Viewpoint: Prepaid’s Move to Help Canadian Businesses Break the Check Habit
Canada is the North American front-runner to eliminate checks, which is one of the many reasons the country is fertile ground for expansion of electronic payments, including prepaid.
All signs point to the rapid nationwide decline in check use (at an annual rate of about 7 percent) being good for consumers, businesses and the financial system. Payments Canada forecasts that by 2020, virtually all checks written by businesses and governments in Canada will have migrated to electronic payments.
Prepaid is a particularly well-suited electronic payment method to replace checks in the country, largely because of Canada’s stable regulatory environment and the benefits of prepaid compared with credit and debit products, and most certainly compared with cash.
There are several corporate-funded market segments driving prepaid market growth in Canada and among the most compelling are insurance, employee and partner incentives, and campus applications.
In 2013, Canadian insurers wrote CA$47.8 billion in direct premiums for insurance on consumers’ homes, cars and businesses, and more than half of every dollar of those premiums is paid out in claims. That’s a minimum of CA$24 billion, almost all of which has traditionally been paid out by check from one of the more than 210 private property and casualty insurers across Canada.
In the U.S., insurance companies are heavily invested in the check business, some even running their own printing presses—a formidable barrier to any electronic payment solution. But Canadian insurance companies are reviewing their entire claims operations process—especially check-issuance—to understand how electronic payments can drive operational efficiencies and customer experience. Known as “InsurTech,” this movement seeks to modernize everything from pricing strategy to customer service, claim processing and payments.
Prepaid payment solutions bring big advantages to insurers, including improved efficiency and reduced fraud. By using a RAN (restricted authorization network), insurance claim payments can be limited to a specific list of approved providers, such as auto body shops and related services, in the case of an auto insurance claim. The RAN concept is a relatively untapped opportunity in the insurance industry, even in the U.S. The insurance provider that takes the lead in this area will have a significant market advantage.
Employee and Partner Incentives
On the employee front, Benefits Canada recently reported that 60 percent of Canadians aren’t motivated by their employer’s rewards program, and that employees prefer prepaid cards 16 times more than receiving company-branded merchandise for a job well done, other recognition or service anniversaries.
Timely awards and the convenience of an immediate payment method are a huge draw for card recipients, and open-loop prepaid cards enable employees to apply the funds as they see fit, such as for some guilt-free shopping, rather than being limited to making a purchase using a store gift card at a specific merchant which they may not frequent.
Employers benefit from the flexibility of choosing a variety of prepaid solutions, depending on the need. Single-load prepaid cards are ideal for one-time recognitions such as service anniversaries and annual bonuses. Reloadable prepaid cards are great for ongoing employee performance and incentive programs such as hitting weekly sales objectives or daily efficiency goals.
Businesses can extend this concept beyond internal employees to reward and incent partners and contractors, too. A common example is multilevel marketing companies that reward their contract associates with ongoing perks to drive sales results or retail sales associates who may also have daily sales objectives. Cards can even be company branded to drive awareness and affinity when the card is used.
The higher education segment hasn’t updated its payments processes in decades, and school administrators are under pressure to reduce costs and improve the student experience. Institutions across North America issue scholarships, grants and bursary payments by check, requiring students to go to a bank or use a check-cashing service to obtain cash to pay for books, meals and other expenses. It could take several months of red tape to replace a lost or stolen check. Unlike checks, prepaid cards can come with a zero liability policy and, in many cases, emergency card replacement.
In the U.S., the regulatory environment for campus prepaid programs is uncertain. The CFPB and the Department of Education have finalized rules that govern disclosures, overdrafts, and in the case of the DOE, fees, making many U.S. program managers rightfully hesitant to invest. Additionally, the recent election results mean that existing regulations may be overturned. But Canada’s stable and transparent regulatory framework provides a much less complex path forward.
There are hundreds of universities in Canada serving more than 1.7 million students who spend on average CA$6,000 (US$4,500) annually on tuition alone—much of which is paid via check. That equates to at least a CA$10.2 billion (US$7.7 billion) market riding on the rails of a very outdated payment method.
Canada is also a top 10 destination for international students, welcoming more than 300,000 international students each year. Those students need a secure, easy way to pay school and living expenses and need to receive funds from family abroad more efficiently.
Prepaid is a more secure, convenient and timely solution for open-loop prepaid cards that carry funds for expenses like tuition, room and board, or more restricted campus cards that limit spending to university properties.
Because campus programs are still a fairly new concept in Canada, program managers have open opportunity to build profitable programs from the ground up, which can later be exported to the U.S. once there’s more regulatory clarity around such programs.
Canada’s payments and banking system has several notable differences when compared with the U.S. financial system, beginning with a significantly more consolidated arrangement of financial institutions. Program managers should incorporate several key elements in their go-to-market road maps to ensure efficient compliance with all Canadian regulatory requirements.
To get more insight on going to market in Canada, download Peoples Card Services white paper entitled, Cheque-ing Out: Prepaid’s move to help Canadian businesses break the habit.
Peter Read is president of Peoples Card Services, where he’s responsible for the company’s overall performance through the formulation of strategies and business plans for the issuer’s payment card products.
In Viewpoints, payments professionals share their perspectives on the industry. Paybefore presents many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore.