From Our Archives: Revisiting the Ten “D”s of Prepaid Success
In 2008, we published this list of factors we deemed critical to the success of prepaid. We thought it would be interesting to revisit the list with refreshed commentary. Needless to say, a lot has happened since then including the big “D” of Durbin, but even with so much change, many success factors remain the same.
- Distribution: Perhaps even more than in 2008, we believe distribution is the most critical requirement of prepaid success. Distribution is binary – you either have or you don’t – and without it, the business case for even wonderfully developed products is dodgy at best. The quality of distribution is more important than the quantity – steady access to prepaid prospects, the nature and frequency of customer visits, the presence of a seamless reload network, and the funding stream associated with the distribution point separate great points of distribution from mediocre ones.
- Delivery: Distribution is about getting the product to a location where the consumers are. Delivery is about how you take full advantage of the channel to attract and engage cardholders. H&R Block’s Emerald product, Wal-Mart’s MoneyCard, and NetSpend’s ACE product have distribution and delivery advantages. Delivery can take many forms, but it is most powerful and resilient when it is integrated with other services – check cashing, refund disbursement, etc. Of course, mobile is more advanced now, but prepaid still has a fair amount of ground to cover to take full advantage of digital delivery.
- Design: Product design was cited as a factor in our 2008 article. Since that time, products such as the Bluebird product from American Express, Liquid from Chase, and others have been launched to address the needs of certain segments. Those design elements that came straight out of the credit card playbook – co-branding, affinity sponsorships, and segment specific cards (i.e., student, premium) have proven to be niche-based. However, we still believe there is opportunity particularly in the area of product integration, specifically how prepaid, credit, and loyalty products can work in unison to expand and deepen the customer experience. The pending Starbucks Rewards Prepaid Card (with Chase and Visa) will be interesting to watch as an extension of the Starbucks Rewards program.
- Displacement: Unlike credit cards, prepaid is almost entirely dependent upon tender displacement whether cash, checks, rebate coupons, government disbursements, incentive awards, allowances, tokens, etc. The paper check displacement argument can be made on cost alone, but displacement of other financial instruments like debit cards and even cash must be made on affordability, access, utility, and convenience.
- Denomination: Just as revolving balances play a role in the revenue generating power of a credit card, load (and reload) amounts are equally vital to the open-loop prepaid economic model. At the extreme, there is only so much money to be made on a low dollar denominated card absent high fees or a subsidy from a program sponsor such as a retailer. That is not to say that there aren’t other sources of value in low dollar denominated cards, but the business case needs to be that much more compelling (e.g., incremental sales, lower cost than legacy solutions, breakage, etc.). Securing customers prone to using high dollar denominated products on a repeated basis can solve a lot of problems hence the success of programs in the check cashing space and the importance of direct deposit.
- Duration: Consistent with almost every other product, prepaid economics become much more attractive as the average life of the card/customer increases. Average card life is even more important today as Durbin and the sheer forces of competition have pressured revenue streams. EMV would add cost and low duration products would be highly disadvantaged. Getting ‘one-and-done’ customers on the right type of non-reloadable product(s) will be key to long-term success.
- Data: The most successful prepaid products will be those that are developed, priced, marketed, and serviced using rich behavioral data. In 2008, we were bullish about certain financial institutions being able to use prepaid data to later inform credit underwriting decisions and retailers mining prepaid data to better market to their customers. The integration into credit programs has been a case of fits and starts given regulatory requirements and other complexities. While the promise of leveraging data is still high in these ‘offensive’ areas, we can’t understate data as the first line of ‘defense’ protecting programs against fraud and bad-actors when aggregated and monitored correctly.
- Demographics: We would be hard pressed to identify more ambiguous terminology than “unbanked” and “underbanked”, but it reinforces the importance of catering to the needs of specific demographic segments a core part of your prepaid strategy. We could write another article on what we’ve learned about the “underbanked” customer, but a central finding is that underbanked customers have many more diverse prepaid needs and use-cases than the market initially contemplated. Arguably, the most complex aspect of managing a prepaid program is maintaining a balance between the need for customizable products to serve niche segments and avoiding diseconomies of scale. Harmonizing product simplicity while targeting a specific customer niche is no easy task.
- Defensibility: In 2008 we surmised that prepaid will follow the well-trodden path of almost every other payment product. Competition will intensify, consolidation will accelerate, a handful of early winners with defensible advantages will vertically integrate, and regulators will play catch up and introduce uncertainty. Much has occurred and many defensible advantages have dwindled over time, but scale, brand strength and reputation, and privileged access to customers have the most staying power. Other attributes will be important, but look no further than the credit card industry to see how quickly many product features can be replicated.
- Deposits: Prior to the credit crisis and the rapidly evolving regulatory environment, deposits would have been too obvious to make this list. No matter how fundamental, consumers need to have full confidence that their money is readily accessible and protected in the event of an unforeseen event. We’ve observed a growth in savings accounts attached to select prepaid cards (particularly GPR) which is a positive trend. Having the right tools, partnerships, and promotional strategy to capture prepaid balances and direct prepaid spending will be more critical as the level of prepaid balances grow.
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