The New Frontier: Providers Turn to Technology to Dive Deeper into Commercial Prepaid

The New Frontier: Providers Turn to Technology to Dive Deeper into Commercial Prepaid

The New Frontier: Providers Turn to Technology to Dive Deeper into Commercial Prepaid

Charles Keenan

Charles Keenan

Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997, a time when automated teller machines were appearing just about everywhere but people's living rooms thanks to the relaxation of surcharging rules.

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As consumer growth in prepaid slows, providers are now looking to capitalize on new opportunities in the commercial sector. Commercial prepaid, which has mainly been comprised of payroll and incentives, now offers promise in areas such as disbursement and expense management, as technology has made platforms more robust and providers search for new revenue streams.

"Commercial prepaid is where the industry is looking for its next growth phase," says Ben Jackson, a director at Mercator Advisory Group, a consulting firm based in Maynard, Mass. "Now, corporations, processors and program managers are looking at ways to combine other business tools with the prepaid card."

Technology advancements have helped develop these areas for prepaid. Fintech startups are entering the commercial prepaid space using cloud-based platforms, allowing them to scale up quickly at a lower cost. And mobile phones make these systems much more user-friendly and flexible, allowing for companies to control spending among employees using prepaid cards.

Market need is another driver. While much of the commercial prepaid sector includes payroll cards and associated payroll services, new applications are gaining steam because they are meeting the needs of businesses. Disbursement programs allow companies to distribute corporate funds to employees, customers and partners. Expense management platforms now can integrate with accounting software. More industry-focused applications include restaurant-tipping distribution platforms.

Prepaid providers can offer competitive products in these areas much like the banks do, but with more flexibility and features, says Jeff Feuerstein, vice president of market product management and former lead of prepaid at Mastercard. "Customers want a little bit more than what they are getting from their traditional financial institutions," he says.

Slowing consumer market

Much of the prepaid growth in recent years has centered on consumers, such as providing them with replacement accounts post-financial crisis. Prepaid also has served niche markets as a transactional account, such as helping parents send money to college students.

Yet growth among consumers has become more challenging. "That market has matured," Jackson says. "There aren’t that many unbanked people out there that haven’t heard of a prepaid card."

While prepaid numbers aren't broken down by vendor, it’s clear that the traditional consumer prepaid market — for many years a revenue staple for providers — has shown signs of flattening growth, as the market approaches saturation. Transactions of general purpose prepaid cards increased to 3.7 billion in 2015, up an average annual rate of 2.3 percent from 2012, the slowest pace since 2000, according to the 2016 Federal Reserve Payments Study, a triennial report by the agency. The average value of payments in the segment slipped to $34 in 2015, down from $35 in 2012.

Prepaid providers will also face higher compliance costs down the road, another reason for providers to find new revenue streams. A new rule by the Consumer Financial Protection Bureau will require prepaid card vendors to limit consumer losses on stolen or lost cards, resolve reported transaction costs and provide customers free and easy access to account information. The rule is scheduled to go into effect April 1, 2018.

New flexibility for businesses

All the headwinds have providers looking to commercial prepaid. Cloud vendors and innovative processors are helping providers create flexible platforms that have appeal to businesses. For example, dashboards allow small business owners to add funds, set spending limits for each employee per week or month and set spending ability for each employee. Some of these products integrate prepaid cards with widely used accounting software to help business owners customize and control employee spending.

With these products, expense tracking of purchases becomes more centralized. Without them, a contractor might hand out Home Depot cards to his workers to make purchases for supplies, making it hard to track receipts and balances, Jackson notes. "Then if somebody says, 'Hey I'm going to build a dashboard and you can do all of these things,' then it becomes a viable option to use," he says.

Bento for Business, for instance, offers a prepaid debit card that allows companies to have real-time control over employee spending. Employee budgets can be set on their cards, and utility cards — much like gas cards — can provide flexibility. Karmic Labs offers a product that allows for employees to request specific amounts of cash for events, which managers can approve remotely. PEX's prepaid has similar flexibility, and allows users to sync with QuickBooks, Tallie and Expensify.

Other innovations in commercial prepaid include disbursement and management of restaurant tips, which can be a cumbersome and time-consuming task. Netspend's Tip Network allows restaurants to calculate checkouts, distribute tips and digitally transfer funds. The system uses APIs to help restaurants easily integrate it with point-of-sale platforms.

So when it comes to commercial prepaid, there's a lot of potential for disruption, with a caveat, Jackson notes. Commercial prepaid providers have the promise of taking away business of financial institutions, but they need to be mindful of their target market, Jackson notes. "Everyone is looking at it," he says. "They are all saying this is the next big thing. Where they are going to have to be cautious is in finding the right range of businesses where this makes sense. Really small businesses don't have the liquidity typically to fund a prepaid card. Most large companies aren't going to have the same petty cash needs — they'll probably do purchase orders and buy things in bulk."

That said, there's a market to be had in commercial prepaid. "We are very optimistic on the commercial landscape in general, both targeting small businesses as well as expense management," Feuerstein says. "The growth beyond the payroll landscape is bright."

The statements and opinions of the writer do not necessarily reflect those of TSYS.

Other Articles by Charles

Charles Keenan

Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997, a time when automated teller machines were appearing just about everywhere but people’s living rooms thanks to the relaxation of surcharging rules.

His work at the American Banker included writing about credit and debit cards, merchant processing, and bank stocks. He later freelanced for the Banker and industry publications such as Banking Strategies, Bank Director, Community Banker, and U.S. Banker. He also writes about investing, insurance and health care, and is based in Los Angeles.

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