Prepaid cards – an emerging revenue source for banks by Sutherland Global Services

Prepaid Cards – Banking the Unbanked August 2013

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Why Banks Should Look at the Prepaid Card Market? Huge Prepaid Card Opportunity • • •

Open loop prepaid card market is growing across countries and is expected to reach USD 822 Bn of gross dollar volume (GDV) by 2017 at a CAGR of 22% during 2010-17 In 2012, closed loop prepaid cards were estimated to be loaded with USD 243.6 Bn. Growth of closed loop prepaid card has relatively stagnated and is expected to remain same in the near future In addition to the US, several other countries including Brazil, Mexico, Italy, the UK, Ireland, India, Canada, Russia, Saudi Arabia and the UAE are expected to play a key role in driving the growth of open loop prepaid cards through 2017. They are expected to contribute a cumulative 31% to the open loop prepaid card market Estimated Open Loop Prepaid Card Growth (2010-17)

Open Loop Prepaid Card: Growth by Country (2010-17)

CAGR 2010

2017

2010

2017 US 421

38%

Canada Canada USD 2 Bn USD 19 Bn 16% US USD 152 Bn

ROW 148

27%

KSA/UAE 13

18%

Europe Europe USD 28 Bn USD 149 Bn

Russia 16 Canada 19

US USD 421 Bn 37%

51% MEA MEA USD 3 Bn USD 46 Bn

LAC LAC USD 15 Bn USD 133 Bn

26% AP USD 10 Bn

AP USD 54 Bn

ROW 27% USA 73%

CAGR ROW 32% USA 16%

51%

India 23 UK/ Ireland 31 Italy 41

31% Total: USD 210 Bn

Mexico 46

Brazil 65

Total: USD 822 Bn

Source: MasterCard; Sutherland Research

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Large Underserved Population, Low Cost of Operation and Growing Acceptance Bode well for Prepaid Cards •

Large Unbanked Population: Prepaid cards have the potential to serve the 2.5 Bn underserved adults globally since no banking relationship or credit check is required for prepaid card usage –

–

•

In emerging markets, underserved individuals indulge in cash transaction and receive wages and government benefits outside of the banking system due to lack of affordable banking options and unavailability of banking infrastructure In developed markets, high banking fees, lack of steady income, and the availability of alternative financial services such as check cashing and walk-in bill pay facilities will encourage financial exclusion

Region (2012) High Income Economies

11%

East Asia and Pacific

45%

Europe and Central Asia

55%

Latin America and Caribbean

61%

South Asia

67%

Thrust on Financial Inclusion: Corporate bodies are also serving financial Sub-Saharan Africa inclusion either due to government compulsion or motivated by sound business judgment. They are converting cash and checks to electronic Middle East and North Africa payouts for their underbanked employees –

% of Total Population

76% 82%

Corporate payroll opportunity is projected to reach USD 191 Bn globally by 2017

•

Cost-effective Option for Organizations: Prepaid cards enable both commercial and government entities to increase financial inclusion while reducing processing costs and increasing efficiency and risk management

•

Growing Acceptance of GPR: The increasing availability of General Purpose Reloadable (GPR) cards at retail POS is also driving the migration of cash to electronic payments

•

No Capital Required for Prepaid Operation: Unlike the credit card business, where banks are required to keep a certain amount of capital aside to start their operation, the prepaid card business can be easily started without any major capital investments

Source: MasterCard; Demirguc-Kunt and Klapper; Sutherland Research

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Consumer-friendly Environment Ensures Prepaid Success Regulatory Changes Favoring the Prepaid Segment Durbin Agreement Carved Out Interchange Fees for Prepaid Card • As per the Durbin Amendment implemented on October 1, 2011, the Federal Reserve ruled that debit interchange fees would be capped at 21 cents plus 0.05% of the transaction • Prepaid cards are largely spared from this amendment as the closed-loop reloadable prepaid cards are exempted from interchange fees while the open-loop, network-branded and non-reloadable cards will be subject to interchange fees – Presently, the market for the open-loop cards is relatively smaller as compared to the closed-loop cards – Closed-loop prepaid cards can only be used for issuers’ products or for limited purposes such as prepaid gift card, and open-loop cards can be utilized for multiple purposes, such as making purchases at various stores or paying bills Regulation for Overdraft Fees • On August 22, 2010, the Federal Reserve introduced “Regulation E”, which limits the overdraft fees that can be charged to accounts – In addition to this, customers have to opt for overdraft protection to be charged the overdraft fees • Impact of the overdraft fees on the prepaid cards was minimal as most prepaid cards do not provide overdraft protection and the funds have to be deposited prior to use

• Loss of the overdraft fees led to banks looking for alternative sources of revenues including prepaid cards Impact on Banks and Their Increasing Attraction towards Prepaid Cards • Banks are raising fees on basic accounts citing new regulations and the slow economy. They are offering prepaid cards to the customers who are not opting for them due to higher charges • Banks are attracted to prepaid cards, partly because such cards are not subject to restrictions under the Dodd-Frank financial-overhaul law which shrank the revenue banks collect from merchants on debit cards. The cards also do not carry any credit risk for the banks as they use customers’ money Source: Sutherland Research

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Recent Trends in the Prepaid Card Market Lower Fees • Wal-Mart Stores and American Express launched Bluebird, a prepaid debit card • The Bluebird card does not charge any monthly maintenance fee, annual fee or activation fee. Other prepaid cards carry fees of USD 5 or more a month, in addition to activation fees and charges for talking to a customer-service representative, checking balances at automated teller machines and other activities Adoption of Prepaid Debit and Payroll Card by Banks • The combined user base of prepaid debit and payroll card users is expected to reach 12.4 Mn by 2014 • The success of alternative financial services providers like Green Dot and NetSpend, and drastic reduction in debit card interchange are strengthening the case for banks to embrace prepaid debit cards • More banks are likely to use prepaid debit cards to maintain relationships with customers who might be put off by repricing of free checking accounts – Some banks will introduce prepaid debit cards as the ultimate basic account, a step away from a full-blown checking account Second-chance Accounts (Turn-down Accounts) • Most banks have nothing to offer to customers who are declined a checking account. Through prepaid cards, banks have been able to establish a relationship with customers not eligible for a checking account

Source: Sutherland Research

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Competition and Consolidation in the Prepaid Card Market Activity

Category

Description

Rationale The acquisition is expected to strengthen US Bank’s position in the prepaid market. As the prepaid market has been the bank’s strategic focus over the last decade, the acquisition will help it offer a full suite of prepaid services The move is intended to strengthen the position of both companies in the prepaid card market

US Bank

Vertical Consolidation

US Bank has initiated acquisition of FSV Payment Systems, a prepaid card processor

Wal-Mart & American Express

Strategic Alliance

JP Morgan’s GPR Prepaid Card Launch

Entry by Banks in the Prepaid Card Space

In October 2012, Wal-Mart and American Express launched a new prepaid card called Bluebird In July 2012, JP Morgan launched its own GPR prepaid card branded Chase Liquid

Fifth Third Bank’s Reloadable Prepaid Card Launch

Entry by Banks in the Prepaid Card Space

In November 2012, Fifth Third Bank, a US-based regional bank, launched reloadable prepaid card, Access 360°

JP Morgan entered the prepaid market to become a part of the growing prepaid card business and recover fee revenue losses due to various financial regulations Additional revenue from the prepaid card line of business

• Prepaid card market has been dominated by companies that began as non-banks, including Green Dot Corp. and NetSpend Holdings, Inc. The cards originally were sold mostly in pharmacies, convenience stores and supermarkets. But mainstream lenders are

increasing their presence in the business, with JP Morgan Chase & Co., American Express, US Bank and other banks now offering them in thousands of branches across the US • Prepaid card market is expected to see more competition from new market players, which may result in market consolidation. For example, recently US Bank has announced the acquisition of FSV Payment Systems, a leading prepaid card processor • Traditional prepaid card players are planning to expand their business portfolio and are seeking banking license – In December 2011, the Federal Reserve approved prepaid debit card giant Green Dot Corp.’s purchase of BonneA-ville Bancorp Source: Sutherland Research

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Case Study: Bluebird Description • In October 2012, Wal-Mart Stores and American Express launched Bluebird, a prepaid card • Bluebird card does not have a monthly maintenance fee, annual fee or activation fee. Other prepaid cards carry fees of USD 5 or more a month, in addition to activation fees and charges for talking to a customer-service representative, checking balances at automated teller machines and other activities • Within four months of launch (January 2013), it had over 575,000 account holders and USD 275 Mn in funds loaded onto the cards. About 85% of Bluebird customers are new to Amex, and ~45% are below 35 years of age

Success Factors • Bluebird prepaid account was built on Amex's Serve digital wallet platform. Amex and Wal-Mart began testing the card in late 2011, and launched the product a week after Wal-Mart put in place a system for reloading prepaid cards at cash registers • Amex has been continuously updating the card since its launch. In March, it added FDIC insurance and checkbooks, transforming Bluebird from a prepaid product to a true checking account. Users can now load up to USD 100,000 into their accounts each year “…With FDIC insurance coverage, the ability to write checks (even with a pre-authorization requirement) and the increased funding capability, Bluebird has emerged as a very powerful free checking alternative…” – Jim Marous, SVP, New Control

• The new paper checks have an unusual, added security feature. To write a check, a user must first obtain an eight-digit authorization code and set aside funds for the recipient. The payee can then call an 800 number to verify that the funds are available "Bluebird is really designed as a checking and debit alternative to appeal to the millions, and I would even suggest tens of millions of customers who just aren't getting the value that they're expecting from their traditional checking accounts…" – Daniel Eckert, Vice President, Financial Services, Wal-Mart Source: American Banker; Sutherland Research

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