The next big thing in prepaid is about to happen and when it does, it will probably lead to more price compression and lots of competition from new players that have been previously outside of the payments system.
The story starts with T-Mobile's Mobile Money Card.
Mobile Money is a prepaid debit card and an app. It is probably going to be an app-first experience where a retail relationship follows after an initial sign-up made through a smart phone. As it becomes more and more popular with the kind of under-banked consumer that buys prepaid minutes, it will compress margins across the entire prepaid debit card spectrum.
T-Mobile is using this transaction account as a cross-subsidy to enhance the longevity and reliability of its other revenue streams. That is going to hurt the Green Dots and NetSpends of the world. T-Mobile has decided to offer a transaction account that is virtually free so long as the cardholder has a T-Mobile cell phone account. The cross-subsidy strategy is most clearly revealed by what happens if you don't have a T-Mobile account. Then, there are all kinds of costs. In fact, I'd dare say that the Mobile Money account is only competitive if you have a prepaid phone account with the company.
"Do I have to be a T-Mobile customer to use this?" asks an FAQ on their site. "No, but it would be better if you were. Anyone can use our card, but we save the best benefits for our customers."
T-Mobile could be the first serious entrant to what I would call Prepaid 3.0. In Prepaid 3.0, new forms of non-banks offer prepaid cards in the hope of saving money and adding stickiness to their recurring customer base. Appropriate players for this strategy are utilities, cable TV providers, and health insurance companies. All of those companies use a recurring monthly fee. While none are exclusively dedicated to serving under-banked consumers, they are all entitities that serve people across the entire financial spectrum. Everyone needs electricity and cable television or a dish are increasingly a must have. With the Affordable Care Act, many previously uninsured consumers will suddenly need to pay a modest sum for their semi-subsidized accounts. I am sure that Blue Cross is not going to want to take its payments in cash.
You can see that this is already happening. Univision has its Tarjeta card. MetroPCS, TracFone, and Boost Mobile do as well.
Franchisees may be unhappy
The only downside here could be if T-Mobile corporate ends up putting its interests at odds with those of its franchisees. Typically when a customer comes into a store to re-up their minutes, it can produce one or several revenue streams. If the person is solely there to buy minutes, then the store owner still gets a share. I have heard that the share might be somewhere between 7 and 15 percent. That is not an insignificant sum. But the person is also likely to make a few accessory purchases, too. I bought a screen protector for my Note II the other day. Trust me, someone made some margin on that piece of film.
Certainly, customer flow equals more revenue for corporate. When a person pays for those minutes through a card, T-Mobile will be able to replace the fee due to the franchisee with an interchange charge for far less. Moreover, if a prepaid phone customer had previously been using a card to buy minutes at a store, then T-Mobile had been on the hook for interchange and franchisee fees.
By the way, did I mention that T-Mobile can offer customer service calls for free?
This should really scare Green Dot most of all. This is because Green Dot also earns a significant amount of money from selling its MoneyPaks. True, Green Dot has its app-first GoBank account but we still don't have any evidence that it is earning money. T-Mobile essentially has a pre-existing branch network. There are thousands of T-Mobile stores across the country. My sense is that unless the franchisees balk, T-Mobile will let people reload their cards in the store for free. It is like the second coming of the register re-load at Wal-Mart. Suddenly, it is going to strike a lot of people as an extravagance to pay $4.95 to buy a load.