The payment processing industry became pretty predictable and boring in the early ’90s. It was all about optimizing operations, global reach, scale and higher efficiencies. A payment card could come in different colors, designs or with a better rewards program but that was about it—a stifling state of affairs for the innovators in the payments industry.
Prepaid made its entry as a last resort option for those not able to access credit or debit card products. It has come a long way since then and has moved from Rodney Dangerfield’s “get no respect” to what I like to call “prepaid by choice”. There are differing opinions on whether prepaid cards have crossed the chasm but almost everyone agrees that we are well beyond the early adopter stage. Prepaid as a segment is evolving and growing rapidly, bringing back spark and enthusiasm in the payments industry. Attend a prepaid conference and you will notice the infectious energy and excitement all around.
The early years of prepaid have not been without their joys and sorrows. We have seen some successful and plenty of not-so-successful programs rolled out. The good news is that, today, more and more successful programs are being launched than ever before. This positive trend can be attributed to the stakeholders learning more about the pay-before model, higher market awareness and infrastructure improvements such as introduction of new processing platforms to address the unique and rapidly evolving needs of this exciting frontier.
Having now spent a good deal of time in this industry, I have been fortunate to interact and work with some brilliant minds. I also have had the opportunity to reflect on what has worked and what has not. In the following paragraphs I will share with you some of my key learning in managing successful and profitable prepaid programs.
The basic accounting principle: “profit = revenue - expense” holds true for prepaid programs too. As in other businesses, the goal is to maximize revenue and minimize expenses. This much is easy and widely understood. The problem begins when one starts digging deeper. Understanding all possible revenue opportunities and knowing all of your costs can be very challenging in the prepaid segment.
Almost all general purpose reloadable (GPR) programs in the market today have significant cardholder fees in one form or another and heavily rely on them for the program to be profitable. One could try to justify these fees by comparing them to expensive checking accounts or being the cost of a service which otherwise is not available to the cardholder. I, however, have a fundamental disagreement with the fee-based revenue model and for good reason. First of all, for a business to be sustainable and scalable the interests of all stakeholders need to be aligned. Secondly, we all know that cardholder fees are not sustainable and will see strong downward pressure as the competition heats up. So a non-fee based business model is not only good for the cardholders, it is the right model for the program managers, too.
The obvious question then is how does one make money? The answer to this question lies in understanding your customers, knowing how and where they spend their money and then aligning your program in such a way that you are part of a higher percentage of their spend. This could mean providing some of the products and services, or facilitating, or promoting or aggregating what your customers spend on. This model is effective because as cardholders get better deals due to aggregation by program managers, program managers make money by marking up or earning commissions. The product/service providers benefit by getting access to customers. We have all witnessed how Google has used this approach to create value in access of combined value of American icons such as General Motors, Coke, United Airlines, Caterpillar, Sears and Sun Microsystems. You can add a few more names to this list before it all adds up to the value of a company no one knew a decade ago.
The “Share of spend” approach has a self-perpetuating element to it and scales extremely well. If you think about it, one feeds the other—the better deals program managers offer to cardholders, the more cardholders they get; and the more cardholders they have, the better deals they can offer. It is therefore important that program managers not only think about revenue per cardholder but they also actively work on reducing churn and growing their card base. Once this model gets going, there is no stopping it. To sum it all up in one word I’d say “Google”. Need I say more?
Moving on to the expense part of the equation, one has to understand two basic types of costs: Customer Acquisition Cost (CAC) and Cash Cost of Service per Customer (CCSC). Managing both of them is critical.
The CAC can be thought of as a hole, program managers dig themselves into to acquire a customer. Obviously, the deeper the hole, the longer it takes to come out of it. And if on average, the customer leaves before the program manager has fully recovered CAC, it is only a matter of time before the business is unsustainable. A good example of how high CAC can destroy a company is Vonage. With its $400 CAC and monthly service fee of $24.99, it takes Vonage 16 months just to recover CAC. Add to this some realistic CCSC and churn, and you have a recipe for disaster.
CCSC is the ongoing cost of servicing a client excluding non-cash costs such as amortization. It is imperative to understand fully and manage these ongoing costs. The operations in this business, by its vary nature, are heavily dependent on technology. A program manager’s ability to measure and control costs quite often is limited by the capabilities of the processing platform. This makes choosing the right processor absolutely critical to the success of the program.Legacy processing platforms do not address some of the unique but very basic needs of the prepaid segment. This leaves the program managers either having to build or outsource the functionality to address these basic needs. This can be extremely expensive, clunky and, at times, almost an impossible task. Having to deal with multiple systems not only makes the operations disjointed, it also increases the operating costs significantly. The“Prepaid 2.0 Ready” processors are more involved with program managers and support core business functions. The net result is an increased synergistic partnership, rather than an arm’s length vendor-customer relationship, as in the past. Investing in Customer Service Another essential element in the success of a program is customer service. The dilemma is, while quality customer service is extremely important, it can get very expensive. Those involved in innovation understand that real value is created by solving dilemmas rather than balancing between two opposing attributes. In other words, it is best if one can find a way to eat one’s cake and have it too. Fortunately, technology today can provide mechanisms to deliver quality customer service and reduce cost at the same time. Functionality such as campaign management, notifications and state-of-the-art IVR fully integrated into a processing platform can deliver quality customer service at lower cost. In summary, we must move toward a more cardholder-friendly model that integrates additional products and services in a mutually beneficial structure. We also must manage our costs, not by compromising quality but by leveraging technology. Amir Wain is CEO and founder of i2c Inc., a “Prepaid 2.0 Ready” processor headquartered in Redwood Shores, Calif. Wain heads the product strategy at i2c and is actively engaged in setting future direction for the i2c product suite, which includes stored value processing and card management, point-of-sale-activation solutions and turnkey ATM services.