The Prepaid Business Model: It Pays To Know Your Costs

Last week, we talked about how prepaid is a unique product with different P&L dynamics than credit and debit products. As such, managers of prepaid programs must very tightly manage program costs and be smart about where to concentrate cost-reduction efforts. Before we get into how to make these resource allocation decisions, let’s consider the costs incurred when running a prepaid program.

Some costs are:

• Acquisition
• Know Your Customer (KYC)
• Ongoing marketing
• Overhead
• Bank and settlement fees
• Fulfillment
• Customer Service
• Processing
• Statement fees
• Network fees

As you can see, there are many of them! So how do you manage them? How do you decide where to focus your limited resources to get the most positive impact?

Mapping your costs out into a simple pie chart will help you see what pieces of the pie are the largest and gives you an indication of where to focus. But, it’s not just about focusing on your largest costs and attacking those. Instead, ask yourself which ones are most critical to your business and your consumer value proposition (discussed at length in this post).

There are some costs – for example the bank and processor fees – that are gates to doing business and you need the best you can afford as they are absolutely critical to your success. On the flip side, there are some components that are important but perhaps not necessarily mission-critical to keep the card working, and these are areas ripe for looking for efficiencies.

As you track your costs and think about how to best manage them, keep in mind that some costs are fixed and some are variable. As your program gains scale, the fixed costs will become a smaller portion of the total per card cost.

So looking at your costs on a per-card basis will help you better understand what will make your business model work. Too often, we see people getting lost in absolute numbers and getting distracted with costs that don’t have that big of an impact on the overall business. Spreading acquisition costs and fixed overhead costs over the average life of your accounts and looking at per card figures is a great way to get additional insight into the performance of your program.

So what’s missing from this discussion? Revenues, of course! We’ll cover that in our next blog.

Related: Agility and Flexibility: A Business’s Best Friend