Economics of Prepaid CardsEconomics of Prepaid Cards

ATM, Debit & Prepaid ForumATM, Debit & Prepaid ForumOctober 3October 3--5, 20075, 2007

Matt Matt ““AnilAnil”” KerperKerperVP of Prepaid ServicesVP of Prepaid Services

Parago, Inc.Parago, Inc.

Credit, Debit, & PrepaidCredit, Debit, & Prepaid

Pay NowPay Later

Pay Before

Prepaid Prepaid

Credit Credit Debit Debit

Credit, Debit, & Prepaid Credit, Debit, & Prepaid -- FeaturesFeaturesPay Later Pay Now Pay Before

1. Qualification tied to extension of credit

2. Longer life span

3. Used for purchases requiring extended financing

4. Often comes with generous reward programs

5. Generates most revenue from Interest & Interchange

1. Quasi-qualification based issuance tied to DDA account

2. May include overdraft protection

3. Includes PIN debit & traditional credit functionality

4. Primary payment tool for many banked consumers

5. Generates revenue from Interchange, Fees, & peripheral bank services

1. OFAC and CIP required. Typically no credit check

2. May include limited overdraft protection

3. Usually includes PIN based debit & traditional credit functionality

4. Often a limited lifespan due to product use

5. Primary financial tool for self banked while specific use product for others

6. Revenue generated from Interchange & fees

Pay Before Market SizePay Before Market Size

4.739.04

14.63

26.76

0.00

5.00

10.00

15.00

20.00

25.00

30.00

Open 2003 Open 2004 Open 2005 Open 2006

US Open Branded Prepaid Market Growth(in Billion $'s Loaded)

Source: Mercator Advisor Group

Current Prepaid SegmentsCurrent Prepaid Segments

Source: Mercator Advisor Group

The Prepaid Supply ChainThe Prepaid Supply Chain

ProgramProgram

ManagerManager

CardAssociation

Processor

Transaction feesIntegration / developmentMinimums

ReceiveReceiveInterchangeFloat (negotiated)Card holder feesProgram management fees from third party

PayPayTransaction feesMinimumsRisk / fraudFront loaded costs

Bank

InterchangeFloatTransaction feesMinimums

Interchange

Payroll CardsPayroll Cards

Payroll

Cards

Payroll

Cards

Typically low/no fees to consumer

Can be costly to administer due to complex sales process, heavy CS/IVR usage, low offsetting fees, high expectation of customer service

Usually solid, cyclical loading patterns yield profitable consumers once critical mass is reached

Revenue generated through interchange, fees to cardholder, fees to corporation (load, issuance, CS), interest on float

Government benefits, contract workers, short term staff, unbanked / self banked, immigrant centric work pools with high rates of money transfer

General Purpose ReloadableGeneral Purpose Reloadable

GPR

Cards

GPR

Cards

Typically higher fees to the consumer

Widespread distribution and competition from small operators through the largest players

Revenue mostly from card fees, initial purchase and reload fees, and interchange

Short term customer lifespan due to lack of loyalty, stickiness, and fierce price based competition

Wide reaching category including retail based product, online, direct mail

Promotions & IncentivesPromotions & Incentives

P&I

Cards

P&I

Cards

Revenue mostly from card fees, initial and reload fees (corporate paid), and interchange

Non-sales employees, especially effective for hourly employees where high turnover exists to measure and recognize performance

Typically no fees to consumer or participant

Becoming the leading payment vehicle for channel and sales incentive programs

Increasingly used in consumer promotions such as rebates, test drives, and other give away promotions

Other Prepaid UsesOther Prepaid Uses

FSA / HSA

CorporateSpending

Travel/per diem/expense management

Use based products designed to deliver efficient reconciliation, ease the burden of employees reimbursement, & provide accountability

Typically no cardholder fees

Revenue from interchange, float, and card program management fees

Life span usually tied to particular employer or in some cases per project

Typically offered as part of a larger treasury management service from company’s banking partner

Benefit based cards designed around flexible spending accounts

Further transition from traditionally check based product to plastic to reduce cost and increase convenience for consumers

Typically no cardholder fees

Revenue from interchange, float, investment of benefit funds, and corporate paid card program management fees

Life span usually tied to particular employer

NOTES

Prepaid Economics: WhatPrepaid Economics: What’’s real s real and whatand what’’s Not!s Not!

Varies between 60bps to 150bps on average

FEES

Blend of credit/debitInterchange

ITEM

Varies between 25bps-35bps of GDV on averageSystem & Network Fees

Less than 15bps is excellent Budget more until you model the portfolio

Negative balance reconciliation and fraud

prevention

Plastics range from $0.14 through $1.50 base upon volume and card stock Entirely volume driven

Materials production (plastics, collateral, web

development)

Varies between $0.40 to $1.00+ for mail/emboss/fulfillment

ID Verification and OFAC average cost varies from $0.25 to $0.75

Both should be volume driven

Emboss, fulfillment and ID verification

Prepaid EconomicsPrepaid Economics

Expect $135-$200 per hour for custom IT development through your processor

FEES

Custom Development

ITEM

Processor minimums typically start at $5,000 to $7,500 per monthand escalate as high as $50,000 monthly in 5+ year agreements. Bank minimums can vary from $0 to $5,000 per month or may be

based upon a per program/per BIN minimum

Bank and Processor Minimums

Program Managers should expect to a pay between $50k and $100K for initial integrationIntegration Fees

Varies, but expect to pay at least $5,000 per monthOngoing Support Fees

Expect to pay 10%-25% of monthly revenues for the remainder of the term if you terminate

Conversion is very difficult, costly, and often leaves cardholders with a bad taste in their mouth.

Termination and/or conversion costs and

penalties

Future Prepaid UsageFuture Prepaid Usage

The Future of Prepaid

A

B

C

D

Aggressive Incentive Reward Adoption

Prepaid Offered To Credit/Checking Declines

Reward of Choice For Referral /

Loyalty Programs

GPR & Credit Converge

Thank YouThank YouMatt KerperMatt Kerper

VP of Prepaid ServicesVP of Prepaid ServicesParago, Inc.Parago, Inc.

Matt.Kerper@parago.comMatt.Kerper@parago.com972972--538538--39803980