By Katy Jacob, Center for Financial Services Innovation (July 2004)
http://www.cfsinnovation.com/managed_documents/storedvaluecard_report.pdf
Abstract
The paper highlights the potential of stored value cards (SVC) as a powerful tool to engage consumers in a variety of financial transactions with greater ease, favored by an increasing number of competitors and the fast evolution of the technology. However, it stresses the lack of asset or credit-building components, which would benefit the consumer (longer-term financial opportunities) and the provider (customer loyalty, cross-selling opportunities and, thus, greater profits).
Among the main takeaways are:
The profitability of the business model and the limited legal and regulatory requirements have been prone for the entry of several participants. However, legal requirements could change as several issues are currently under review at the FDIC and OCC.
SVC products distributed by financial institutions are more prone to have consumer protection, lower prices and they have a more obvious transition into other financial products that allow the accumulation of assets.
SVC - that allow different kinds of functionalities such as the development of credit history or that can be used to perform a variety of financial transactions are still rare and there is plenty of potential, due to the fast evolution of technology.
Summary
The beauty of SVCAos or pre-paid debit cards or SVCAos is that they limit the risk of overdrafts and provide immediate liquidity thanks to a magnetic stripe technology that stores information and tracks funds.
How do they operate?
There are two ways: a) closed-loop: which can be used only by the issuer; and b) open-loop: the cards can be utilized for multiple purposes at multiple points of sale. Both systems manage funds in real time and they may or may not carry FDIC insurance.
The paper concentrates on open-loop SVCs because they are the closer to a traditional bank account. Consumers can make deposits and withdraw cash or make payments. Besides, the authors believe that these accounts can be cash and check alternatives for underbanked consumers.
One key concern of open-loop SVCs is their lack of functionality, they do not allow a single card to function across channels; that is, the same issuer would have a card for consumption purposes and there another card for payroll services, but do not have one card that could be used for both of them. This is a challenge for future cards, which would also allow SVCs to become more widely accepted by consumers.
Because SVCs are new in the market and do not have many comparables, some legal and regulatory concerns that have been raised are:
If SVCAos are considered depository accounts (an issue currently being reviewed by FDIC) FDIC insurance would apply.
Proper disclosures for consumer protection might also apply. Some issuers have already complained about this and consider this could change the current economic model of SVCs.
Because of moneylaundering and terrorism concerns, the need for costumerAos ID or social security numbers may limit acceptability of customers and sometimes can be difficult to check customerAos identity as in the case where customers are given a second card to be used by their relatives abroad.
The market for SVCAos has seen dramatic growth since the late 1990Aos and it is expected to continue to follow this trend. Some analysts forecast that by the end of 2006, 25% of unbanked families in the US would be using SVCs, while another research firm says that transactions with SCVs will account for USD143bln and another one estimates that payroll cards have the potential to serve 150mln consumers and by 2006 it will be 7mln card users.
Pricing Ai The fee structure changes varies widely even within a specific card system, some carry entry fees, monthly fees, some of these are sometimes paid by the employer, but the price of most of them would depend on the usage pattern. Considering an average usage, estimates suggest the cost to customers is close to USD$250 per year.
InnovationsAi In an aim to increase functionality of SVCs and to make them more convenient some providers are piloting to reload through local retail stores; others are looking into reloading via phone, internet or check cashing outlets. On the marketing side, some cards are designed to attract immigrantsAo remittances (often Latinos) and urban unbanked consumers via mass media (i.e. African Americans). Others have been designed especially for those receiving tax refunds, who do not have bank accounts.
Challenges
One of the main concerns of the authors is the lack of asset-building opportunities attached to SVCs, but its research highlighted the existence of at least three products that offer consumers the ability to build a credit history. This component would allow consumers to buy a house or car or rent an apartment by reporting accounts in good standing to credit bureaus. It is unclear whether these programs improve the customerAos credit score or by how much, but it is considered a promising trend in the industry.
Another area of interest for the authors is the linkage between SVCs and other financial services, and they also found some evidence of organizations providing extensions of small amounts of credit to consumers. One of them would allow consumers to borrow up to USD$500 against the next direct deposit of their paycheck. And another one, under the name of Aooverdraft protectionAo would charge USD$15 to receive USD$100 advance from their next direct deposit.