Prepaid Customers Are Your Customers

               May  21,  2013     Prepaid  Customers  Are  Your  Customers         Another  in  an  ongoing  series  of  white  papers  on  ...
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       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    We  believe  it’s  time  to  take  a  fresh  look  at  the  prepaid  market  and   challenge  some  outdated  views.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