At Prepaid Day held during the Electronic Transactions Association's 2009 Annual Meet-ing & Expo, Peter J. Quadagno, Principal and founder of payments consultancy Quadagno & Associates, advised ISOs to become prepaid card program managers as a way to gain greater control over the profitability and future direction of their businesses.
According to Quadagno, distributors, acquirers and other specialized companies offer out-of-the-box, closed-loop gift card programs to merchants. But those payment companies do not provide programs customized to individual markets, such as universities, health care providers and travel agencies, he said. More importantly, Quadagno said gift card providers do not allow ISOs to control the costs of gift card programs or manage product rollouts. But ISOs are not powerless. They can be in charge of gift card programs and pricing by becoming program managers (PM) themselves, he noted.
The main advantage ISOs can leverage to become PMs are the merchants they already have in their portfolios, Quadagno said. Those merchants become the distribution channels for ISOs' gift card products. "If you have those distribution channels, then you should seriously consider the additional profit for yourself by becoming your own program manager," he said.
The job of a PM is multifaceted. Quadagno outlined the functions PMs must either outsource or perform in-house. A PM must have a cardholder enrollment process; card activation process; bank sponsorship in order to access the Visa Inc. or MasterCard Worldwide networks or use of a gateway for open-loop card processing; customer support service, such as one using the Internet, an interactive voice response system or a call center; reporting feature that tracks cardholder activity, card status and so forth; fraud and Payment Card Industry Data Security Standard compliance monitoring system; card production function; and card distribution channel.
"These are all the things that you need to think about when you're going to decide to be in control of your own solutions," Quadagno said. He recommends PMs do not contract out any of these responsibilities. If PMs perform certain functions but outsource the rest, "you're not going to end up in control of the situation," he said.But Quadagno said the one function PMs cannot provide is the processing of payments because PMs do not "hold the files, and they don't do authorizations." ISOs must contract with processors whose platforms are designed to process payments for the types of card programs ISOs intend to implement.
"You can go to the big boys [such as Fidelity Information Services Inc., First Data Corp., TSYS]," Quadagno said. "You can go to the startups. You can go the little guys. Or you can go to the guys in the middle [such as Firstview LLC, eCommlink Inc., Springbok Services Inc.]. But the fact is when you go to them, you come to them with, first and foremost, a bank that has given you a BIN [bank identification number]. "You give that BIN to that processor and that processor is responsible for providing the gateway services, so that they can talk to Visa or MasterCard and route those transactions."
As an example of a relatively simple closed-loop gift card program model, Quadagno gave the private-label BIN card solution. According to Quadagno, the solution uses a bank's BIN to route closed-loop gift card transactions over Visa's or MasterCard's open-loop network.
Quadagno said the benefits of this program are threefold: no changes need to be made to merchants' POS environments; no changes need to be made in the relationships between merchants and their acquirers; the solution is easily integrated with merchants' existing end-of-day revenue reconciliation processes.
"Everything integrates with what that merchant does right now," Quadagno said. "So it's a real easy way to get the merchant into a gift card program."
The major downside to a private-label BIN program is that it is expensive to implement, he said. The processor, the gateway provider and the card company need to be compensated for their services - on the order of six or seven cents apiece per transaction, Quadagno said. He estimates that every transaction processed over this system would cost the PM approximately 21 cents.
But Quadagno believes the positives outweigh the negatives. "I don't care if that merchant has 2,000 stores spread across the country," he said. "I can get to everyone. As long as they accept Visa or MasterCard, I can touch their point of sale terminal. I don't have to ask them to do anything differently. I don't have to ask them to build any interfaces. I don't have to ask them to give me access to their hosts. I don't have to engage their IT [information technology] people."
Quadagno likened the role of the PM to that of an orchestra leader. Like a conductor who controls the arrangement of the music as it is being played by many musicians, from the tempo of the music to the blending of the sounds, the PM manages disparate components of a gift card program so that it will run smoothly and efficiently. The end result - beautiful music in the form of profits for all the players in the gift card program value chain.
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