested in learning more about how to add prepaid cards to your product line, please give TransCard a call at 1.800.504.3126 or contact us at sales.transcard.com. can also visit our website at www.transcard.com You
