The Green Sheet Online Edition
September 9, 2010 • 10:09:01
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Getting started in prepaid
Reloadable, open-loop, network-branded prepaid cards are big business, as evidenced by the July 21, 2010, initial public offering of Green Dot Corp., which raised approximately $164 million in its first day of trading.
With the success of Green Dot and others, stakeholders in the merchant channel are taking increased notice of opportunities in prepaid - from selling cards to customizing programs. These opportunities can take many forms, each with varying levels of investment, product control and economic return, and the decision process can be daunting.
Here is a primer to help you develop a strategic plan, establish the requisite relationships and execute your plan for maximum benefit.
Speaking 'prepaid'
The prepaid space is still relatively new, and terminology can be confusing or often misapplied. So let's make sure we're speaking the same language.
The network-affiliated banks (issuers) that issue reloadable prepaid cards typically contract with third-party partners (program managers) to operate and market prepaid programs.
Under these arrangements, program managers must use certified, issuer-integrated processing partners (called issuing processors or more simply processors), and these processors must be distinguished from acquiring processors that route card transactions for authorization.
The issuer submits the program to its affiliated network for approval. Once approved, the issuer supplies the program manager with a designated set of card numbers (the bank identification number, or BIN) for which the program manager assumes financial and compliance responsibilities.
The processor then sets up the program on its platform, identifying the assigned BIN, establishing the authorization parameters, storing cardholder registration and card account transaction data, maintaining card account balances, and providing card authorization, cardholder support and other program-connected services.
Exploring options
Your prepaid options are simple. You can build and operate your own product for maximum control; engage a program manager to fully customize and manage your solution; or manage product sales channels for a single program manager or an aggregation of program managers.
Or you can retail pre-labeled or private-labeled, off-the-shelf cards for commission. You determine your right choice by your market access and available capital resources, both financial and human.
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Option 1 - Operate:
Program managers can enjoy greater program control, portability and transactional margins by working directly with issuers and processor partners. But these benefits do not come cheaply, or quickly. Many program managers focus on building and marketing their own specific card products, while others leverage investments and relationships to manage a portfolio of client programs. Scalable account portfolios are a prerequisite to success.
Option 2 - Incubate:
To establish a market for your specific program opportunity, external program managers can minimize upfront expenditures, expedite time-to-launch and provide an operational infrastructure that lets you focus on building a market for your products. But it's important to weigh incremental servicing costs or revenue sharing against the benefits of lower costs and operational efficiencies of this "incubation" process.
Seek program managers with the types of industry expertise, technology resources, partnerships and enabling technologies that can support specific program needs. The ultimate goal is to establish a sizable portfolio base and to become your own program manager.
Option 3 - Distribute:
With limited exceptions, the networks and issuers permit wholesale distribution of open-loop prepaid products by program managers only.
The large aggregators, such as Blackhawk Network and InComm, are program managers for their own reloadable, open-loop card offerings. Likewise, Green Dot serves as program manager for the Wal-Mart Stores Inc.'s MoneyCard, as well as for its own branded reloadable prepaid product line.
If distribution is your strategic opportunity, consider establishing yourself as a program manager, either independently or in partnership with an existing program manager.
Option 4 - Sell:
This option offers a share of the prepaid profits, even if the company has limited resources or market reach. Program managers establish the turnkey product (including branding, card collateral and related functionality) that merchants can sell in their marketplaces.
Card merchants earn a commission for card sales and, particularly in the retail environment, can gain additional revenue based on card loads or spending. In addition, opportunities may exist for private-labeling and flexibility in establishing the retail price and cardholder fee structure. This can be a good introduction to the prepaid space.
Proceed with caution
The road to prepaid gold can be long and bumpy. Here are a few guidelines to help make the ride smoother.
- Don't underestimate. Prepaid debit is a multifaceted enterprise encompassing card operations, banking and technology issues; risk and compliance; cardholder services; vendor relations; inventory management; marketing; and more. Make sure you have the bandwidth for the engagement.
- Partner wisely. Carefully choose your banking, processing and other resource partners, and clearly articulate everyone's roles and responsibilities. Partners are the backbone of your business.
- Be adaptable. As with most things in life, a prepaid strategy may not go as planned. Anticipate and react effectively to business disruptions, regulatory changes, bank mergers, service outages, vendor snafus and like situations.
- Plan ahead. Experienced consultants and knowledgeable legal counsel can help you remain in control and protect the portability of your card program and cardholder relationships.
So there you have it. Apply these basic tenets to your niche, and you're ready to chart your own path in the prepaid world and enjoy the wealth of opportunities this fast-growing market offers.
For more stories from SellingPrepaid E-Magazine, as well as breaking news and forums devoted to the prepaid sphere, please visit greensheet.com.
Editorial Note: This article originally appeared in GSQ, Vol. 13, No. 2, June 2010.
Barry J. Kessler is CEO and President of Prepaid Resources Inc. He has developed, launched and managed many successful prepaid debit card programs during his career, and is considered an industry leader in the general-purpose, reloadable prepaid card segment.
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