Prepaid Enterprise

It’s more than just technology

I’ve had some interesting conversations with a very innovative mobile technology company over the last few months. The group has built a pretty cool mobile payments platform which enables prepaid card issuers to essentially “bolt” on SMS based mobile banking services via a robust API. Almost all services made available through a traditional browser based online banking system such as balance inquiry, transaction history, deposit history and card-to-card transfers are accessible through a customizable set of SMS commands. The company’s strategy is simple – board as many new issuers to drive transaction volumes then enable inter-issuer transfers to dominate the money remittance space. WAIT! Say that again please. “Enable inter-issuer transfers”, says the savvy business owner.

This scenario represents the mindset of many new entrepreneurs in the prepaid space. The thought process is typically, “if we can technically do it, why not?” Based on the company’s strategy, it’s clear that at some point their platform will access APIs for dozens of issuers with the ability to sling value loads and unloads across multiple issuers like there’s no tomorrow. In theory it seems like a super deal. However, this represents a fast way for a prepaid related initiative like this to die in the start-up phase. It won’t matter how well you’re funded or how progressive the venture is.

Here are some reasons why:

• There is a difference between what each issuing bank, issuing processor and association will support. Banks and processors are governed by associations and federal guidelines in addition to internal policies. In some cases, the bank or processor may choose to not support initiatives fully endorsed by associations or the Feds as part of their respective business strategies.
• Card programs are highly compartmentalized. The issuing bank and association will approve a new program launch based on a set number of attributes. Everything ranging from program type (e.g. payroll, gift, general purpose) funding guidelines, authorization guidelines and KYC rules come in to play here. Launching a program with a set of attributes then doing something else will earn you a call from someone in the food chain. And it won’t be a warm and fuzzy call.
• Performing transactions on the issuer’s authorization host is only part of the puzzle. It’s all accounting entries followed by a physical movement of funds based on pre-established processes. For everything to work properly it’s ultra-critical to work within these processes. To transfer value from one issuer’s platform to another without considering the regulatory and business implications is suicide.

I can’t just be negative here. Here are some ways to bring a vision like this to reality:

• First and foremost – understand the mindset of the institutions governing payment systems.
• Learn where the existing “rails” are and ride them when possible. Why recreate something if it already exists? If it’s not core to the business, piggy-back on someone that has already blazed the path. Your competitive advantage could be based on how you assemble existing infrastructure to meet a market need.
• Stop and look around frequently. Engage your issuing bank at all levels so you’re never considered a renegade or make costly mistakes.

Prepaid cards are starting look more and more like traditional demand deposit accounts in terms of how they are regulated. This means new players must understand the entire ecosystem to make it to first base. It’s more than just technology.

The next BIG ONE

Tony Craddock, CEO of Giftex Prepay recently posted an interesting discussion topic in the LinkedIn group People i n Prepaid. I thought it was a great topic and wanted to share Tony's post as well as my response. To view the entire thread visit the forum group via the link provided.

 

Tony's Post:

If corporate loaded prepaid is going to be such a big deal, what will come next after incentive, motivation and reward? Being in the prepaid business, you'll know that there are only three types of prepaid application: consumer loaded, corporate loaded and government loaded. Corporate loaded has been led by those lovely people in the incentive, motivation and reward industry. I'm looking forward to meeting with a few of the IMR industry's leaders at the MoShow in Chicago later this month. They have achieved a great deal with vouchers and cards already.

But I want to know what people in prepaid think is going the be the next Big One in corporate loaded prepaid. So kick off this discussion by sharing an example of a company or card that has used prepaid to solve a business problem. What was the idea? What was the benefit? Did it work? What did you learn? Go on. Take a moment out of your busy schedule and tap a reply. After all, you can’t have a ‘discussion group’ if its members don't discuss. Best wishes, Tony

My Response:

I think the "Next Big One" won't necessarily be a new product but an extension of existing products. Processors can extend the usefulness of prepaid products by supporting the inclusion or insertion of merchant level or market basket data in the financial authorization path. I think about verticals such as insurance, warranty, loyalty, and incentive. How would these organizations benefit from being able to take product or service level data from the point-of-sale and insert this information into the authorization path? Organizations would be able to extend authorization parameters beyond a simple "yes, there is enough money on the card for the transaction" or "no, there is not enough money on the card for the transaction."

Now the door opens up to new opportunities such as claims adjudication, direct marketing and data mining. I'm sure the list of things we can think of to do with gobs of purchase data goes on and on... The challenge for organizations will be understanding all the moving parts on the acquiring and issuing side including ecosystem dynamics, message formats, and everything else in the middle. It's a big mountain to climb but absolutely possible.

So what do you think will be the bext BIG One in prepaid?

Same window pane, different view

Viewing the world through the same window pane doesn’t necessarily mean we’ll see the same things. Gray clouds could mean cool relaxing weather to one person and to another, the end of the world. I’ve recently been involved in long discussions about what ‘Card Management’ is and what a Prepaid Card Management System (‘CMS’) is supposed to do. After a series of intense discussions with my colleagues (I could very well be the only one that saw the discussions as ‘intense’) I realized at many different levels, we were not only saying the same things, we were framing ideas based on our experiences in different verticals of the prepaid issuing space including issuing bank, acquirer and the prepaid third party processor.

This post will cover what I believe to be essential, high-level attributes of a solid Card Management System for prepaid issuance.

What is Card Management? The phrase ‘Card Management’ is actually an inaccurate use of words for someone that comes from the area of the prepaid space that requires the CMS to not only manage the life cycle of cards, but programs, products and business entities such as program managers and other sales channels associated with issued cards. I guess a more accurate phrase could be “Everything you need to run a prepaid business as a service provider or third party processor system.” That would make the acronym – EYNTRAPBAASPOTPPS. Thank goodness CMS is in play here!

Robust APIs CMS needs to interact with the authorization host to retrieve transaction data for business use. CMS will also need to communicate with external systems for supporting services such as ID verification, OFAC, card fulfillment, IVR and others. (may vary depending on program type i.e. payroll, gift, general purpose)

Hierarchy Management Being able to create an account, mail a card out, authorize a transaction and settle is as important as oxygen but is not all there is to the business of prepaid. Associating business entities at different levels enables business owners to analyze, measure and report on important portfolio data.

Program & Product Management Assigning hierarchy levels and product attributes from a single UI is important in my opinion. Think about how the business comes together starting at member sponsorship on through card issuance. Program and product configuration within CMS should be representative of this process.

Card Life Cycle Management Card issuance, account creation, account activation, self-service cardholder support, CSR support and alike. Everything that happens after all the business relationships and entities are in place.

Reporting and Billing In most cases this will happen in separate system but should be configured and delivered either through CMS or in partnership with CMS. Establishing fees, reporting revenue based on business entities is what brings it all together. Keep in mind that the reports I'm referring to are outside of what the authorization host typically delivers to the issuing bank as part of the third party processor's responsibility.

So there you have it. The world through my CMS window pane. What's your view?

Card-to-Card Transfer opportunity is not as good as it seems (part 2)

In part 1 of this post I discussed some of the interesting points raised by Red Gillen of Celent concerning  the card-to-card transfer opportunity many program managers pursue. In this post, I'll share the attributes of a program I  personally worked on, with an emphasis on strategies expected to address and/or eliminate many of the social, infrastructure and regulatory challenges faced.

For starters, here is the actual program description submitted to MasterCard for approval (MasterCard issued approval on 05-08-06):

Program Overview

The Allende Coahuila Prepaid MasterCard is a two card set Program designed to provide former residents of Allende Mexico now living in the U.S. a means to transfer money from the U.S. to family and friends in Mexico. The primary card will be a MasterCard branded debit card with the secondary card being a Cirrus/Maestro card for ATM cash access only. Card sets will be mailed directly to verified consumers by a certified MasterCard vendor. As a personal spend card, the primary card in the U.S. can be loaded via Payroll Direct Deposit and any approved retail or RPPS payment center.

Target Audience

The Allende Coahuila Prepaid MasterCard Program will target specifically residents of Allende Mexico and their families living in the U.S. who currently transfer money on a regular basis to family members.

Marketing Methods

Unlike traditional marketing methods associated prepaid card programs, the Allende Coahuila Prepaid MasterCard will take a reversed approach in that we will enlist the secondary card recipient in Mexico to influence the sale of the primary card to a U.S. Resident family member. We have formed a relationship with the city of Allende Coahuila, Mexico to assist with the promotion and marketing coordination designed to identify the consumer currently receiving money transfers.

The City of Allende will initiate various promotional activities designed to generate a response from residents who are currently receive money transfers from family or friends living in the US. In the promotional message the consumer will be instructed to visit the City Hall where city staff members will educate the consumers on the benefits of receiving money transfers via a card based program versus Western Union or Money Gram. We will then encourage the Mexican resident to contact their family member in the U.S. to promote the card and provide MSP contact information for follow up sales.

Marketing tools Include:

• Radio Spots
• Flyer Distribution
• Posters
• News Paper Ads

Sales, Enrollment and Distribution Process

1. Allende resident responds to a promotional radio, newspaper or flyer.
2. The resident is instructed to visit the City Hall to learn more about the program.
3. City staff members educate the resident on the benefits of the debit card program on location and are encouraged to contact their family member in the U.S. on the spot.
4. If the family member is contacted at that moment they are introduced to the Allende Prepaid MasterCard program and are instructed to contact MSP to order their card.
5. The call is fielded by an authorized MSP TPP contracted by (issuing bank name omitted) to receive phone applications. All calls are recorded for security and regulatory purposes.
6. All necessary information to verify the cardholder in accordance with the U.S. Patriot “Know Your Customer” regulation is collected for processing.
7. Upon successful verification and OFAC screen the cardholder information is processed and sent to a certified MasterCard vendor for card fulfillment.
8. One personalized MasterCard debit card and one non-personalized Maestro/Cirrus card is mailed directly to the cardholder with a U.S. address.
9. Once the card is received by the cardholder they are instructed via an instructional insert to call the IVRU to register and activate the card, and select their PIN.
10. The secondary card is then mailed to the Mexican resident by the primary cardholder for cash access only.

 

In part 3 of this post, I'll line up the challenges and results. Stay tuned...

 

Technorati Tags: prepaid debit,program management,money transfer,prepaid mastercard,mastercard

Card-to-Card Transfer opportunity is not as good as it seems (part 1)

This week I had a chance to catch up with some reading and picked up the 2008 Fall issue of PayBefore (so I'm a little behind). The article written by Red Gillen of Celent titled 'Remittances May Be Tempting, but Card-Card Not the Way to Go" was insightful and accurate. As a partner/operator of a small TPP in my previous life, we developed and launched what we felt was the answer to many of the barriers described in the article. Some worked some didn't.

Red writes:

To some in the payments industry, a card-to-card model appears to be laden with promise due to its theoretical simplicity: Issue a network branded prepaid card to a cardholder in the sender country, send a secondary card to a cardholder to the receiving country (or have the secondary  card sent by the primary cardholder), have the primary cardholder transfer funds via the card program's internal processing and have the secondary cardholder access funds via ATM withdrawals or POS. use.

Complimenting this apparent simplicity is the potential for multiple revenue streams: card activation fees, ATM withdrawal fees and interchange fees. If one makes sure that card-card-transfer fees are just a little more competitive than Western Union's fees, It's jackpot time, right? WRONG.

The key phrase being 'theoretical simplicity'. Everything covered in this article is dead on. Issues ranging from social, regulatory and infrastructure hurdles leave many program managers wondering how a sure fire opportunity fails even with significant investment of time and resources.

 

In part 2 of this post, I'll go through the program I worked on called the Allende Coahila Prepaid MasterCard. It was a pretty slick partnership between a Northern Mexican town and our issuing bank designed to support card-to-card-transfers in a isolated community. Many of the program attributes were implemented to address the list of issues covered in Red's article.

Stay tuned...

 

Technorati Tags: prepaid debit,card management,program management,prepaid mastercard,prepaid visa

Prepaid is not for everyone

Every now and then I come across an article that tells an incomplete story on Prepaid Debit. The article published on CNBC.com titled "The Real Deal Behind Prepaid Cards," is yet another example of the common misunderstanding surrounding prepaid products . The article essentially picks apart the Prepaid Visa RushCard as a sub-standard option for credit challenge consumers.

The article states...

"Take the trendy-looking Prepaid Visa RushCard, the brainchild of hip-hop mogul Russell Simmons. Simmons says the product makes you “financially empowered,” and many Americans have bought in, with 1.5 million RushCards issued in the past five years. But these cards may be more financially draining than empowering – carrying costs and transaction fees that add up fast. So before you rush out to get one, know the price you’ll pay for the prepaid life."

My thoughts...

Prepaid debit products are primarily designed for consumers unable to access mainstream banking services for any number of reasons. Based on normal, every day usage, a cardholder can expect to pay $10-$15 per month in fees. For someone making a transition from cash, it is a small price to pay for the security and convenience associated with holding funds in an account. In contrast, a traditional checking account may not be the best option for a consumer just learning to manage their finances. The cost of checks and overdraft fees will dwarf the cost of a prepaid card. Additional cost benefits include the elimination of money orders and check cashing fees. A service widely used by the unbanked consumer.

The article states...

"Prepaid cards also come with extremely high fees. To get the card in the first place, you have to pay a fee of $19.95 and then for every withdrawal or transaction you make you pay $1 PLUS ATM fees associated with the bank you are withdrawing from."

My thoughts...

Unbanked or underbanked consumers spend far more using other alternative financial products and services such as check cashing, bill pay, money orders and money transfers. Additionally, you don't have to look too far outside of a normal checking account to find "extremely high fees." Consider a $30 dollar overdraft fee on a $10.00 purchase. A few of these and you're beyond extremely high fees and somewhere in the neighborhood of outrageous. Prepaid cards become a good "starter" account for a consumer in training.

The article states...

"Prepaid cards in general are marketed to those of us who still believe that everyone has the right to credit, even if you've already destroyed your own. But having credit is a privilege, not a right – and its a privilege you pay for. In some cases such as these, the price is simply too high."

My thoughts...

Prepaid cards are marketed to individuals who are traditionally unwanted by financial institutions. Or just coming out of financial hard times. Credit building is a nice feature but is probably the last thing on an unbanked consumers mind. They are looking for ways to eliminate the cost and inconvenience of having to run around cashing checks and paying bills. Some are even looking for a little dignity. Having a branded Visa or MasterCard can have a positive affect on self worth in unbanked social groups. Read my previous post for more on this subject.

The article states...

"If you're going to get a card to build credit, start instead with a secured card. A secured card is a credit card with a credit line that is built on your initial deposit – your credit is your cash –and these cards build your credit history. And if simply having the ability to plop down plastic is your goal, you're better off with a debit card."

My thoughts...

Using a prepaid card credit building feature such as the RushCard card's RushPath to Credit makes much more sense for a new or recovering credit consumer because;

1. These programs do not require an initial deposit to secure a line of credit.  
2. Positive credit reports are made on monthly payments the consumers is already making such as rent, utility bills, etc.
3. The program does not penalize the consumer for late payments. Only positive reports are made.

At the end of the day, prepaid is not for everyone. Just like BMW's are not for everyone. The slightly negative perception displayed in the article is a result of taking a product designed and package for one demographic and weighing against factors applicable to another. Unbanked and banked consumers have different needs so having access to entry level financial account services is a good thing.

The financial empowerment RushCard refers to is not just about building credit but about leveling the playing field for disenfranchised consumers. In order to play they need a ticket to the game. Prepaid account services get them in the door to mainstream banking (when most banks won't) so one day these same consumers can make the transition to traditional checking accounts, credit cards and eventually home ownership.

I'm not hating on Carmen or CNBC - I'm just dropping some science.

 

Technorati Tags: prepaid debit,unbanked,underbanked.prepaid visa

MasterCard Remote Transaction Account Program

  Today I came across a press release covering NETTELLER's recent introduction of their virtual card product. The product allows consumers to generate one-time use Prepaid MasterCard accounts for for Internet purchases. It is a pretty neat way to keep your primary account safe from potential fraud.

If you're a Program Manager interested in adding this feature to your product line, your issuing bank will be required to submit a Special Issuer Application to MasterCard requesting approval for a Remote Transaction Account program.

What is a Remote Transaction Account?

"A Remote Transaction Account entails the issuance of a MasterCard account number, an expiration date, and CVC2 with the option of receiving a physical MasterCard card. This account number may be used for remote transactions such as Internet or mail order/telephone order purchases."

Section 5 of MasterCard's Special Issuer Application lists the following requirements:

1. Remote Transaction Account must be linked to an existing
   physical MasterCard card, or the Remote Transaction Account
   account holder must be provided with the option to receive a
   physical MasterCard card.
2. A Remote Transaction Account must include
   • 16-digit account number
   • Expiration date
   • Assigned CVC2 value
3. Determine how the account number, expiration date, and CVC2
   will be communicated to the account holder.

Keep in mind a Remote Transaction Account program is typically associated with an existing Special Issuer Program. Be clear when planning with your issuing bank and they should be able to guide you through the product development cycle with ease.

Stay tuned for details on my experience with my new NETTELLER account!

 

Technorati Tags: prepaid mastercard,remote tranaction account,prepaid debit,program management

Program Management is no easy task

During my days as a program manager, It was such a challenge to drill down the performance of our card portfolio because of the inadequate reporting provided by our processor. The relationship between accounts on file, active accounts, collected fees, and pass through costs from the associations and member bank were a constant moving target. Without the help of external systems and applications, it is very possible for a program manager to sell his way straight into the ground. Managing costs and cash positions are obviously a concern of any business, but in the world of prepaid card issuing, a small company will experience similar pressures of a large, multi-national company because the speed at which individual cost and revenue units are generated.

To give you an idea of what I mean, here's are some examples of the variables a program manager must keep track of:

1. Monthly Account on File fees - How the program manager's issuing bank and processor define an "Account on File"  may vary. The bank/processor may say any account created and placed on our system is billable regardless if there is no activity. Or, say if the card has generated a transaction in a 30 day period it will be considered a billable account on file. The ideal situation would be if both bank and processor agreed on how to classify this fee category, but most don't. So here we have two sets of fees and two methods of billing.
2. Billed vs. Collected Monthly Account on File fees - New program managers make the huge mistake of expecting all transactional and pass through costs to be covered by cardholder fees. Why not, "if I'm charging $4.95 per card per month I have nothing to worry about right?" Oh boy are you in for a surprise. Cardholders adapt well and they will learn the billing cycles. Check your transaction history reports and you'll start to see heavy ATM withdrawals right before your scheduled 3:00 AM monthly fee billing run.
3. POS/ATM Authorization fees - This item could go either way. The last two processors I worked with did not include the cardholder fee in the authorization request. A batch "end of day" process was run to collect cardholder fees, and just like the monthly account on file fee, if the money was withdrawn before the account is pinged, you're out of luck. As a side note, OLS.Switch does support the real-time inclusion of POS and ATM cardholder fees.
4. Account Creation fees - This fee category is one to watch closely. If your processor charges an Account Creation fee, you don't want to go full blast on a sales campaign without a solid strategy to promote activation and utilization. There is a huge difference between shipped and active cards. An even bigger difference between Active and profitable cards.
5. Attrition - In my previous post titled "Reaching the unbanked market with prepaid products" I mention the importance of live cardholder support. If left to the wind this number could go through roof.

In the world of prepaid card issuing the program manager is where product development and consumer need meet. The program manager acts as the conduit between bank, transaction delivery and end user, and in many ways, is the most involved process as it physically must interact and be accountable to all parties. Not an easy task.

Does your fee schedule match your marketing message?

In a previous post titled "Reaching the unbanked and underbanked market with prepaid products," I touched on some things we should all think about when reaching out to this consumer group. The interesting thing is if you take a look at many of the card products on the market, many of the user fees do not reflect the dominating marketing message. A far too common occurrence in the sub-prime space.

Overdraft, POS/ATM decline, and inactivity fees should be outlawed. I remember in the early days of my program management career I would justify charging my cardholders these fees by comparing the overall cost of the card to the cost the cardholder would incur using alternative financial services such as check cashing and payday loans. When comparing these two scenarios there is absolutely no doubt the card cost less.However, if the goal is to provide a solution to a consumer in need and create a long term relationship, does it make sense to penalize the cardholder for not having money?

Here's some food for thought:

• Mr. cardholder we know the reason you're in this bind is because you've had some trouble with bouncing checks and overdrawing your account. That's why we allow your prepaid card account to go negative when we try to bill you for the monthly maintenance fee. Additionally, you will be billed an overdraft fee.
• Mrs. cardholder we know you didn't realize there wasn't enough money in your account when you tried to withdraw $20 from an ATM for your daughters school lunch money but I'm afraid that in addition to the ATM surcharge fee you were just billed, a $1.50 decline will be assessed to you account.
• Mr. and Mrs. cardholder we understand you have been unemployed for the last few months but because there has been no activity on your accounts, we've assessed a $5.00 inactivity fee for the last 3 months.

Believe me I'm fully aware of the cost associated with maintaining accounts on file with your processor and/or issuing bank, but does it make sense to penalize your customer for having hard times? Or, does it make better sense to create positive incentives to keep the account long term? At minimum, your product attributes shouldn't conflict with your marketing message. Remember...the fastest way to expose a bad product is good sales & marketing. So the next time you're planning a new product launch, make sure your product and marketing strategies are lined up.

Card Management Mini Podcast

My colleague Dave Bergert came down to Dallas from Iowa last month to discuss some of our prepaid card issuing initiatives. Click on the image below to listen to our discussion.

To Process or Not to Process - Part 1

As part of my new responsibilities at OLS, I am constantly reaching out to MSP/ISOs aka: Program Managers, to talk about our latest offering called OLS.Host. In a nutshell, OLS.Host  allows smaller organizations to take the next step in their businesses by becoming a Third Party Processor or "TPP" through a Software-as-a-Service (SaaS) model. Let me tell you... being the owner of a program management company for 8 years in my former life, I would have given up everything short of my first born to have access to something like this. No more outsourcing issues, no more system  limitations and yes... better reporting!

Any program manager will tell you that it is virtually impossible to love your processor. I agree. For the simple reason that nothing in life is perfect. Businesses are still made of people and people drop the ball. Add technology, security and operational variables to the table and you are in for the ride of your life. I remember starting out in the business and sitting in a strategic session with my partners listening to them talk about how we were going to book a million active accounts in the first year! 1.5 years later we were still wrestling with our processor on how to get monthly maintenance fees billed to cardholder accounts correctly. I always thought to myself "can it really be that difficult?" Knowing what I now, I can certainly appreciate implementation delays but 1.5 years is a joke.

Now that I am on the other side of the fence pitching technology solution, I have the opportunity to listen to every gut busting problem my customers have with their processor. It's an interesting perspective.

The most common problems faced are:

1. Authorization Downtime - a customer came to us because they were experiencing no authorizations for over an hour multiple times per month!
2. Poor Account Management - A return call or email every now and then would be nice.
3. Reporting - This is huge. Raw data does not provide the business intelligence necessary to run a successful program management company.
4. Reporting - I get this one so much it was worth mentioning twice.
5. Product Limitations - Text messaging. Some people just need it.
6. Third Party Integration Issues - value added services can't be made available if vendors can't connect.

In the land of milk and honey it would be as simple as dropping a new payment systems in place and items 1 through 6 go away. Unfortunately it's not that simple. Without a doubt, OLS.Host provides a proven method of gaining control of the card business. But it can't fix the un-fixable. So should you consider becoming a Third Party Processor? The answer is yes.

Stay tuned for Part 2 of this post for a simple road map to processorship.