The benefits and functionality of prepaid are now being appreciated by all types of issuers and customers. Prepaid is increasingly becoming the infrastructure of choice for FinTech innovation. So, what does the future hold, and what can other parts of the payments industry learn from prepaid?
Prepaid is a real-time product in a batched world. Its in-built checks and balances make it suitable for all types of customers. In this way prepaid rejects typical either/or thinking to offer both convenience and control, widespread acceptance and peace of mind, high customisation and a low-cost operating model. Small wonder then that almost every new product, feature or functionality brought to market by FinTech firms seems to run on a prepaid card platform.
The global prepaid market is set to top $500 billion in card sales volume by 2020, according to Mastercard. It is also the fastest growing product in the world with double-digit growth in all regions, except the US. Growth is strongest in Europe where prepaid is increasing at a compound annual growth rate of 18.6 percent over the period 2014-2021, compared to consumer credit at 5.8 percent and consumer debit at 7.8 percent.
The explosive growth of prepaid worldwide is because it can support a wide range of different propositions. “There are so many sectors it can service, it’s not just a consumer prepaid card or a corporate prepaid card. It can be used by companies to do payroll, expenses management or for competition winners. It could be used for insurance pay-outs or multi-currency,” says Suresh Vaghjiani, managing director, EMEA, Global Processing Services (GPS).
Prepaid also has a chameleon-like ability to adapt country to country. This is important as payment habits are strongly national. They have developed over time and are formed by various cultural, political, economic and technological factors. “If you look globally, prepaid is never the same in any two countries or markets in terms of where the real success is,” says David Parker, director, Polymath Consulting.
Indeed Mastercard’s top four countries in Europe by prepaid volume are disparate. “We’ve seen the popularity of prepaid in Italy being driven by the major banks, which is very different to other markets in Europe,” explains Jason Field, director of business development, prepaid, UK & Ireland, Mastercard.
Poste Italiane [the Italian post office]was among the first to market bank lite-style prepaid cards more than a decade ago. This was originally to circumvent high bank charges. Prepaid cards have now become part of the Italian psyche. “We see great usage online and at point of sale. People have their salaries paid onto their cards. It’s not just one type of age group that uses prepaid in Italy, it’s across a wide range of ages and demographics,” says Field.
“In direct contrast, the prepaid value chain in the UK is quite fragmented and crowded with numerous specialised issuers and programme managers addressing specific needs,” he says. In Turkey, prepaid is being driven by a large student disbursement programme. Whereas social funds disbursement, multi-application and gift cards are advancing prepaid in Russia.
PREPAID BECOMES A TEENAGER
So, what has contributed to making prepaid such a runaway success in recent years? According to Parker from Polymath, nothing. “It’s always been a success if the product proposition is correct. I can take you around the world and show you products that were prepaid and highly successful.” These include mobile phone cards and retailer gift cards, which contribute 4-6 percent of retailer sales in most markets worldwide.
Paypal was a closed loop prepaid wallet when it was first launched. Neteller and Skrill are prepaid wallets in the gambling sector and highly successful with around 18 million customers. “Open loop prepaid cards have also been very successful where the alignment has existed between proposition, culture and infrastructure,” contests Parker. “Prepaid comes in many forms and has always been successful. It is now been recognised finally because the propositions that are being created are more applicable to people in the western world,” he says.
For some, this new recognition comes from understanding what prepaid is and does. “I think it’s wrong to view debit and credit in the same light as prepaid. Debit and credit are products in themselves. Prepaid is a platform on which you build a product,” explains Parker. For perhaps too long prepaid was assumed to be a single product as opposed to a platform which enables multiple products. “When you say that prepaid was the ‘poor relation’ or was in the past, I would push back against that. It was the misunderstood relation.”
Debit and credit are 35-40 years old. They are middle-aged. In Europe, the first prepaid cards were issued in the early 2000s, which makes prepaid a teenager. “People are still understanding the teenager, how to use the teenager and what products to create. By its very nature, there have been failures but also successes,” says Parker.
Teenagers often feel misunderstood. But in the case of prepaid, perhaps this is justified. It is not a problem child, it is a problem-solver. When it comes to re-imagining prepaid, it is less about prepaid coming of age, and more about everyone else recognising what prepaid can do and be.
THE PERFECT STORM
The versatility of prepaid is both a strength and a weakness. The platform is flexible and adaptable. Yet the plethora of propositions makes it difficult to pigeon-hole.
A combination of various regulatory and technological factors have also created the conditions for prepaid to thrive. In Europe, a series of electronic money directives and regulations have cut red tape. They have allowed firms to hold prepaid funds or e-money without having to apply for a banking licence. There has been a 143 percent growth in financial and electronic money institutions (EMIs) issuing Mastercard-branded prepaid cards since 2011, the card giant confirms.
More back-end-as-a-service infrastructure and support is available. Issuers can outsource various elements of the prepaid value chain to specialist processors, programme managers and BIN sponsors. This removes barriers to entry, cuts costs and improves speed-to-market.
Prepaid features and functionality have also improved in the last 5-10 years. The rise in smartphone adoption and apps as a delivery mechanism have played their part. So too has improved processor capability. All prepaid transactions are authorised online to the host, which allows various real-time notifications and alerts.
If users misplace their prepaid card, they can simply freeze it in their app and unfreeze it when they find it again. If they are wary about using contactless or shopping online, they can switch such transactions off in their app. The same applies for magnetic stripe or ATM transactions. If they are planning a particular purchase, they can enable this functionality in advance and switch it off afterwards.
Issuers can also implement controls at an increasingly granular level. Merchant category code (MCC) blocking has been a feature within a corporate card environment for many years. However, processors are now able to use black- and white-listing to restrict the use of prepaid cards to particular regions, countries or cities. Or to particular store chains, outlets or terminals.
Vaghjiani gives the example of a prepaid luncheon voucher card developed for a client. Staff were supposed to use the card at lunchtime only. However some used it in the evening as restaurants accepted it. The new card now only works at certain times of the day in certain outlets. Staff that work night shifts receive a card configured to work at different times. The card gives staff a lunch allowance every day for the week, and any unspent funds can be clawed back.
STORM CLOUDS GATHERING?
Certain regulatory and technological factors may have created the perform storm for prepaid. But there are also storm clouds ahead for issuers and the industry generally. These include regulatory provisions around anti-money laundering (AML), know your customer requirements (KYC) and passporting.
The fifth EU anti-money laundering directive (AMLD5) was published in the Official Journal of the EU on 19 June 2018. It must be transposed into national law by member states by 10 January 2020. It contains various provisions to increase transparency of financial transactions in response to the terrorist attacks of 2015/16 in Paris and Brussels, as well as the Panama papers leak.
The new rules address risks linked to virtual currencies and prepaid cards. This is primarily around anonymity, which the European authorities feel facilitates money laundering and the financing of terrorist attacks and logistics. Currently, when businesses offer financial products that fall below the
non-reloadable and reloadable thresholds, they are not required to carry out KYC.
“AMLD5 has squeezed those limits from €250 to €150. Critically, a lot of these solutions are provided in an online environment, for example gift cards for use at multiple retailers. AMLD5 has reduced the online threshold for spending using one of these products to €50,” explains Siobhan Moore, partner at law firm Locke Lord.
This will have a real commercial impact on the providers of prepaid gift cards. “It means that the proposition is a lot less attractive to the retailer and the customer, if they are going to have to provide ID verification before the customer can use it. Even if you did this on an electronic basis, it would come at a cost. So how is the issuer or retailer going to bear that cost? Will it be passed on to the customer? And if so, is that product actually attractive to the customer any more?” asks Moore.
Prepaid issuers and processors have the ability to deliver international products. But while they can operate without boundaries, the law is tied to countries, warns Moore. She advises understanding how the regulations apply in each market, which will inform how issuers comply. For example, some businesses rely on electronic KYC, which is not always an acceptable way to meet customer due diligence requirements in all jurisdictions. Germany may require something more than database checks, for example, whereas in the UK this may be sufficient.
The standard card proposition is largely unchanged since the 1970s. There are credit cards for transactors or revolvers with or without loyalty programmes. Debit cards are either tied to a financial institution or they are decoupled and are not. For years it has been a case of same old, same old.
Banks and financial institutions have continued to sell financial products on their own terms. At best, this left them talking at their customers, not to them. At worst, it left them talking to themselves as customers who did not pass credit or KYC checks were left out. So it may have continued if technology, regulation and external competition had not disrupted everything.
Disruption starts with thinking differently. Prepaid has been at the forefront of helping the industry think differently. FinTechs have understood the power of platforms and ecosystems, both for prepaid and more generally. They appreciated that debit and credit were products, whereas prepaid was a platform on which they could build products.
Once the FinTechs travelled through this parallax and changed their angle of view, they began to see banking, shopping and payment began differently. They focused on the long-tail of un- and under-served niches: new-to-country, new-to-banking, children, students and small businesses. They focused on customer needs and worked backwards from these to create propositions. They launched on a prepaid platform, iterated as they went and solicited customer feedback to constantly refine the proposition. This was counter to the prevailing attitude.
It was also a wake-up call for incumbents, who have tried to do the same. They started with good intentions, but hamstrung by legacy infrastructure, systems and processes, they had to devise work-arounds. These were often cumbersome and time-consuming to implement. A traditional bank takes around 2.2 years to launch a debit card product, according to GPS analysis. Their customer Monzo, a UK challenger bank, went from contract signing to card issuance within 14 weeks.
Markets move quickly. Saliency and relevance is key. Incumbents have been looking at FinTechs and wanting to copy their features and functionality, but also their agility. Many are now using the same service providers to enable this.
“If you had asked me two years ago, I would have said that the FinTechs were going to own the customer. The traditional banks were going to become wholesalers who sit behind the scenes, holding the real money. Now what has happened is that the traditional banks are fighting back by launching their own digital banks. They don’t want to lose the interaction and touchpoints they have with the end-customer,” says Vaghjiani.
The DNA of prepaid makes its appeal almost universal. There is no connection to a bank account and no overdraft. Users cannot spend more than they have loaded, so there are no interest or late payment fees. By the same token, issuers do not have to have a banking licence to offer the product. They can also passport their product across various countries, providing it meets local regulations.
The characteristics of the prepaid platform enable issuers to target a long-tail of niches.
Prepaid is inclusive not exclusive. In an age when financial inclusion is rising up the social and political agenda. And when regulators are seeking to encourage open competition, drive market efficiency and protect consumers, this is very powerful.
Prepaid is also forcing a re-think of mass-market. Prepaid is applicable to the whole market, just not with the same proposition. It runs the entire gamut from travel money cards for international holidaymakers and corporate expenses cards to government disbursements via social care cards and humanitarian aid cards for refugees. One size, or in this case one platform, does fit all. However, issuers have to tailor how they design and communicate their prepaid offerings.
Issuers cannot continue to develop the same offerings and say the same things to each other, or as they always had, and expect a different response. This is the definition of madness. Bank-lite, neo or challenger banks have helped to re-frame the prepaid proposition and conversation with customers. This was partly out of necessity. Initially most did not have full banking licences so could not call themselves banks. So they positioned themselves as ‘beyond banking’ or ‘the next-generation of banking technology’ with the features and functionality to match, running on prepaid.
Paired with an app, prepaid cards can be customised by their users to work as and where they want them to. In the FinTech space, “everything is about user experience and instant gratification,” says Vaghjiani. Prepaid allows instant gratification and provides user experiences in a way that other products cannot do. Tomorrow belongs to prepaid.