|Feature/Function||Piloted Prepaid Card|
|Card Focus||General Spend|
|Transaction Types||Point of Sale and ATM|
|Major Card Brand||MasterCard|
By mid-year 2006, University cancelled its pilot because of the following issues:
- Vendor Issues – University’s first vendor did not have a flexible system that would allow one card to have multiple capabilities, even though the vendor had initially sold its product features as such.
As an example, the piloted card could not also serve as a payroll card, which management believed was a key product feature to reach the unbanked market. Subsequently this vendor was acquired by a major card provider which caused delays as they became absorbed in their own integration issues.
- Regulatory Issues – During the pilot, the state legislature in Minnesota sought to ban fees for stored-value gift cards. While University’s stored value card was not the target of this scrutiny, it did nonetheless become embroiled in the debate.
University’s CEO, David Reiling, testified before the state legislature to distinguish between high fees on certain gift cards in Minnesota and responsible pricing for general purpose prepaid cards.
Scale/Efficiency Issues – University management believes it overreached by attempting to pilot the product at all three of its affiliate banks to quickly gain scale, rather than starting at one bank and focusing on creating an efficient process before extending it to other distribution points.
Competition – Non-banks such as local check-cashing outlets sold prepaid cards that were priced similarly to University’s card with the same basic functionality.
Profitability Issues – The piloted card was expensive to administer, placed all of the fraud risk at the bank (as opposed to risk being kept by the vendor) and yielded a minimal revenue stream.
Management also concluded that a card that only targeted one segment of the market (i.e., low-income consumers) would not produce the volumes necessary to sustain a profitable business model.
During the pilot, University sold 274 cards and generated fee income of $1,630.30. These pre-paid cards did not produce float balances, so there was no net interest income. Processing expenses were $7,811.18.
This resulted in a net loss of $6,180.88.University’s management said the company’s approach to prepaid cards has shifted from using cards to serve consumers without bank accounts to viewing cards as a line of business.