It’s no secret that the majority of banks could be doing more to broaden their digital-banking services; however, legacy infrastructure and regulation often hinder their progress. The challenge for banks is in understanding how they can introduce innovative products to meet customer expectations that are fully integrated and compatible with the traditional banking model.
There has been a lot of hype about FinTechs causing disruption in financial services, but it is becoming apparent that collaboration is the best way for both parties to solve issues and extend their value chains. With FinTech companies being able to provide agile and flexible technologies that complement existing banking services, incumbents have the opportunity to increase their customer bases, improve margins and grow revenues. Of these technologies, prepaid is one of the more straightforward solutions banks can deploy to reach previously untapped customers without having to interfere with existing systems.
Integration with traditional financial services
Since 2011, prepaid-card issuers in the UK have to abide by the Electronic Money Regulations (EMRs) set up by the FCA (Financial Conduct Authority) to ensure a greater degree of transparency and fair competition in the sector’s operations. The introduction of the EMRs under the Second Electronic Money Directive (2EMD) clarified the regulatory authority’s position on a number of issues, including what services e-money issuers could offer.
In order to protect customers’ funds, each Electronic Money Institution (EMI) must safeguard funds received from customers for e-money so that if it becomes insolvent, the e-money issued will be protected from other creditors’ claims and can be repaid to customers.
Also, a key objective of the FCA and regulatory authorities of the European Commission is to ensure that prepaid-card consumers get value from their products. Ultimately their aim is to ensure that this consumer demographic has a flexible form of financial inclusion instead of seeing them burdened with a service that generates more charges and fees than it provides value. This again works in the customer’s favour when compared to some debit and credit products on the market, making prepaid accounts an attractive proposition.
Incumbents can extend their value chain by adding prepaid solutions to their existing banking services, with products that can be deployed far more quickly than if they were developed in-house, and far more cost-effectively. In fact, FinTechs acting as both the card issuer and technology provider on behalf of a bank can launch a programme in as little as a few months—a much shorter timescale than could be expected for a bank to build its own prepaid infrastructure. The FinTech is also responsible for the creation, implementation and management of ongoing operations, leaving the bank free to focus on other areas. Compared to adapting a banking platform, with a development schedule that is often 18 to 24 months, a prepaid platform delivered by a FinTech provides flexibility and a time-to-market advantage.
There used to be somewhat of a stigma around prepaid products, with consumers generally feeling that they were reserved for those that could not obtain credit. However, prepaid is no longer being considered a sub-prime offering and is a fast-growing payment method that could be used to generate new revenue streams for banks.
A multi-faceted solution
When people think prepaid, pre-loaded cards are often the first product that comes to mind. While there is a huge market for closed-loop prepaid cards, like gift cards, open-loop and contactless prepaid technologies are providing alternative banking solutions to those who previously did not have access to these services. Physical prepaid cards can replace debit and credit cards, and virtual cards, e-wallets, contactless stickers and mobile-banking solutions are also becoming popular choices for consumers. Prepaid programs are empowering the underbanked and support financial inclusion by facilitating access to products with greater security and efficiency than cash—without the need for a bank.
Consumers are looking for better ways to budget, and in the wake of the financial crisis, many of them are nervous about losing control of their finances. Prepaid eliminates these concerns, as an individual can load a specific amount onto a card and spend that and no more, as well as avoiding overspending and overdraft fees.
Banks can enable customers to readily manage their cash flows by offering prepaid accounts and can also link products, rewards and offers together in all-encompassing value propositions, meaning that they are not suitable just for those with poor credit, but also consumers who have access to traditional banking services but are incentive driven.
All ages and demographics are embracing the functionality, convenience and speed of contactless payments, and prepaid mobile stickers are another product that banks can offer to their customers—allowing them to enter the mobile and prepaid arenas with a single product. Nova Ljubljanska Banka (NLB), the largest bank in Slovenia, recently launched a prepaid programme targeted at Millennials—a contactless, prepaid MasterCard and mobile sticker product. Using cult, sci-fi film parodies to market the product, NLB had more than 3,000 customers signed up within two months of launch.
Prepaid products targeting younger customers can also be launched, as no credit checks are required. By giving them access to prepaid accounts, they can learn to budget, and this early introduction to financial services may help to retain them as customers once they are old enough to utilise other banking products. Prepaid can help banks to engage with younger customers who are keen to try new technologies and also have an eye on better budgeting.
The way in which prepaid can be integrated with other products also creates huge opportunities; Topshop already stocks a range of prepaid accessories and contactless stickers. The risks that come with carrying cash are also eliminated. Real wallets can be left at home, with a secure e-wallet accessed via a sticker or accessory taking its place on a night out.
Loyalty programmes are yet another benefit that prepaid can deliver. By knowing what customers are spending their money on, 1-2-1 marketing becomes more streamlined. For example, e-vouchers for a customer’s favourite coffee shop can be sent to his or her phone to be redeemed. By looking at each consumer’s behaviour over time, banks can offer incentives that are tailored, thus building loyalty.
Prepaid cards offer a number of benefits to the B2B (business-to-business) sector, too, from reloadable expenses cards to payroll to multi-currency travel cards, providing SMEs (small- to medium-sized enterprises) with a payment solution that is easy to keep track of, while giving them a helpful way to manage cash flow.
All in all, prepaid is a lot more diverse than many people give it credit for, and banks would be foolish to pass up the opportunity to deliver profitable products and services their customers want and need. Prepaid is no longer just an alternative to banking; it is banking. Banks that understand this will have a distinct advantage.