The building of a bridge arises out of a desire to connect one physical location to another. Once built, the bridge allows people to travel more quickly and efficiently between two points. In the digital world, data replaces the physical transportation of people over bridges. But it's the same urge that drives the development of new technology.
In the payments industry, the pace of new bridge building has accelerated. Physical POS networks once connected over phone lines were replaced by networks that linked to the Internet, then wirelessly to the Internet, and now to mobile devices in a vast array of configurations. What all these new bridges have in common is they connect to prepaid card accounts, or various kinds of stored-value or transaction accounts.
Network operators and application developers realize that, along with a growing consumer demand for prepaid both domestically and around the world, the accounts can be more flexible payment tools than either credit or debit accounts. Banks and other businesses outside of the prepaid card industry are thus clamoring to enter the space. ISOs and merchant level salespeople locked into traditional credit and debit card processing may want to take the trip, too.
The Western Union Co. made the move for good in 2009. Michael Hafer, Vice President, Global Cards, The Americas, at Western Union, said the money transfer specialist dabbled in the space in 2005 but only got serious four years later when it recognized its customers were demanding it.
"We do a lot of consumer research before we build and develop anything," Hafer said. "And it's all based on [asking]: What are consumers looking for? What are they not seeing in the market that they want? And how can we meet those needs? And do we think we can be successful meeting those needs?"
Western Union knows a thing or two about how to fulfill consumer demand, as attested to by its longevity. Not many companies can claim to be among the first tracked on the Dow Jones stock market index, but Western Union also has the distinction of being on the forefront of modern communication, from operating the first telegraph network in the United States to launching the first commercial satellite into Earth orbit.
The company's entrance into prepaid was facilitated by its backbone of nearly 500,000 Western Union agent locations around the world: banks, post offices, supermarkets, foreign exchange houses, convenience stores, gas stations and check cashers.
Through those agents, it provides money transfers, bill payments and now prepaid cards to the financially underserved, roughly 2 billion people globally, who send and receive money via 16,000 corridors, whether they be the United States to China or Australia to Brazil.
Western Union is focused on the general-purpose reloadable (GPR) card market with two products: the PayBefore MoneyWise card and a co-branded card developed with Telemundo, the Spanish language television network owned by NBC Universal.
Hafer said GPR card companies have had a difficult time penetrating the Hispanic market. He believes the combination of a trusted media brand with a trusted money service brand has overcome the Hispanic community's skepticism about GPR cards. "Our consumers who use our traditional money transfer and bill payment services are now finding a lot of value in these prepaid products as well," Hafer said.
Prepaid cards fill the same need that money transfers and bill payments do. "It's basically a consumer having the need to send money from one point to another," Hafer said.
Another new player in prepaid is Brookfield, Wisc.-based processor Fiserv Inc. It entered the space in March 2011 by acquiring Maverick Network Solutions, a Delaware-based prepaid card processor and program manager. Philip A. Valvardi, General Manager, Prepaid Solutions, at Fiserv, said the bankcard processor recognized a void in not having a prepaid card processing capability. The purchase of Maverick, where Valvardi was Chief Executive Officer, filled that void.
Indeed, the entire retail banking industry seems to have awakened to similar voids. Banks that historically shunned low-income individuals are now entering prepaid to capture that growing consumer segment. Younger generations of consumers, characterized by Valvardi as under 30 years old, are rapidly adopting prepaid as their primary financial tools, with little interest in traditional banking.
"Typically they are totally electronic accounts," Valvardi said. "I think the younger crowd looks at going into a bank as something that your grandparents did."
Indeed, research conducted by Think Finance, a developer of online financial products, found that Millennials (consumers aged 18 to 34) ignore traditional bank products even when they start making more money. In Think Finance's survey, 51 percent of respondents making less than $25,000 annually reported using prepaid cards recently. But Think Finance found that the same percentage of respondents who earn $50,000 to $74,999 a year also use prepaid cards as alternative financial tools.
"[Banks] are starting to see more and more money moving out of accounts onto prepaid products," Valvardi said.
Fiserv has made other acquisitions to strengthen its position as a new money company. Around the same time as the Maverick purchase, Fiserv acquired Mobile Commerce Ltd., better known as M-Com, to enhance its mobile banking capabilities. Then Fiserv scooped up CashEdge Inc. in September 2011 for its person-to-person money transfer service, called Popmoney. "You can kind of see the direction we're headed in," Valvardi said. "We want to be in the forefront of digital payments, and we've accumulated some really interesting assets to support that strategy."
The average ISO can't enter the prepaid sphere by leveraging a worldwide network of agent locations or dipping into its war chest to acquire cutting edge tech firms. The only other alternatives are either to build in-house systems or partner with third-party providers.
The first option is becoming a strategy that only companies with deep pockets can deploy, and even then it's a dicey proposition, given the increasing complexity of prepaid programs and the costs to maintain them. Douglas Hardman, CEO of loyalty and stored-value processor SparkBase, said large ISOs who built loyalty programs years ago are now saddled with them.
"So now they're scrambling to integrate better tools and better programs," Hardman said. "Everybody thinks loyalty is only points. It's so much deeper than that. And if you're not careful, you can really mess things up for a merchant. You can, in a matter of days, with a bad loyalty program, do damage to their brand."
That leaves partnering with a vendor as the only legitimate option for the majority of ISOs. But he advised ISOs to tread cautiously, as partnering with the wrong loyalty provider is almost as bad as not having a loyalty program at all.
"What we're seeing time and time again now is that people are coming into this space thinking they can throw a quick fix together," Hardman said. "I mean, if you've seen the dashboards that a lot of these ISOs give their merchants to show them their credit card balances, they're atrocious."
ISOs may be lured to large, prominent loyalty vendors, but their very size and entrenched systems can hint at the antiquated nature of their programs, Hardman noted. On the other hand, SparkBase prides itself on being nimble and cutting edge. The Cleveland-based company integrates its LoyaltyOS back-end processing engine with ISOs. That integration gives ISOs and their merchants access to SparkBase's analytics dashboard, Loyalty Star, and its Paycloud mobile wallet rewards and loyalty platform.
Hardman said, "When we show [ISOs] a dashboard that says, 'Here are the exact people who came into your store this week; here's how much money they spent; here's your trend over the last six months, with your current economic climate in your particular ZIP code, and weather patterns you can expect over the next 10 days, over the next 40.'
"When they see that and then they go back and look at what some homegrown system had done, it's a night and day thing. And that's when they instantly lose the client."
When merchants see what cutting-edge data analytics look like and how that data can be crunched to illuminate consumer behavior, merchants see the light, Hardman said, adding, "And if [ISOs] don't have a program that can handle what the merchant's looking for, they're going to lose that account - and the credit card processing - to the company that can give that to them."
Another bridge to prepaid is via the venerable ATM. It's not simply a money acceptor and dispenser for debit cardholders anymore. Brand new ATMs and older, retrofitted ATMs can dispense gift cards and facilitate money transfers for nonbank customers. And increasingly, they accept open-loop, Visa Inc.- and MasterCard Worldwide-branded GPR cards.
Payment Alliance International, which operates a network of over 56,000 ATMs in the United States, is rolling out ATMs that accept GPR cards. Donna Embry, Senior Vice President at PAI, sees wide-open opportunities for ISOs with these advanced ATMs. Embry offered several examples.
Factories with large unbanked workforces direct deposit payroll to GPR cards. Payroll card accepting-ATMs can be installed at factory locations to allow employees to get cash from their cards.
Hospitals are another possibility. Health service administrators are looking for ways to reduce coin usage at hospital cafeterias, for instance. So ATMs placed next to vending machines can allow customers to use reloadable gift cards to withdraw cash from ATMs to get snacks from the vending machines.
Yet other locales for prepaid-enabled ATMs are shopping malls or neighborhood movie complexes - wherever teenagers congregate - because savvy parents opt to give their children teen cards preloaded with fixed spending amounts.
The new prepaid functionality of ATMs has opened up two new potential revenue streams for ISOs, according to Embry. "One is to expand the services you currently have in markets that already have ATMs," she said. "And then you have the markets that just haven't been tapped."
Many trends are converging toward prepaid's favor. Embry pointed to the rise of the self-service culture as one. "The younger generation prefers not to have to deal with people," she said. "They're used to machines. They're not afraid of machines. They expect certain things out of machines."
By selling prepaid services through ATMs, ISOs are given firsthand knowledge about what will soon be the dominant consumer group as older generations fade away. "I think it's important for ISOs to understand that market because it's an extension of consumer behavior," Embry said. "They need to understand the consumer and what they use. And how they spend. And what instrument they use to spend. And for them to understand that this is a thriving market that may be untapped."
Hardman pointed to the new purveyors of technological change as another influencing factor. When it comes to the importance of loyalty, ISOs are recognizing a real threat to their present and future prosperity, he said. And that threat is companies outside the payments industry that provide merchants with value-added services as primary services. Think Square Inc.
"The new payments processors that are coming out today and the people that are building their own rails have deep pockets behind them that are outside of this industry," Hardman said. "So they're not playing by the same rules. The ISOs and the resellers and the agents - their time is now to figure out the right way to make this work for them, or they are literally going to be left behind."
It may already be too late for some ISOs that bet on the wrong solutions, according to Hardman. But not for many others. "ISOs are finally waking up and saying, 'I get it now. I'm losing my merchants to people that didn't exist two years ago,'" Hardman said.
In fact, the next big advancement in commerce is probably percolating in someone's garage right now. "There will be a time when a company will emerge that will have a very good product for the merchant and very good product for the consumer," Hardman added. "And at that point, you become a commodity that they can afford to go to someone else for."
The bridge to prepaid has been built, and continues to be developed and improved. ISOs just have to make the decision to go over it, before too many competitors get there first.
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