The Green Sheet Online Edition
November 28, 2011 • Issue 11:11:02
Advice for prepaid pros
The electronic payments industry can trace its origins back to credit cards issued in the mid 1940s. By comparison, the prepaid card industry, founded in the late 1990s, is barely in its teens. If it takes about 20 years for industries to mature, as claimed by Donna Embry, Senior Vice President at Payment Alliance International, prepaid will achieve adulthood sometime before 2020.
Robert O. Carr, Chief Executive Officer of Heartland Payments Systems Inc., puts the prepaid sector's maturation on a little quicker pace. He said it took debit cards 25 years to develop serious traction in the marketplace. But he thinks prepaid is maturing about 10 years faster than debit, which means prepaid will reach full flower in only a few short years.
Aite Group LLC Senior Analyst Madeline K. Aufseeser believes the prepaid market's pace is quicker still. She places prepaid behind credit and debit by as little as a year or two when it comes to features and functionality and about five years behind in overall market maturity.
But regardless of what lens is used to track the prepaid industry's development, it can profit from the experience of individuals who began working in the payments industry decades before prepaid cards were even invented.
To fee or not to fee
Embry, who has 40 years of banking and payments industry experience to draw upon, advises prepaid professionals to keep focused on the needs of the end user; that means alleviating pain points, not creating them. Implementation of the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is a prime example.
With lowered debit card interchange revenues to rely on, banks attempted to introduce fees on heretofore free checking accounts and debit card programs. Such developments did not sit well with consumers, who started to leave big banks in droves. The consumer backlash forced Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo and Co. to cancel or make changes to fee schedules.
Embry said consumers have long borne the burden of interchange fees merchants pay to issuing banks via acquirers. Merchants simply offset their interchange costs by raising prices on goods and services, but consumers never made that connection.
"But you see what happened with Durbin," she said. "The minute Durbin goes into place, what do the issuers do? They start implementing fees for the use of debit. So now it's got the consumer all confused. And they're like, 'Wait a minute. You train me to use this card and now you're going to hit me with fees? I'm going to find a bank that won't.'"
High fees on prepaid cards were once a hindrance to adoption, Embry noted. Now that many prepaid card providers have lowered fees on cards in recent years to increase usage, companies are training their consumers that prepaid cards come with low fees.
Embry believes it is thus wise that providers don't follow the banks' lead and attempt to increase fees at some future date, even if regulation should increase their costs.
"You've got to have fees," she said. "But don't get greedy."
Differentiation through distribution
Aufseeser takes a different approach. She charts her career in payments back 25 years to when she helped launch secure credit card programs for MasterCard Worldwide in the early 1990s. It is her opinion that necessity will force prepaid card program managers to charge cardholders for ancillary services.
"I think it's incumbent upon the prepaid industry, especially with the CFPB [Consumer Financial Protection Bureau] coming in, that we just do a very good job at disclosing all the fees that we charge for," she said. "We have a right to charge for the fees.
"It just needs to be properly disclosed to consumers. ... If we do a good job educating the consumer on what they're getting for that service, then I think we're fine."
Aite released a September 2011 impact note that looked at the future of two of the strongest growth markets for prepaid cards. In U.S. Alternative Financial Services: Long-Term Success in the GPR and Payroll Markets, Aufseeser said consolidation is on the horizon. The primary reasons are threefold:
- Margin compression due to increased competition and regulation
- Market fragmentation due to failure by companies to diversify distribution channels
- Needs by companies to grow portfolios and gain economies of scale
Aufseeser believes prepaid card providers will have to add more distribution channels to stay vital. For example, a company that distributes cards mainly via convenience stores might want to look at other channels, such as grocery stores or the Internet. "For any of them to grow significantly in the business, they need to get better at acquiring through multi-distribution channels as opposed to a single, threaded approach," she said.
The future of commerce
Biff Matthews, President of Thirteen Inc., the parent company of CardWare International, also sees that consolidation lies ahead for prepaid. "I think we're not only going to have consolidation; I think we're going to have companies that are just going to literally fold their doors," said the 40-year payments veteran.
It is therefore not a joking matter when he advised, "If you're a small, bit player, get out now."
The blunt statement points out one aspect of Matthews' success in business planning - having an exit strategy. "It's like investing," he said. "You develop an investment strategy and plan. When the stock reaches a certain point, you sell.
"I don't care if it's going to go higher, you sell. Now you may buy back, but you stick with your plan and you need to have a plan. You need to constantly look at the plan and be prepared to revise it."
But planning is made difficult by the speed of change that is affecting both the prepaid sector and the larger payments industry. It is Matthews' view that a profound shift in payments is approaching.
With technology companies like Facebook and Apple Inc. enjoying user bases in the hundreds of millions, it's not a stretch to visualize payment marketplaces 10 years hence that have no use for the networks run by the dominant card brands today, Visa Inc. and MasterCard, Matthews said.
He considers the relatively smooth transitions that comprise the history of payments -from "knuckle busters" to POS terminals, from paper checks to mag stripe-enabled bankcards - to be at an end. In some ways, the shift to online and mobile payment marketplaces is a complete break from the past, he said.
Thus, prepaid card businesses should be planning for this dramatic change. "Quite frankly, you cannot transition; you must leap frog," Matthews said. "In my view, transition is impossible. You've got to be prepared to literally leave the past behind and [let it] die a natural death, and do something new."
He believes the distinction between prepaid and debit accounts will blur in the future. Funds will be deposited into accounts from any number of different sources, he said; whether those funds are funneled through prepaid or debit cards will not matter.
It boils down to how the term "money" will be defined. Will it mean Google or Facebook credits? "Once money is defined, people will then follow that path," Matthews said.
Cross sell or die
Another path to follow might be the one taken by 30-year payment veteran Rick Pylant, Chairman and CEO of Strategic Processing Systems Inc. When he was President and Chairman of CoCard Marketing Group LLC in the early 2000s, Pylant recognized his ISO had to change to survive. Thus, the ISO diversified its merchant offerings with services like gift card programs, check processing, website development services and online couponing.
"We started a long time ago doing nothing but credit card processing," Pylant said. "And then as our industry matured, we ended up having to go to other products and services. ... Prepaid cards were the hot ticket. They grabbed it and ran like crazy. And now I think they are at a point where they need to do the cross selling like we do."
Essentially, Pylant is recommending prepaid card businesses partner with ISOs or become ISOs themselves, to guard against the inevitability of prepaid cards becoming a commodity product. He said, "Would you go and start an ATM deploying company? Not anymore."
By diversifying products and services, prepaid card providers can broaden their appeal to businesses, merchants and consumers. It is the choice of being a one-trick pony or becoming an expert consultant selling diverse solutions, Pylant said.
Open door policy blues
It is also Pylant's opinion that the prepaid card industry suffers from isolation. It seems to the industry's advantage that its leading trade group, the Network Branded Prepaid Card Association, would ally with the payments industry's leading association, the Electronic Transactions Association, to increase communication and support between the related industries. But it hasn't happened, according to Pylant.
As president of the ETA, Pylant said the association has reached out several times to the NBPCA, but without success. "They have never really opened themselves up to any dialogue, solicitation of more widened membership, that sort of thing," Pylant said. "We're constantly on that front."
Pylant joined the ETA's board of directors in 2004. The association has grown substantially in that time, both in the size of its membership and the influence it wields politically. "When you mention the names of people who are in our association, it is some of the largest companies in the country," he said. "So when we get a chance to say something, it's pretty meaningful."
Pylant added that the ETA's move to Washington, D.C., and the hiring of permanent staff were instrumental in enhancing the organizations political influence; it gave the ETA quicker and easier access to all levels of government and raised the industry's profile among lawmakers.
Pylant recommends the NBPCA set up an office in Washington. "They need to be there," he said. "You've got to be able to turn around and run over to somebody's office immediately. You've got to be able to tap into the law firms that are there that have the strengths that you may not possibly have. ... So there's just an awful lot of benefits to being in the D.C. area."
An NBPCA spokeswoman told The Green Sheet that the association operates out of New York City and that the Washington office of law firm Bryan Cave LLP is made available to it when needed.
Predation and security
While the prepaid card industry is experiencing steady if not spectacular growth in some market sectors, it is still dogged by bad publicity that has negatively branded the industry in the minds of many consumers.
Black eyes come from disreputable parties such as calling card marketers who cheat vulnerable consumers out of call minutes and general purpose reloadable card providers that charge hidden and predatory fees on certain products.
Similarly, some ISOs have given the payments industry a bad name. It doesn't help when ISOs spring new fees on merchants or charge exorbitant switch fees that are only disclosed in the fine print of merchant contracts.
Indeed, it can be argued that this type of behavior contributed to the political atmosphere that led to the passage of the Durbin Amendment. Carr, who co-founded Heartland in 1997 after 25 years in payments and software development, holds the ETA accountable for that.
"The ETA has been unforgivably lax in working to stop bad actors, and the NBPCA is following in those precise footsteps," he said. "The [payments and prepaid] industry is getting the legislation it has earned."
Data security is another troublesome topic - something Carr knows all about. Heartland experienced one of the largest data breaches in history. The 2008 compromise resulted in class-action lawsuits and expensive reprimands from the card brands, let alone the damage inflicted on the processor's reputation.
The Open Security Foundation's Dataloss DB website pegged the number of records compromised in the breach at 130 million. The Privacy Rights Clearinghouse reported the intrusion cost Heartland almost $140 million in breach-related expenses.
"We have come out of the breach standing and healthy despite the lost years and the loss of hundreds of millions of dollars of wealth," Carr said. "I regret the breach very much."
But Carr was proactive in the wake of it. He founded the Payments Processor Information Sharing Council (PPISC) under the auspices of the Financial Services Information Sharing Council (FS-ISAC) and led Heartland in accelerating the implementation of end-to-end encryption technology to bolster security defenses against fraud schemes.
Carr said Heartland handled the breach as well as it could and in retrospect wouldn't have done anything differently. His advice to the prepaid card industry and the NBPCA: "Beg and plead the FS-ISAC to take them under their umbrella so stakeholders can share security information and best practices among members in the manner that the PPISC does for the payment processors today."
Moral of the story
If parallels can be drawn between the development of a human being and that of an industry, prepaid is a teenager exploring its independence. But teenagers are notoriously stubborn and impulsive. And they think they know everything.
It might therefore be wise for the prepaid sphere to take the advice of its elders. Move toward openness, not only with consumers but also with its fellow payment professionals. And also look out for that upcoming bend in the road. The industry wouldn't want to end up one day remorseful and find its keys have been taken away.
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