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Getting in on the prepaid wave E-mail

ABA program puts community banks into prepaid cards for payroll, unbanked, students, and more
May 6, 2011
By Steve Cocheo, executive editor

Home Savings Bank, a traditional Main Street thrift, operates in Kent, Ohio, where 27,000 students attend Kent State University. That presents very exciting prospects for Scott Mikula, because Home Savings is about to launch a product that will make a big splash in Kent State’s pond.

“We’re not a product-based bank,” says Mikula, assistant vice-president and bank card manager. “We’re a service-based bank.” But the $143 million-assets company’s latest venture fits both roles—an innovative product that will serve the special needs of students and parents.

The new product is a prepaid transaction card that Home Savings will issue through the ABA Community Bank Prepaid Program. The CARD Act put an end to credit card issuance to anyone under 21, without a cosigner such as a parent, and Mom and Dad increasingly resist handing over a credit card to students far from home. But the prepaid card, that’s a different matter. Parents can load them for students with cash, not credit, and, with the financial tools the ABA program makes available, add some financial literacy education to their offspring’s university program.

Although Home Savings plans to offer other variations on the ABA program to additional market segments, “Kent State is going to be our prime market,” says Mikula, himself a graduate and now a grad student there. Every semester Kent State hosts open houses for parents and students, a perfect marketing entrée for Home Savings. “Even if we got only 1% of the students, that would be a very nice piece of business,” says Mikula.

Kent State itself offers a payment card, but it’s comparatively limited in utility. By contrast, as a MasterCard prepaid card, “our card will be usable anywhere,” says Mikula.

ABA’s Business Solutions launched the prepaid program last fall with partners MasterCard Worldwide and TransCard, a prepaid card processor. The program promises to help smaller banks serve the unbanked and the underbanked; Gen Yers who have little connection to the banking system thus far; and companies and government units seeking more efficient disbursement methods.
Prepaid market booming
Americans’ usage of prepaid cards rose by 21.5% from 2006 to 2009, according to the most recent Federal Reserve figures, and these instruments represent the fastest-growing noncash payment method, outdistancing debit and credit cards, checks, and ACH transactions.

By 2017, Americans will make $443 billion in payments annually with prepaids, according to a MasterCard forecast conducted by Boston Consulting Group. That breaks down as follows: $164 billion in commercial prepaids, for purposes such as payroll and T&E; $163 billion in the public sector, such as public benefit and welfare programs; $68 billion in consumer reloadable cards, for campus, travel, remittance, and general uses; and $48 billion for cards used for gifts, incentives, and consumer rebates.


Community banks can get their piece of the growing prepaid card pie through ABA’s turnkey Community Bank Prepaid Program. (Click here to download a PDF of this chart.)
That’s a big chunk of change, but so far community banks have had very little of the volume, according to Janet Guthrie, vice-president, commercial prepaid products, U.S., for MasterCard Worldwide. A handful of large providers have been the most active, including the aggressive nonbanks GreenDot and NetSpend.

“It takes a great deal of expertise to offer a prepaid product” directly, Guthrie explains, far beyond the typical community bank’s resources.

Agent programs exist. But they have drawbacks. A very obvious one is name recognition, points out Terri Koelsch, chief operations officer at $64.3 million-assets St. John National Bank, Kan., the first bank to launch the ABA Business Solutions program, in early March. (Read a case study of St. John’s experience.) Typically, she explains, an agent program means the community bank sells a card branded with the issuer’s name, not its own.

But even more important than branding is profitability. For their efforts, typically, the banks may obtain only a one-time fee for loading the agent-program card, says Mikula, whose bank investigated such programs earlier.

ABA and its partners devised a program that represents a win for all parties, including consumers, points out Bill Kroll, president of ABA Business Solutions.

“We’re taking all of the difficulties and putting them into a box,” says Kroll. “We’ve made it almost as simple as an agent program.” But participating banks not only gain simplicity, but also financial incentives at a time when steady fee income sources are otherwise hard to come by.

One further plus: Prepaid cards don’t fall under the Dodd-Frank Act’s Durbin Amendment.
How the program works
Overall, what makes the ABA program unique is that community banks take an active role. “They bring the customers, and we give them the toolsets to serve those customers,” says Craig Fuller, TransCard CEO.

A good illustration of this point is the payroll card application. Fuller says TransCard’s research indicated that local companies liked the idea of issuing payroll cards into which they’d make direct deposits. However, local companies resisted the idea of turning over their payroll files to some provider far away. “We felt that if we could get local community banks involved, they’d go for it,” says Fuller. CFOs trust their local banks more than they do strangers, he explains.

Kroll says that putting a program like this into community banks’ product line adds to their ability to meet companies’ cash management needs. “The partnership lets us take a lot of the costs and make them more reasonable,” Kroll says. He ticks off these other pluses:

• Because all funds loaded onto the cards remain in the bank until spent, the bank has use of the funds.

• Cardholders enjoy full FDIC insurance protection on a pass-through basis.

• In the case of payroll deposits, the paying company’s money is in an insured institution.

• Employees without banking relationships can avoid the high fees of check-cashing services.

• As structured, there is no risk of overdraft charges in these accounts, and there is no credit element.

• To cardholders, their plastic is branded in the name of the bank, maintaining the local connection, and the MasterCard logo guarantees broad card acceptance.
Behind the scenes
The operational guts of the program are shouldered by the three partners. ABA Business Solutions coordinates the program with MasterCard, oversees the master settlement account at a large bank, and sponsors member-bank participants. MasterCard provides settlement of transactions, marketing support, and launch assistance. TransCard is the overall program coordinator. After setting up the bank’s relationship, it provides bilingual customer service support 24/7 by phone and website, as well as bank-level program reporting. TransCard also handles reconciliations, and accepts responsibility for any fraud, indemnifying participating banks for that risk.

Most compliance issues have been addressed by TransCard as well, says Home Saving’s Scott Mikula. He says the vendor has set things up such that BSA, Reg DD, and other issues are handled. “They’ve thought of a lot of things that need taking care of,” says Mikula, adding that as long as the participating bank secures two forms of acceptable ID, it’s in good shape.
Consumer-side benefits
Don’t confuse this prepaid program with one-shot gift cards. In many ways, the ABA offering is a sophisticated consumer account in all but name.

Cardholders can receive a daily text message of their balance, ensuring no overspending. (“For Gen Y, if it’s not on your phone, it’s not happening,” points out Kroll.) Online, they can use customizable budgeting tools to track and control spending. TransCard’s site will enable cardholders to tap their funds in multiple ways, including card-to-card transfers, electronic billpay, check issuance, recurring payments, and transfers to bank accounts.

TransCard has a mobile app that permits prepaid cardholders to go beyond text messages. They can transfer funds; view transaction history; locate ATMs, including those with no surcharges; and pay bills.

“The mobile app holds tremendous promise,” says Craig Fuller. “We don’t care what the device is. We just see it as a transaction.”

He says TransCard is developing a Facebook app for payments through the prepaid program, something that will appeal to Gen Yers and others in the social media universe.
Fee income possibilities
Banks currently face a two-edged sword in consumer payments. Many are reexamining overdraft protection. They are also looking for new fee-income sources. At the same time, FDIC and others pressure banks to find ways to serve the unbanked and the underbanked.

Prepaid cards address both sides of this issue, point out ABA’s Kroll and MasterCard’s Guthrie.

The program has been designed to keep fees at reasonable levels—indeed, participating banks set their own fees, even by segment and type of card relationship (consumer reloadable, payroll, etc.). TransCard collects the total fee and remits to the bank the fee less the charges TransCard and MasterCard may assess for a transaction. Multiple types of fees may apply, such as for transfers and ATM transactions.

Overall, the goal is to offer a low-fee transaction account, says Fuller.

Research has shown that unbank-ed and underbanked people consider these fees quite carefully, says Guthrie. “They’re very savvy, and they know exactly what they are paying,” she explains. When they compare program fees to those charged by check cashers and others, prepaids will be seen as preferable.

“This a great program,” says Home Savings’ Scott Mikula, “because it gives us the ability to market prepaids in different ways to different audiences.”

Read a case study of the first bank to adopt the ABA Community Bank Prepaid Program
[This article was posted on May 6, 2011, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2011 by the American Bankers Association.] 
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