Having worked for over 12 years with organizations of all sorts to launch new prepaid programs worldwide, we have seen our fair share of clients’ business plans take shape. We have seen the industry develop and consumer needs evolve. Pretty much, we’ve seen it all. As we look back on this experience, I am struck by how common it is – even today – for organizations to underestimate what it takes to achieve profitability in this business. On the surface, it seems simple. But in practice, it can be anything but simple! The key to success is to understand the revenue needed to cover the acquisition cost, how long that will take to achieve, and how to retain customers past that point to realize some profit.
Of course, fees alone cannot sustain profitability. Other revenue sources, like interchange, need to be the focus of any successful program. Since these are some of the common challenges we help our clients overcome every day, we thought it would be useful to summarize a few fundamental concepts related to program profitability. In this post, we will discuss the various sources of revenue a program can tap into, and then move on to cover how portfolio performance and costs factor into the profitability equation.
How Will You Generate Revenue?
“Build it, and they will come” is not a valid strategy for a successful prepaid program. There are three main areas for generating revenue on a prepaid program: cardholder fees, interchange, and joint marketing income. It’s important that Program Managers negotiate the best interest and interchange percentages and balance that with what fees they charge.
While fees are the most common source of revenue for prepaid programs, they are also one of the reasons cardholders abandon a card or never activate it at all. It is vital that transparency of fees is considered so that the program does not experience a high volume of cards being mailed out and then never activated. You will never recoup your acquisition costs if this occurs in large numbers.
Interchange Fees and Direct Deposit
Interchange revenue is generated when the card is used for purchases. The percentage of the interchange the program manager receives is negotiated with the issuing bank. So encouraging cardholders to use the card for everyday living expenses extends card life and is key to profitability.
Another important component to a profitable program is the number of accounts that have direct deposit of paychecks. Cardholders who have their pay deposited onto the prepaid card are more likely to keep the card and use it for everyday use. This in turn can lead to higher revenue from interchange fees. Encouraging and rewarding cardholders to sign up for direct deposit should be part of your strategy from the initial contact with the potential cardholder.
Consider the impact direct deposit has on account life:
|Direct Deposit: 354 Days||Direct Deposit: 382 Days|
|No Direct Deposit: 153 Days||No Direct Deposit: 59 Days|
Source: Mercator Advisory Group
Joint Marketing Fees
Joint marketing fees are possible if you are utilizing the loyalty components of a card processor and building merchant sponsored coupon programs and incentives. When your cardholder takes advantage of such offers, you and your merchant partners would share revenue related to this activity.
What has your organization discovered about sustaining profitability in a prepaid program? Share your thoughts below. (Read more Building Blocks to a Successful Prepaid Program – Part II)