A Mercator Advisory Group Research Brief Sponsored by TAS Group

Transcription

1 Merchants, Your Customers Shop Around for the Best Price Why Don t You? A Mercator Advisory Group Research Brief Sponsored by PULSE MODULAR CARD MANAGEMENT SOFTWARE FOR PREPAID PROGRAM MANAGERS: BUILDING PREPAID PROFITABILITY September 2018

2 Contents Introduction... 3 U.S. Open-Loop Prepaid Card Market Forecast, Understanding the Prepaid Value Chain... 5 Where the Revenues and Income Come From... 7 Open-Loop High and Low Performers... 8 Cash Access Category... 8 Money / Financial Services Cards 8 Payroll and Benefits Category... 8 Payroll Cards.8 FSA/HSA Cards.9. Government Category... 9 Open-Loop Temporary Assistance for Needy Families 9 State Employment. 9 Conclusions... 9 References

3 Introduction The prepaid account/card value chain involves many players, and so margins are thin for any one player. For a prepaid program manager, the goal is to gain as much revenue share as possible to support the program, increase offerings, and keep shareholders happy. One way for program managers to control costs is by managing multiple processes within the value chain, thereby retaining more of the revenue. Another is to structure the program using as many variable-cost components as possible to counter the volatility of many prepaid segments, which can change from year to year. As shown in the taxonomy of prepaid card types in Figure 1, the prepaid market is split between closed-loop and open-loop cards as well as a mixed market with both open-loop and closed-loop card types. Closed-loop cards are usually issued by an entity other than a financial institution, do not carry a network brand, and are typically accepted by only one merchant. For financial institutions, the real opportunities lie in open-loop cards those that carry one of the four major payment network brands Visa, Mastercard, American Express, or Discover. Open-loop cards connect to one of these major payment network rails to complete transactions. Figure 1: Mercator Advisory Group s taxonomy of prepaid cards: 11 categories, 26 market segments Open Closed Mixed Cash Access Travel Money / Financial Services Open Gift Remittance / P2P Business Time and Expense Events and Meetings Employee/Partner Incentives Consumer Incentives Campus Digital Content In-Store Gift Cards In-Store Gift Cards Store Credits/Returns Government Social Security Nutritional Assistance Temporary Assistance for Needy Families (TANF) Court-Ordered Payment Transit Tolls State Unemployment Insurance Casualty Claims Payroll and Benefits Payroll Benefits FSA / HSA Petroleum Utilities Telecom Prepaid Mobile Minutes and Data Prepaid Long Distance Source: Mercator Advisory Group 3

4 U.S. Open-Loop Prepaid Card Market Forecast, The U.S. open-loop prepaid card market is made up of funds loaded into accounts associated with prepaid payment devices. For the sake of convenience, the term card is used to refer to all prepaid types, but the payment device may be a plastic card or some other form factor or a code. An example would be a wrist band worn at a theme park or a mobile wallet. Prepaid cards differ from debit cards in that a debit card draws on an account owned by the cardholder. They differ from credit cards in that they do not draw on a line of credit established in the name of the cardholder. Mercator Advisory Group issues annual forecasts for the U.S. open-loop prepaid card market (see Figure 2) and closed-loop market. These forecasts are based on market knowledge derived from research performed by Mercator since 2004 that includes input from issuers, processors, and program managers. However, even this archive of more than a decade of historical data provides little guidance for forecasting the future of markets that are growing rapidly. Prepaid categories have been experiencing double-digit growth for the last decade while facing disruptive technology and services and historic new regulatory constraints. (New prepaid regulations in U.S. that will take effect April 1, 2019 will affect person-to-person, or P2P, payments and extend Regulation E coverage for error resolution to most open-loop cards.) These factors, combined with a dependence on funding sources tightly coupled to the economy and consumer sentiment, mean that the prepaid market is volatile and varies from one segment to another. Given the current robust economy, a potentially rising interest rate environment, and the new regulations staring April 1, 2019, prepaid segments are likely to undergo dramatic shifts in 2018 and beyond. Figure 2: Total amount loaded on open-loop prepaid cards in the United States, (f) Amount Loaded onto Cards ($Billions) $450 $427.8 $400 $368.1 $395.6 $350 $300 $263.7 $287.1 $295.0 $323.8 $344.3 $250 $242.8 $207.9 $200 $150 $100 $50 $ (f) 2019(f) 2020(f) 2021(f) Source: Mercator Advisory Group 4

5 In Figure 2, the load values for are derived from Mercator s annual research, while the load values for represent Mercator s forecast for all market segments that use open-loop cards. Total open-loop loads in the U.S. grew 10% in 2017, to $323 billion. Mercator forecasts that total open-loop loads will have a compound annual growth rate of 10% through 2021, when they will total $428 billion. Understanding the Prepaid Value Chain In addition to the cardholders, seven major players are a part of operating an open-loop prepaid card program. They are the issuing bank (the issuer/bin sponsor), the issuing processor, the payment networks (Visa, Mastercard, Discover, and American Express), the program managers, the service providers, the card distributors, and the acquisition points. Figure 3 shows how these players interact in the prepaid value chain. Figure 3: Market structure of the basic prepaid value chain model Wal-Mart Simon Malls ACE Cash Express Verizon Rebates Dollar Store Help desk Rewards Remote deposit capture Bill pay Reload Meta Bank First American State Bank of Internet (BOFI) The Bancorp Bank Citi JPMorganChase Green Dot Metropolitan Bank Cardholder Acquisition Point Distributor Program Manager Service Providers Issuing Processor Issuing Bank Payment Network Merchant Processor Retail Outlets Simon Malls Websites Mail Simon Malls Green Dot ADP JPMorgan (Gov.) Netspend/TSYS First Data Fidelity ecommlink FSV Fifth Third PSCU Amex Discover MasterCard NYCE STAR Visa Source: Mercator Advisory Group Financial institutions provide the connections that allow transactions and money to flow between the various participants in the value chain. The chain may be composed of fewer players if one company performs multiple functions (issuer/program manager, program manager/issuing processor). Having the right partners is critical to the success of any prepaid program. Having experienced partners can shorten the time it takes to get a program up and running and typically reduces costs. 5

6 Figure 3 is a simple diagram, but the prepaid value chain is extremely complex because it involves so many partners. The issuing bank works with an issuing processor but also with other service providers to add ancillary services to its product. Partnerships with other companies may be needed to provide services such as ATM access and card-reloading. Banks or credit unions that are issuers need to vet and manage all partners and be aware of the risks involved in each part of the business and aware that the actions of their partners may affect them. Typically, the prepaid program manager sets the fees and controls the program, but the financial institution must manage these connections. Figure 4 represents the prepaid value chain reconfigured so that the program manager and the issuing processor are one segment. Combining these segments can be accomplished by a program manager using modular, cloudbased software as a service (SaaS). Such software is typically offered with flexible licensing terms that can dramatically reduce per-transaction costs and set cost minimum volume requirements as well as ongoing costs. Figure 4: Market structure of the basic prepaid value chain model with modular licensed SaaS Wal-Mart ACE Cash Express Verizon Rebates Dollar Store Help desk Rewards Remote deposit capture Bill pay Reload Issuing Bank Meta Bank First American State Bank of Internet (BOFI) The Bancorp Bank JPMorganChase Green Dot Metropolitan Bank Cardholder Bank Supervisory Functions Acquisition Point Distributor Service Providers Program Manager with Processor Platform Payment Network Merchant Processor Retail Outlets Simon Malls Websites Mail TAS Amex Discover MasterCard NYCE STAR Visa Source: Mercator Advisory Group A modular card payment software processing platform (SaaS) connects the issuing bank and payment networks, basically turning the program manager into a processor, a program processor. With this method of processing, transaction costs with large guaranteed minimums are avoided and control remains with the program manager. According to TAS Group, TAS Group has a competitive edge due to its vast experience and expertise in modern software architecture that is robust, modular, scalable, cloud-ready, easy to customize and integrate with other functionality through the use of APIs. This approach decouples the volumes from the fees and effectively gives 6

7 money back to the program manager. i For large issuers/processors/program managers, this structure can result in cost reductions estimated to be around 40%. Small and medium program managers will potentially see even greater cost reductions. This means increased revenue generation for program managers of any size. Where the Revenues and Income Come From Prepaid is a volume-based business because there are so many players in the value chain, which equates to small margins, as previously noted. Typically, all the revenue of a prepaid card program flows through the issuing bank, but the actual net income earned by the issuer is not a simple matter of revenues minus expenses. It is customary in the prepaid industry for the sponsoring/issuing bank to collect all cardholder fees and interchange amounts and net the network and bank fees against these revenue items, providing the program manager with the net amount on a monthly basis. The revenue equation for an issuer/bin sponsor (which is illustrated in Figure 5) is as follows: Revenue (cardholder fees, interchange, float, ) pass-through expenses fees charged to the program manager = net value returned (or amount charged) to the program manager on a monthly basis by the issuing bank. Figure 5: Income equation for issuer/bin sponsors 01 Money Collected from All Sources Cardholder fees Interchange Float on balances Network fees from program manager/processor Transaction fee from program manager Implementation fee from program manager New program fee from program manager Monthly program fee from program manager 02 Fund Payouts to Partners Cardholder fees to the program manager Interchange to the program manager Float often shared with the program manager Network fees to the networks/processor Stage 1 Stage 2 Stage 3 03 BIN Sponsor Income Transaction fee from program manager Implementation fee from program manager New program fee from program manager Monthly program fee from program manager Source: Mercator Advisory Group 7

8 Open-Loop Prepaid High and Low Performers Based on the performance of the segment(s) a prepaid plan offers, it is important to set up the costs to be as variable as possible, meaning costs scale up with growth and cost scale down with reductions. Presented below are Mercator Advisory Group s market forecasts for some important prepaid card segments. Cash Access Category The Cash Access category measures the loads placed by U.S. consumers onto open-loop prepaid products that they purchase as a replacement for cash. This category has four segments: Travel, Money / Financial Services, Open- Loop Gift, and Remittance/Person-to-Person Cards. Money / Financial Services Cards The Money / Financial Services segment of the Cash Access category includes general purpose reloadable (GPR) cards, which are not marketed or otherwise dedicated for a specific use such as travel. Examples are the GPR cards offered by PayPal, Walmart, American Express, and Green Dot Inc. Although the GPR segment is mature, it is also now a mainstream alternative financial service product available through many outlets, including online and at retail locations, check cashing services, and banks. This segment continues to advance as it seeks its place as an ongoing product in the financial industry. The Money / Financial Services segment also includes tax refund cards such as offered by H&R Block and other general spending cards like teen cards. Mercator Advisory Group measures load value for this segment using reporting by processors, issuers, and program managers combined with the filings of public program managers like Green Dot and Netspend, a division of TSYS. Loads in this segment grew by 12% in 2017, to $107.9 billion with forecasted growth in loads in this segment with a compound annual growth rate of 9% through 2021, when Mercator Advisory Group forecasts that loads will total $141.5 billion. Payroll and Benefits Category This category includes the Payroll, Benefits, and Flexible Spending Accounts/Health Savings Account segments. It measures pretax plans that allow employers to set aside tax-deferred funds for employees various child care expenses. The category also includes 401(k) loans disbursed through prepaid cards. Payroll Cards The Payroll segment of the Payroll and Benefits category measures wages paid to employees and 1099 workers using an employer-provided prepaid card. It does not include Money/Financial Services cards purchased directly by consumers and used for direct deposit of paychecks. This segment is the second largest in the U.S. open-loop prepaid market after the Money/Financial Services. Loads in this segment grew 8% to $40.3 billion. Mercator Advisory Group forecasts that loads in this segment will have a compound annual growth rate of 8% through 2021, when they will reach $50.9 billion. 8

9 FSA/HSA Cards Dollars loaded onto prepaid cards as part of flexible spending and health savings account programs are measured in this segment. In 2017, loads in this segment grew at 65%, to $36.2 billion, indicating the continued adoption of high-deductible healthcare programs by employers. Mercator Advisory Group does not attempt to estimate the total dollars in health savings accounts or flexible spend plans nationwide because many Health Savings Accounts are truly debit accounts, not owned by the program manager, thus creating noise in this data. Mercator Advisory Group anticipates a CAGR of 35% through 2021 for this segment, with loads forecast to total $88.4 billion. Government Category The open-loop Government category measures loads primarily by government agencies (federal, state, and local) in the United States onto prepaid cards in the Social Security, Temporary Assistance for Needy Families (TANF), Court-Ordered Payments, and State Unemployment Cards. Although both open-loop and closed-loop cards are used in many of these segments, only open-loop cards are the focus here. Open-Loop Temporary Assistance for Needy Families The TANF segment measures the loads by state governments onto cards for cash assistance programs that help the poor. Rapid growth has occurred in this segment as states have adopted open-loop cards in place of closed-loop cards tied into the government s electronic benefits transfer (EBT) system, which also allowed for withdrawals from automated teller machines. A report by the Federal Reserve states that 2017 loads in this segment were $6.4 billion, which is down 25% from iii Based on government projections of the number of recipients, Mercator Advisory Group forecasts that loads will decline at a compound annual rate of -11% through Mercator also believes that this segment will not be a priority in the federal budget and is likely to decline from reduced funding. State Unemployment The State Unemployment segment measures loads onto cards for distributing unemployment benefits. At least 42 states have adopted prepaid cards as a way to distribute benefits to those recipients who don t have bank accounts or do not want their benefits directly deposited into their bank accounts. Loads in this segment are from the same Federal Reserve report cited above. Mercator Advisory Group expects loads on the unemployment segment to continue to decline, with a CAGR of -9% through 2021, when loads will total $15.3 billion. Conclusions The open-loop prepaid card market has its ups and downs, as shown by the benchmark results presented in this research brief. The disruption in segments is an ongoing concern for program managers as their revenue is directly related to economic conditions causing segments to vary from year to year. A cloud-based platform has benefits whether the market is hot or not. It allows continued scalability without additional cost when market segments are hot. And it enables the program manager to cut production and processing back to whatever the current environment demands when they are not. The key to profitability is the ability to increase revenue when the economy is hot as well as cut costs and hence keep revenue on par with activity when the segment(s) slow(s). If you are a program manager, it may be time to rethink who is in your prepaid value chain. 9

10 References Related Research 15th Annual U.S. Open-Loop Prepaid Cards Market Forecasts, (September 2018) 14th Annual U.S. Closed-Loop Prepaid Cards Market Forecasts, (November 2017) BIN Sponsorship of Prepaid Card Programs: Benefits for Financial Institutions (April 2018) Endnotes i TAS Group website, ii Devenir Research, 2016 Year-end HSA Market Statistics and trends, iii Report to the Congress on Government-Administered General-Use Prepaid Cards, July 2017, Copyright Notice External publication terms for Mercator Advisory Group information and data: Any Mercator Advisory Group information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate Mercator Advisory Group research director. A draft of the proposed document should accompany any such request. Mercator Advisory Group reserves the right to deny approval of external usage for any reason. Copyright 2018, Mercator Advisory Group, Inc. Reproduction without written permission is completely forbidden. 10

11 About Mercator Advisory Group Mercator Advisory Group is the leading independent research and advisory services firm exclusively focused on the payments and banking industries. We deliver pragmatic and timely research and advice designed to help our clients uncover the most lucrative opportunities to maximize revenue growth and contain costs. Our clients range from the world's largest payment issuers, acquirers, processors, merchants, and associations to leading technology providers and investors. Advisory services include Credit, Debit and Alternative Products, Prepaid, Merchant Services, Commercial and Enterprise Payments, Emerging Technologies, and Global Payments practices, which provide research documents and advice. Primary data services include the CustomerMonitor Survey Series, which report and analyze data collected in our biannual consumer surveys, as well as the Customer Merchant Experience Survey and the Small Business Payments and Banking Survey. Consulting services enable clients to gain actionable insights, implement more effective strategies, and accelerate go-to-market plans; offerings include tailored project-based expertise, customized primary research, go-to-market collateral, market sizing, competitive intelligence, and payments industry training. Mercator Advisory Group is also the publisher of the online payments and banking news and information portal PaymentsJournal.com. Visit About TAS Group TAS Group is a market leader in payments technology, delivering innovative software solutions for cards and payment systems for over 35 years. With a global reach and offices in 7 countries spanning Europe, North and Latin America, customers around the world rely on our advanced technology and secure, flexible and seamless payment solutions. Our systems handle millions of financial messages each day for the European Central Bank and over 100 million cards are managed on our platforms also used by one of the largest issuers of prepaid cards in Europe. cashless 3.0 is the innovative processing platform that empowers clients with a one-stop-solution for card issuance, transaction processing, acquiring, and fraud management. The cloud-ready platform with its modular design and open APIs, integrates seamlessly with legacy systems and is scalable and flexible to fit business needs as payments evolve. 11