Citi Preps for Prepaid Spinoff
A year after JPMorgan Chase announced plans to exit its corporate and public sector prepaid business, Citigroup Inc. told investors last week it’s transferring Citi Prepaid Services to Citi Holdings, where the business line will be groomed to become a freestanding entity.
“Citi Prepaid Services will operate as a standalone entity within Citi Holdings and will have more flexibility to expand its platform,” a Citi spokesperson tells Paybefore. “While in Citi Holdings, the plans are to reconstitute the business as a free-standing entity with full support across front- and back-office functions,” she says. “This includes the addition of new staff, investment in its technology platforms and the development of new product solutions.”
Citi, which is the third largest U.S. bank by assets, operates via two primary business segments: Citicorp, consists of businesses that are part of Citi’s long-term strategy and Citi Holdings, which includes businesses and portfolios of assets Citi has determined aren’t central to its core franchise, the spokesperson explains. “Many of the businesses in Citi Holdings are still good, strong franchises with important clients and so we will seek strategic alternatives for those businesses.
“Businesses that are moved in to Citi Holdings benefit from the expertise of its merger and acquisitions professionals who evaluate current Citi businesses and explore potential strategic alternatives,” she continues. “One example of a benefit from the move to Citi Holdings is that Citi Prepaid Services will become staffed appropriately to operate as a standalone business.”
Citi entered the prepaid market in 2007, when the bank acquired Conshohocken, Pa.-based Ecount, a corporate incentives pioneer. Since then, the Paybefore Award-winning platform expanded globally, providing government sector, payroll, T&E and incentive programs across 16 countries.
Not a Scale Issue
Citi did not comment on regulatory matters, but industry experts suggest corporate and public sector programs, in particular, may be struggling to keep up with rising compliance costs. Often considered a direct means to scale, corporate and public sector prepaid programs face fairly limited opportunities for fee income compared with their direct-to-consumer counterparts. And, while public sector programs may qualify for an exemption on the Durbin interchange fee caps, corporate incentive programs are subject to the debit interchange caps for banks, such as Citi, with assets over $10 billion.
Third-party oversight continues to be a key focus for regulators, the FDIC’s latest FAQs on brokered deposits have raised some concern among prepaid issuers, and the full implications of the CFPB’s proposed prepaid rules are still being explored, but there’s little doubt that those implications will include increasing the cost and complexity of prepaid programs. (Comments are due March 23.)
“Corporate B2B and government prepaid business is not as profitable as you might think,” says Lori Breitzke, president of E&S Consulting. “B2B is lower risk but low profit per card and usually is part of a bigger play for corporate client leverage. Government programs also are low profit and take a well-oiled fraud prevention machine to be successful.”
Industry experts have been suggesting that consolidation will continue among prepaid businesses across verticals and the value chain, partly because of the natural maturation process but also because of increasing compliance costs. And, with two of the largest asset banks in the U.S. shedding their prepaid units, it’s unclear who the buyers might be.
Meanwhile, Citi says it will continue to invest in the prepaid business, growing its North American-based footprint and supporting client programs in the other regions. Management, including Managing Director Hubert J.P. Jolly, also will remain in place and the business will retain its name.
“Other businesses you may recognize as having been transferred to Citi Holdings in the past include the Smith Barney retail brokerage business and CitiFinancial. A significant piece of what was CitiFinancial still operates within Citi Holdings and has evolved into the business now known as OneMain,” the spokesperson says. “So while we have decided that Citi Prepaid Services will not stay part of Citicorp, we will continue to support clients after it becomes part of Citi Holdings.”
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