EMV Could Make Prepaid Cards Prohibitive to Issue, Unless
Observers have suggested that if EMV or chip-and-PIN cards were required throughout the U.S., a recent $45 million fraud that involved some U.S. ATMs would have been prevented. A closer look at the incident suggests this may not be so.May 22
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While it's hard to deny that chip cards are more secure than magnetic stripe cards, it's equally hard to deny they cost more, too.
When it comes to debit and credit cards, Visa and MasterCard argue the expected fraud reduction from moving to chip-and-PIN make that extra unit cost worthwhile. However for prepaid cards, the story may be different.
While the opportunities are big a MasterCard study last year predicted the global market for prepaid would grow to $822 billion by 2017 the margins are small. High fixed costs and a typically short card life span mean relatively low levels of profit.
For example, research by the Prepaid Card Center at the Federal Reserve Bank of Philadelphia in 2012 showed that cards are typically used for six months or less, limiting the fee and interchange revenue the cards can generate.
Regulation, such as the Durbin amendment to the Dodd-Frank Act, has made the prepaid market start to look more attractive to banks since the restrictions on imposing high charges don't apply to prepaid cards. However, the additional $1 or more a card that chip cards cost to manufacture will eat into margins already lowered by the CARD Act of 2009, which laid down changes in disclosures, fee structures and expiration dates.
For prepaid products like one-time-use rebate cards, that extra $1 could really cut into margins. For employers that use payroll cards, checks may start to make sense again.
Of course it depends on who ends up paying for the additional plastic cost, but for products that already have a relatively short life span as the Philadelphia Fed figures show, passing on additional cost to the customer may further reduce the utility of the product and hence revenues.
There appear to be two possible ways out of this. Either prepaid will move to mobile or prepaid will have to be repositioned toward a more value-added proposition.
The star example of mobile prepaid today is the Starbucks app. According to Starbucks CEO Howard Schultz, over 7 million customers use the coffee chain's mobile payments app, generating 2.1 million transactions a week. Not only does Starbucks benefit from the float, but each transaction also generates valuable customer data.
Although the Starbucks app links to the Starbucks prepaid card, there's no reason a simple bar code or QR code on a mobile phone could not work for one-time-use prepaid products, cutting out a whole layer of plastic-related cost. For longer-life prepaid products, near-field communication technologies could allow mobile prepaid to be read by the same point of sale devices as contactless EMV credit and debit cards.
In addition, while it's easy to cut up or put away a prepaid card and stop using it, people don't stop carrying their mobile phones. Research last year by the mobile analytics firm Localytics suggests that once people have downloaded an app, retention rates (i.e. continued use rather than deletion) grow.
In addition, with the number of mobile devices globally set to overtake the world population, according to forecasts by the telecommunications giant Ericsson, mobile prepaid is equally available at all levels of society.
Another possibility, which is energized by the addition of mobile, is to move the perception of prepaid away from serving the underbanked toward value-added propositions that customers are happy to pay higher fees for. The MasterCard report predicts payroll and government benefits will together account for $369 billion of the forecasted $822 billion market in 2017. That leaves more than half of the market opportunity for value-added products.
One possible example of such a service is the O2 Money Visa Card in the U.K. This is a prepaid Visa card issued as a companion to the O2 Wallet on the phone. It's a standard chip-and-PIN prepaid card that can be swiped or tapped against the terminal, with all transactions authorized "online" (i.e. by the issuing bank, rather than just between the card and the terminal). The card is issued on behalf of O2 by IDT Finance. Every time the card is used, the phone accountholder receives a text. It can also be loaded from the wallet app on the phone. My colleague Dave Birch finds it invaluable to monitor the spending of his teenage sons.
However, note that here, the card is a partner product to mobile prepaid.
Indeed, as payments in general start moving toward mobile Visa expects that by 2020 half of its overall volume will come through mobile why will prepaid be any different? Maybe it's time to use that extra $1 cost as the impetus to start that shift now.