Page 52 - Pay Magazine s2014

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State of the Industry: Changing but Unbroken
Seeking New Revenue Streams
Revenue streams from value-added services will be increasingly impor- tant to the industry going forward, especially in the EU as providers face cuts of roughly half to their interchange income. In March
the European Parliament passed interchange legislation that caps interchange for credit products at 30 basis points for intra-European Economic Area and domestic transactions and 20 basis points for intra-EEA and domestic debit transactions. Member states can set rates even lower. Although the caps won’t go into effect until later this year or early next, prepaid providers—unless they enjoy large FX income—already are looking for ways to offset the loss.
“Interchange caps will make the economics of issuing prepaid cards much more difficult,” says Mark Beresford, a director in Edgar, Dunn & Company’s London office. “The lost revenue will need to
be recovered through other types of fees—probably consumer or program manager fees.”
As providers re-evaluate program economics, those that haven’t relied on interchange as a key revenue driver will be in a stronger position. London-based processor and program manager PrePay Solutions is one of them. “It’s vital for prepaid providers to ensure that they’re consistently adding value and offering more than just a generic prepaid proposition—that’s the only way to ensure profitabil- ity,” says PPS CEO Ray Brash.
It’s vital for prepaid providers to ensure they’re consistently adding
value and offering
more than just a generic prepaid proposition— that’s the only way
to ensure profitability.
—Ray Brash, PrePay Solutions
50
Brash suggests enhancing loyalty and using big data—or using data more effectively—could offer new revenue streams to improve overall economics for prepaid providers and retailers.
U.S. Innovation on Ice?
Growth in the U.S. prepaid market is expected to continue across many verticals as well. Mercator forecasts total loads on network branded cards, which include GPR, payroll, open-loop gift and unem- ployment benefits, will have a compound annual growth rate of
9 percent through 2017, reaching a total of $337.8 billion. But, there’s concern that specific pro- visions of the CFPB’s final rule on prepaid accounts could have a chilling effect on certain aspects
of innovation, particularly as it relates to fee models and anything to do with overdraft or small-dollar credit. (See page 90.)
If prepaid cards are to be used as checking account alternatives, the next logical step is to offer some sort of revolving credit facility, notes Stefan Happ, execu- tive vice president and general manager, global emerging pay- ments and services, American Express. Although Happ says the
company has no current plans
to offer any type of credit to prepaid users, he can see the virtue of such a feature to lengthen the customer relationship—some- thing issuers and program man- agers have been trying to do— with varying degrees of success— for years. “I think that’s the one feature that’s missing, but it continues to be tricky because
of regulation and the FICO scores [or lack thereof] of many prepaid customers,” Happ says.
Brad Hanson, president of Meta- Bank, one of the largest prepaid issuers in the U.S., says program managers and issuers are going to need innovative ideas to forge ahead in the current environment. “It will be difficult for smaller com- panies to survive,” Hanson says. “As margins continue to compress on consumer products due to declining prices and increasing compliance costs, there will be
a growing necessity to vertically integrate, find synergies, leverage economies of scale and reduce costs to survive.
“Scale and sophistication are required to ensure sustainability and effective management controls are enabled,” he continues.