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Big Banks Undecided on PrePaid Strategy

Adam Rust's picture

Posted February 23, 2011

Big banks have already said that they intend to enter the prepaid card market, but their success or failure is far from certain and could hinge on how they frame the purpose of the entire space.

Banks are no longer going to offer free checking willy nilly. You will have to have a hefty deposit account, or use other services that generate enough revenue to justify the costs to the bank. It is the

same with branches.  Banks are closing branches in low-income neighborhoods.

The writing is on the wall. A relationship with a local full-service retail

bank branch is no longer an essential element for every American household. In the future, it may be something that we think about quite differently. It may be something that becomes a distinguishing factor between the middle class and everyone a few rungs below them.

Wells Fargo says that it will have a prepaid card in the near future. BB&T has one already.

Consider the country's largest retail bank: Bank of America has one card, designed to serve business owners, that allows employees to receive their payroll checks.   Bank of America offers another (the "Visa Commercial Prepaid") that is not reloadable.  There is another for state government payments, one specifically marketed to serve the needs of teachers that want to buy school supplies, and then one for gifts and rewards. Bank of America has "Employee of the Month" covered.

Some executives appear to be uncertain about how these cards will work within the broader suite of products offered at their bank. Will the card cannibalize customers away from the mainstream bank. Is that a problem? For banks that worry about customer retention, the prepaid card becomes a dumping spot for problem accounts. Prepaid is a consolation prize, offered to consumers that couldn't handle a regular account.

That strategy virtually guarantees that banks will never take their prepaid cards to scale. It creates a money-losing division. Banks already hate unprofitable checking accounts. Well, low-volume prepaid is going to be bad news, all over again.

Prepaid relies on a high-volume, low-cost approach. It isn't about high-cost, low-volume marketing: special brochures in branches, distribution of DVDs through housing counselors, and other second-best plans. Why would a non-banked person walk into a bank to get a debit card? It is sort of like trying to catch fish in a stock yard.

Prepaid cards won't cannibalize consumers because there is such a divergence in how consumers use the banking system. Wells wants to develop four to seven relationships with each customer. Green Dot is making money by offering one basic service to several million households. The profit margin is never going to be that high: Green Dot makes less than $100 on each card, per year. How can a bank maintain a card program with 1,500 accounts? They won't.

BB&T has created a good a general purpose reloadable card, but its ability to find a customer base is far from certain. I say that because being first to market should mean that they can seize an advantage. Yet I wonder if they will take that to scale.

BB&T's product is the MoneyAccount card. It has what unbanked people say that they want - a card with no surprises.  The card has a monthly fee of $10, and while acknowledging that this is a fee that is higher than most, the customer can do something to change it. The fee drops to $5 when a consumer loads $1,000 a month on to the card. That sum is within the reach of even a single parent working full-time at a minimum wage job. Using the card is almost costless from then on. Signature transactions are free. That in and of itself isnt' very unusual, because issuers generate higher interchange fees for signature. PIN transactions are also free. Cardholders can make deposits, get money, and check balances at a BB&T ATM. Offering free service through an ATM is smart. Those ATMs are much more easy to spot than some of the ones that competitors place at Western Unions or in other retail locations. There is a bill payment feature, too.

Nonetheless, the card has virtually no marketing effort working on its behalf. It is possible to find the card on their website. Other card issuers partner with program managers (NetSpend, Rush) or with networks like Green Dot to find their business. That isn't the case with this card, and for now, it seems like a missed opportunity.