Viewpoint: What I’ve Learned about Prepaid and Velcro Pants
Velcro pants and prepaid? What do these two things have in common? One of my professors told a story about brainstorming solutions to keep children in shopping carts at the grocery store. She shared an idea that would fix the problem: What if you lined the seats with Velcro and dressed children in Velcro pants? I love this example and often return to it. Dressing children in Velcro pants might not be a realistic solution, but the point is to think beyond practical boundaries to create unique, workable solutions.
The complex prepaid space must be approached with the same utility and creativity as the Velcro pants scenario. When I took over as head of prepaid at Discover a year ago, I thought the transition would be simple. With 12 years at the company, having worked in technology, investor relations and payments business development, I figured my understanding of the payments landscape would help me hit the ground running in prepaid. Instead, I spent the last year building relationships and learning from my team, our partners and influencers. While it’s been a year filled with interesting learnings, a few topics easily filter to the top of the list.
- Prepaid is extremely fragmented. With more than 31 different segments, prepaid is in a constant state of change. Nearly one-third of the U.S. population—106 million people—is either underbanked or unbanked, according to the FDIC. The recent “Millennial Disruption Index,”1 a three-year study of industry disruption at the hands of teens to thirty-somethings noted 1 in 3 millennials are open to switching banks in the “next 90 days,” and 33 percent don’t believe they need a bank at all. It’s clear consumers are searching for alternatives to traditional banking. The result is a fragmented market, driven by a plethora of consumer wants and needs.
- Prepaid is experiencing more innovation than debit or credit. Prepaid has been around for many years, but the
“In the world of prepaid, we must consider solutions that push traditional boundaries and offer creative, useful solutions. The ideas that offer value to the customer will be the ones to stick.”
break from the early form and function is creating a new trajectory in innovation. Where a handful of banks and program managers traditionally owned the prepaid market, new entrants and innovative use cases are disrupting the competitive dynamic. These new entrants refer to themselves as “prepaid platforms.” These disruptors are pushing the boundaries of innovation and value in the prepaid market. Many of the disruptors are coming out of the Bay Area—a place I’ve called home for the past three years. I intend to continue to raise the profile for Discover on the West Coast to ensure we’re staying close to the innovation. Innovation in prepaid means flexibility, creativity and accelerated product design beyond what’s possible in any other aspect of payments or financial services. The prepaid industry is full of innovators and innovations changing the way we think about payments.
- Consumers define markets—prepaid is no exception. Fragmentation and innovation lead to creative payment products, but, in reality, success is about the value proposition and customer experience. At the end of the day, you’ve got to provide a value to your customer base because there are too many options, too many creative products and, in today’s environment, the switching cost is low. Across the board, people are looking for a better user experience and great value. Value, however, means different things to different people. For unbanked consumers, it could be cost avoidance. For college students, it might be all about convenience. For frequent shoppers, it could be loyalty. We, as an industry, need to provide options that deliver value and are integrated into what consumers are already doing. Adoption comes after educating consumers on the benefits of prepaid—including monitoring and tracking spend, convenience and simplicity—in their daily activities, such as paying bills, online shopping or just purchasing dinner.
- Partial authorization is an ongoing issue. Many of the big retailers are enabled for open-loop partial authorization; however, there’s a larger gap in the small to midsize business space and e-commerce. Although prepaid is only 4 percent of the total plastic spend in the U.S.,2 it’s the fastest-growing consumer financial product. When you think about the numbers, it isn’t surprising there hasn’t been a big focus on enabling partial authorization. As there continues to be broader uses and more customers walk through merchant locations or visit retail commerce sites with a prepaid card, it’s increasingly important for the industry to ensure a positive customer experience or risk alienating consumers.
Rounding the corner into my second year in the world of prepaid, I see the takeaways above continuing as a focal point. I’ve also got my eye on new developments. We’re early in the cross-section of payments and social commerce. There’s a lot more to learn in the ways to use payments, specifically prepaid, across social networks. It’s similar to when e-commerce started—you had the brick and mortar and then there was the new e-commerce channel. Social media sites are providing innovators with a new playground, which brings me back to the story my professor told. In the world of prepaid, we must consider solutions that push traditional boundaries and offer creative, useful solutions. The ideas that offer value to the customer will be the ones to stick.
Amit Parikh is the head of prepaid and director of business development for Discover Financial Services. He has had the role of director of business development since 2010. In early 2013, he was given the added responsibility of running prepaid. Amit joined the company in 2002 and has held several positions in technology and investor relations before assuming his current role. He has extensive knowledge of the financial services, information technology and payments industries. He can be reached at [email protected].
1 “Millennial Disruption Index” Viacom Media Networks, 2013. http://www.millennialdisruptionindex.com/wp-content/uploads/2014/02/MDI_Final.pdf
2 Nilson Report #1031, December 2013