The complexities of the prepaid card business became apparent last month when JPMorgan Chase & Co., the biggest bank in the United States by assets, announced plans to sell or exit its prepaid cards business.
Their decision reflects the challenges many large financial institutions have with a business model best suited for smaller and more nimble companies that specialize in prepaid card programs.
Its prepaid operations include disbursements for government tax refunds, child support, food stamps, unemployment benefits and state payrolls.
Reuters reported that the product "had become a headache of risks in operations and regulations"
Among the difficulties faced by clients whose prepaid programs were being managed by JPMorgan Chase & Co. include:
- The company mailed incorrect replacement prepaid cards to 4,000 people receiving payments from the state of Connecticut.
- Last month 465,000 cardholders may have had their personal data accessed by hackers.
- A highly publicized lawsuit was filed against a McDonald's franchisee by an employee who claimed she was forced to use a payroll prepaid card, rather than direct deposit.
- The New York State Attorney General launched a probe into how companies use payroll cards due to outcries over card fees and confusion around corporate card applications.
- In September The Consumer Financial Protection Bureau issued a reminder that laws and rules around electronic funds transfers also apply to payroll cards, and that employers can�t require workers to receive pay cheques on prepaid payroll cards.
Interestingly, just over two years ago JPMorgan's Electronic Benefits Transfer (EBT) program (food stamps prepaid cards) was heralded as a major revenue stream for the company.
It also saves the American government significant amounts of money with the US Treasury estimating that taxpayers would save $44 million a year if social security payments switched from manual paper checks disbursement to prepaid cards.
A 2012 congressional hearing also found that the US government saves nearly a dollar every time it sends benefits via electronic transfer instead of paper cheques.
Plus, surveys have shown that in many cases people prefer Visa and MasterCard prepaid cards due to flexibility, convenience, and choice, especially as corporate applications for prepaid programs grow for employee rewards, channel incentives, consumer rebates, and travel.
There's no question that prepaid programs offer considerable value to consumers, corporations, and financial institutions. So why is JP Morgan unloading such a valuable service?
Here are five possible reasons for their decision:
1. Prepaid programs have historically been executed by small, specialized, and nimble companies, or by large financial institutions partnering with prepaid service providers to optimize product results. Large firms frequently overlook the fact that prepaid operations are much more complex than credit and debit products, with multiple business units, stakeholders, and processes necessary to move programs from account onboarding to program setup to distribution and cardholder support.
2. Not all prepaid programs are created equal - government programs have significantly different requirements, setup processes, and use-cases than payroll programs, and payroll programs are completely different from corporate incentive or rebate programs. Prepaid cards are not a one-size-fits-all solution, and misjudging the differences between applications can be costly.
3. A focus on profits and scale in a complex environment can distract from the fact that the cardholder experience is still the most important success metric for prepaid card programs. Sending incorrect replacement cards to 4,000 cardholders only jeopardizes the value of prepaid in the eyes of the consumer, which has direct impacts on the economic success of the program.
4. The consumer prepaid business in the US has also been plagued by perception issues from the banking crisis in general, compounded by opacity around fee gouging, regulatory activity, and confusion around how prepaid cards work.
5. Prepaid can be profitable, but it's a drop in the bucket when considering JPMorgan's core banking competencies which drive annual revenues of nearly $100 billion.
Although the prepaid business offers tremendous benefits for financial institutions, governments, corporate clients, and cardholders, success requires careful planning, operational measures and management to help simplify the complexity of the product.
