Prepaid Master Card, Prepaid Card

Home
About

1

2

3

4

5

Payroll Card

March 17th, 2011

admin

Central Bank began offering payroll cards at the end of 2007 for an employer who is also a major depositor at the bank. The bank now has payroll cards in Illinois, Kansas, Louisiana, Missouri, and Texas. Cardholder numbers grew and expenses fell with the payroll card, but it did not make a profit for the bank.

The table below shows the features of the Central Bank Payroll Card as compared to La Tarjeta Segura.

Feature/Function	Central Bank	Payroll La Tarjeta Segura
Card Focus	Payroll Card	General Spend
Transaction Types	Point of Sale and ATM	Point of Sale and ATM
Major Card Brand	Visa	No on instant issues/Visa on others
Bill Payment	No	No
Remittances	No	Yes to Mexico
FDIC Insurance	No	No*
Reload Options	Direct Deposit/Cash at the Bank for $2.50	Direct Deposit/Cash at the Bank for $2.50
Savings Features	No	No
Credit Features	No	No

One benefit to payroll cards is that employers offer a defined audience with specific needs, according to bank management. The employer solves the marketing questions of people, promotion, and place by bringing the bank’s products to employees.

However, because the employer is a large depositor with the bank, Central Bank did not charge any program fees. In addition, due to payroll laws in various states and resistance from the employer, Central Bank did not charge cardholders for using ATMs.

The lack of ATM charges meant the bank could not make money on the payroll cards because the cardholders would withdraw their wages from the ATM rather than using the card to make purchases or pay bills. This resulted in low transaction income. The table below shows the income and cost for Central Bank of five transactions.

Transaction Type	Income Per Transaction	Cost Per Transaction
ATM Balance Inquiry	0¢	38¢
ATM Withdrawal	0¢	61¢
Signature Transactions	29¢	10¢
PIN Payment	18¢	8¢
Pinless Bill Payment	40¢	8¢

Infrastructure Issues

March 7th, 2011

admin

Central Bank functioned as the issuer and program manager for the cards. It outsourced processing to the lowest cost provider, and outsourcing just the processing meant that Central Bank could keep the deposits to earn interest income and possibly turn the cardholders into account holders.

The card launch was delayed because the vendor could not combine features of its various stored-value cards into one. Central Bank needed to go through the set up process three times, which is one reason card numbers were low in 2006.

Central Bank stopped selling the Tarjeta Segura in the fourth quarter of 2007 as the payroll card began to gain traction.

Because the Tarjeta Segura instant issue card only allowed for PIN debit transactions, Central Bank lost the potential for fee income because cardholders did not make purchases where they had to sign a receipt. These purchases would have given Central Bank more income than PIN purchases.

By way of comparison, when Central Bank started its payroll card, it earned 29 cents for every signature transaction made, and 18 cents for every PIN transaction. Branded Tarjeta cards were not an easy sell because consumers had to part with their money and then wait for up to a week to have the card delivered.

Central Bank stopped selling the Tarjeta Segura in the fourth quarter of 2007 as the payroll card began to gain traction.

La Tarjeta Segura

February 9th, 2011

admin

Central Bank began offering La Tarjeta Segura as an alternative to cash in 2006 to the Hispanic community in its area. The original objective was to offer a product that could convert customers from cardholders into accountholders.

The card was sold in two forms. One was an instant issue card, which consumers could pay for and receive immediately. To support this card, Central Bank purchased a card embosser that it could take to festivals and community centers. The other was a Visa-branded card that consumers would get five to seven days after they purchased it.

Feature/Function La Tarjeta Segura
Card Focus General Spend

Transaction Types Point of Sale and ATM

Major Card Brand                          Visa-branded – available with seven-day wait
Bill Payment                                                                        No
Remittances                                                               Yes, to Mexico
FDIC Insurance                                                                   No
Reload Options                                   Direct Deposit/Cash at the Bank for $2.50
Savings Features                                                                  No
Credit Features                                                                     No

Potential cardholders needed to show one form of government-issued photo ID to get the card. They could use the Matricula Consular ID card issued by Mexican Consulates in the United States to obtain the card. They had to pay a $5.00 purchase fee and could load up to $2,500 onto the card.

Much of the struggle with La Tarjeta Segura came from marketing issues as well as customer perception issues. We have tried to use the five principles of marketing, or 5 Ps, to provide a framework for this analysis.

Product
The product had limited appeal to Central Bank’s target audience. Many did
not want to wait a week to receive a Visa-branded card and saw less use for an
unbranded card. The bank’s management said that the Hispanic population was more interested in receiving a mainstream card rather than one that designated the cardholder as Hispanic.

Price
Price, however, did not seem to be a factor keeping consumers from adopting the cards. Cardholders paid a $5.00 new card fee and a $2.50 reload fee.

People
The bank had two employees who focused on meeting with community leaders and attending events to sell the cards.

Promotion
The bank used billboards and brochures as its primary marketing. This was
supplemented by staff members attending events and meeting with community leaders. While these leaders welcomed the cards in theory, when the cards actually became available, they were not active in helping to market them. These methods were not as successful as anticipated, in bringing new customers into the bank.

Place
Customers had to come into the branch to purchase and reload cards. This may have put some of them off from using the cards because they were unfamiliar with banks.

Testing Prepaid Products

January 31st, 2011

admin

In 2005, Bank of Kansas City, Mo., a $168 million-asset Community Development Financial Institution, saw an opportunity to reach out to consumers who did not have bank accounts by offering them prepaid cards.

Its goal was to move these consumers away from high-cost financial service providers such as check cashers towards opening regular bank accounts.

At about the same time, Uni National Bank of St. Paul, Minn., a $120 million-asset Community Development Financial Institution, wanted to develop a prepaid card program to serve individuals without bank accounts.

To help them with that goal, the National Community Investment Fund and the Ford Foundation gave each bank a $150,000 grant as part of the Ford Foundation Innovations Fund in December 2005. The grant period closed at the end of 2008.

The analysis considers the opportunities, products, and infrastructure of prepaid cards and is based on three hypotheses discussed in:

1. Product Profitability Hypothesis: Banks can use prepaid cards as a product line to generate sufficient fees on a standalone basis to create positive net income.

2. Deepening Relationships Hypothesis: Banks can use prepaid cards to win business, deepen customer relationships, and/or earn fees from commercial customers who want to pay wages, rebates, or benefits without checks.

3. Unbanked Consumer Hypothesis: Banks can use prepaid cards to turn people who do not have bank accounts into accountholders.

Case study:
Kansas City Bank

Bank’s management planned to sell prepaid cards to Hispanics in its market who did not have bank accounts and eventually turn them into accountholders.

In 2006, it began offering La Tarjeta Segura (The Secure Card), a card specifically designed for Hispanics. When card growth was slow, management examined the reasons and started exploring alternatives.

In 2007, Central Bank began offering payroll cards for one of its clients that wanted to stop giving paychecks to employees who did not have bank accounts. This resulted in a significant increase in the number of people using this card, as shown by the table below.

Cards Outstanding
Before Payroll After Payroll
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q084Q08
24 27 30 55 71 74 51 584 1,052 1,244 1,397 1,535

Bank offered both cards at the same time, but stopped marketing La Tarjeta Segura after the introduction of its payroll card. As of the end of 2008, only 52 of the cards outstanding were La Tarjeta Segura cards.

Offering prepaid cards was expensive for Central Bank. Neither card made a profit for the bank. The costs of starting up the Tarjeta program were very high in the beginning. Then costs fell once the payroll card was introduced, and the bank moved closer to profitability.

Despite the performance of its test cases, Central Bank’s management says it wants to continue selling prepaid cards and considers the initial costs as “research and development and set up” costs to understand the product and the markets. It is important for new issuers to budget a significant ‘initial set up investment.’

Credit Risk Issues

January 21st, 2011

admin

The big value proposition associated with prepaid cards is that they generally cannot be overdrawn, therefore reducing the credit risk associated with folks who have been running consistent overdrafts.

It should be noted, however, that it is actually possible for a cardholder to exceed the limit of the value on the cards if, for example, transactions are not processed in real time; in this situation, the cardholder and the issuing bank do not know that the cardholder has exceeded his or her balance.

Direct deposits help to manage this risk because banks can always recover the amount of the overdraft at the next deposit. Banks also can put holds on the cards for transactions to try to avoid purchases exceeding the amounts loaded onto the card. Measures like low balance alert messages may also help banks manage this risk.

Another risk is fraud. Banks need to monitor card transactions for suspicious activity. They can also set up systems such as contacting cardholders, with a phone call or text message for example, to get approval for certain types of transactions. Some card programs will send a text message to a cardholder’s cell phone requesting approval for transactions over a certain amount.

Regulatory Issues

January 11th, 2011

admin

The regulatory space is still evolving with some open questions, issues that have been resolved and others that continue to be difficult to fix.

Here is a nonexclusive list of regulatory issues that affect prepaid cards:

• Bank Secrecy Act

• USA PATRIOT Act

• Regulation E of the Electronic Funds Transfer Act

• Federal Deposit Insurance Corp. Insurance

• State Laws about payroll and escheatment

• Credit CARD Act of 2009

With open-loop prepaid cards, banks face questions about requirements under the Bank Secrecy Act, The USA Patriot Act, Regulation E of the Electronic Funds Transfer Act, and state laws, such as abandoned property and wage payment laws.

The FDIC clarified one issue in November 2008 when it issued an opinion in the Federal Register that its insurance covers cardholders’ funds as long as certain conditions are met.

In the opinion issued on Nov. 13, 2008, the FDIC said that it will insure prepaid card funds to each cardholder as long as the pooled account is identified as a custodial account and the cardholders’ identities and card balances are available from the bank or the program manager.

The addition of deposit insurance to prepaid card funds makes the cards more like checking accounts and leads some observers to ask whether prepaid programs will face scrutiny for compliance with other laws and regulations that govern traditional checking accounts.

To address Bank Secrecy Act issues, banks have limited the maximum amount that can be loaded onto prepaid cards, and they have implemented systems to monitor how money goes out of the bank through cards as well as how it comes into the bank

For example, Central National Bank of Enid, Okla., which issues a large number of prepaid cards, many with remittance capabilities, monitors foreign transactions to be alert to patterns that indicate money laundering.

If the bank sees that a large number of cards are all sending money to the same recipient, for example, the bank can put a block on future transactions from those cards to prevent money laundering.

Banks need to have a program in place for Know Your Customer rules. For example, a bank that has a third party selling prepaid cards for it would need to make sure that the vendor gathered the information required by the regulations so that the bank could make sure its files were complete.

As an example, Green Dot Corp., which sells prepaid cards issued by Columbus Bank & Trust Co., tells consumers applying for a card on its Web site that Green Dot will ask them for their names, addresses, dates of birth, and other information, including social security numbers to comply with the USA Patriot Act. It also says Green Dot may “ask for copies of your driver’s license or other identifying documents.”

Steps In The Transaction

January 3rd, 2011

admin

POS Transaction:

A cardholder receives funds by having pay or benefits directly deposited with the issuing bank via ACH.

The cardholder receives a card and/or a load notification from the program manager, if there is one.

The cardholder uses the card at a merchant.

The merchant’s processor sends a transaction request to the bank.

The networks route the transaction using the Bank Indentification Number for the card.

If approved, the bank allows the transaction.

The issuing bank settles with the merchant’s acquiring bank via a brand network ( i.e. Visa, MasterCard).

ATM Transaction:

The cardholder inserts the card and makes a withdrawal request.

The ATM contacts the ATM network (e.g. Cirrus, Plus, Star).

The ATM network contacts the issuing bank/the bank’s processor.

If approved, the funds and any charge is taken from the cardholder’s account.

The transaction is processed through the Federal Reserve’s ACH system.

The surcharges and funds are deposited in the bank that owns the ATM.

The issuing bank debits the cardholder’s account for any charges it imposes.

Banks that offer reloadable prepaid cards to consumers make money from fees that they charge cardholders to get new cards, monthly maintenance fees, reload fees, net interest income on card balances, and interchange fees paid by merchants who accept cards.

However, they must share those fees with some or all of the companies.

Cardholders into Accountholders

December 26th, 2010

admin

People don’t have bank accounts for a number of reasons. They may have had accounts in the past which were closed due to consistent (planned or unplanned) overdrafts or they may have bad experiences in the past (either in the US or in the case of immigrants who saw nationalization in their home counties).

As a result they have had to work with check cashers, payday lenders and other informal channels that may charge excessive fees for simple transactional services, but provide some convenience in financial services.

Hence there seems to be an opportunity to create a path for bringing these customers back to open accounts via responsible products. Several CDFI banks have experimented with Second Chance Accounts (Legacy Bank, WI) to help re-induct these folks into banking relationships coupled with financial counseling.

Prepaid cards seem to be a reasonable product to slowly transition underserved and unbanked customers back into the banking system.

However it is not clear how long it takes for this transition to occur. Limited success has been reported in turning prepaid cardholders into accountholders in the short term – this could be due to faulty card design or due to the need for a longer time horizon for changing the attitudes and needs of customers.

For customers who have a high risk profile or who do not want to have an account, prepaid cards can serve as a substitute for a bank account. In this case, banks could use the cards to provide a fee for service product as described in Hypothesis One of this paper.

A study by the Aite Group LLC says that banks should not assume unbanked consumers do not have bank accounts because of cultural and attitudinal reasons. From interviews of 400 customers at check cashing stores, Aite found that consumers do not have bank accounts because of bad credit, high account costs, low cash flow, and problems with bank customer service.

This is supported by interviews of prepaid cardholders done by the Center for Financial Services Innovation that shows cardholders gave up bank accounts for prepaid cards because of treatment they had received at banks.

Some industry franchise models (like Meta Financial) support the idea that the originating bank should get all the information on the prepaid cardholders so that they can market to them to convert the customers into accountholders.

Another sign that cardholders might become accountholders is that some of the companies offer its cardholders the opportunity to open savings accounts with one of their issuers.

Since the savings accounts began in 2005, cardholders have opened over 104,000 accounts and deposited more than $100 million.

How many active accounts remain is not clear, but the numbers indicate interest on the part of prepaid cardholders in opening accounts and saving.

Prepaid Landscape

December 17th, 2010

admin

The size of the prepaid market is open to debate. The Federal Reserve 2007 Electronic Payments Study estimated that open-loop prepaid transactions totaled $13.3 billion in 2006, and prepaid transactions as a whole totaled $49.9 billion, compared with $1.9 trillion in general purpose credit card payments and $986 billion in debit card transactions.

The same report pointed out that Aite Group LLC said the market had $95.4 billion in transactions for all prepaid cards, open and closed loop, and Mercator4Advisory said $197.9 million were loaded onto all prepaid cards, including closed-loop gift cards and open-loop prepaid cards.

Network branded cards had a total of $26.75 billion loaded on them in 2006,and that number grew to $38.66 billion in 2007, according to Mercator.

The range of numbers shows that pinning down the size of the prepaid card market is not easy. Companies do not want to reveal what they have accomplished (or not accomplished) in card sales, and some companies count prepaid cards as debit cards.

Banks have found a place for prepaid cards in their product lines. Banks have served as issuers that hold the funds, settle transactions, and provide bank identification numbers for transaction routing for prepaid cards.

They also have sold cards such as payroll cards, travel cards (to replace traveler’s checks), gift cards, and other types of cards both to consumers and companies.

In a survey conducted in the first part of 2007 by the Independent Community Bankers of America, 43% of community banks said they sell network-brande d gift cards. Only 3% said they offered payroll cards.

In the first survey in 2005, 2% said they provided payroll cards but nearly “one-fifth of community banks plan to offer payroll cards within two years” the ICBA said in a press release.

(The association sent surveys to all but the top 125 banks in the country, and received 1,107 responses in 2007 and 400 in 2005.)

Banks are not alone – other companies, including retailers, sell prepaid cards. Wal-Mart Stores Inc. has offered Visa-branded, reloadable prepaid cards since June 2007. The cards are issued byGE Money Bank. The Wall Street Journal reported that Wal-Mar“is on track to register $2 billion in deposits on two million cards in 2009.”

The American Banker reported that “Wal-Mart, which gained more than 1 million customers with over $1 billion worth of transactions from the MoneyCard, is now ‘in the range’ of doubling both figures….” while other reports say Wal-Mart has sold 2 million cards.

Since companies like Wal-Mart must work with banks to offer open-loop cards, banks can get into the prepaid card business by acting as issuers that hold funds, authorize payments, and settle payments.

What Are PrePaid Cards

December 12th, 2010

admin

Prepaid cards take the place of cash, checks, and other payment cards where consumers or businesses want to use an electronic means of payment, but do not want to tie the payment to a credit or debit account. Some carry major card brands (American Express, Discover, MasterCard, and Visa), and are referred to as “network branded” prepaid cards.

Stored Value Cards Versus Prepaid Cards

Stored value cards are a form of prepaid card where the value is stored on the card itself, and the card does not connect to any account. An example of this would be fare cards that are purchased at a kiosk and used to buy rides on a subway system.

Prepaid cards connect to an account and/or database to authorize payments. What kind of account the cards are attached to depends on the type of card. For example, store gift cards may be tied to a store account, and general purpose prepaid cards that function like debit cards may be tied to a pooled account held at a bank.

Prepaid cards are grouped by where they can be used and whether cardholders can add more money to them. Cards to which consumers can add funds are reloadable cards, as opposed to one time-use, nonreloadable cards.

Closed-loop prepaid cards can be used only at one merchant. Most retail gift cards are closed-loop cards. Other examples of closed-loop cards are transit cards and cards sold to players for Internet games. Semi-closed loop cards refer to cards that can be used at a select group of merchants, such as a gift card that could be used at any store in a mall.

Open-loop prepaid cards connect to a network and can be used wherever the network is accepted. Branded open-loop cards carry one of the major card brands (American Express, Discover, MasterCard, or Visa). The cards draw on funds held in a pooled account at a bank. Cards that require cardholders to enter a personal identification number (PIN) to make purchases using the NYCE, Pulse, and Star debit networks are also open-loop.