Viewpoint: 3 Keys to Sustainable Public Sector Programs

By Alex Liu, Bank of America Merrill Lynch

The benefits of commercial and government prepaid card programs are well known, offering a cost-effective and efficient benefits disbursement solution to companies and agencies around the world. However, an often overlooked factor in determining a successful program is its sustainability; that is, whether it can be profitable for the issuing bank over the long term. In 2013 alone, prepaid card programs were used by U.S. government offices to disburse $142 billion.¹ Given the revenue potential, the RFP process has become fiercely competitive. This has been further compounded by the increasingly complex demands made by companies and public agencies.

Issuers considering entering the commercial and public sector prepaid card arena should look beyond the appeal of “guaranteed” large card volumes. It’s true that commercial programs often have volumes consumer-facing program managers only dream about, and these programs can be profitable. But the revenue streams are generally static. And, don’t forget that benefits recipients are among the most expensive prepaid cardholders to service. High call volume around load times can eat up revenues fast.

At Bank of America Merrill Lynch, we’ve been in the prepaid business for nearly two decades. In the last five years, we renewed our commitment to the vertical and have added more than 20 state government clients for disbursing unemployment benefits and child support payments, along with a similar number of corporate clients seeking ways to turn their paper checks into electronic payments. In the process, we’ve learned that it’s a delicate balancing act to deliver a program that is advantageous for all stakeholders: the client (which, in some cases, is the taxpayer), the cardholder and the issuing bank. By balancing the features and fees, and eliminating inefficiencies in the workflow, it’s easier to deliver on obligations in the RFP.

In this article, I break out three keys to successful, sustainable corporate and public sector prepaid card programs for issuers to follow. The principles could be applied to any prepaid program, but the examples and details below are specific to public sector programs.

1. Balance Fees and Features: Sustainability is a balancing act that requires providers to weigh the features of a program and its fees. In a typical prepaid program, much of the issuer’s or program manager’s revenue is completely dependent on the volume of payments made by the corporate or government client. The one revenue stream that the issuer controls is fee income. Fee revenue on a corporate program often includes cardholder fees and client fees. But the RFP process for public sector programs has gotten so competitive, many clients require a no-fee contract to the agency. That limits fee revenue opportunities to cardholder fees, but that’s a balancing act as well. Most jurisdictions have laws requiring that recipients have ways to access benefit funds at no cost. We balance what’s right and fair for the cardholder with what makes sense for the bank. We may not charge POS transaction fees, for example. We might charge for out-of-network ATMs because of the cost to support that type of transaction and the convenience we’re providing to cardholders. But, it’s a fee that’s common in the traditional debit world. Our view is that these cards shouldn’t be more expensive or have different fees from what consumers would expect from a debit card.

During the RFP process an agency typically includes a list of the program/cardholder features it wants, but issuers should be prepared to manage expectations about what they can provide. Certain features—free out-of-network ATM transactions, for example—would be difficult to sustain because of the expense. Unlimited access to live agent customer service also could pose profitability issues if cardholders aren’t educated about ways to access balance information via self-service channels. Most agencies have had prepaid programs for years and have come to understand what features are practical and what might be unrealistic from a sustainability perspective. That said, some are making it challenging to meet all their requirements and maintain profitability. We’re focused on making sure our clients understand what drives revenue and profitability for these programs, so we can build a program that’s good for their constituents, for the agency and for us long term.

2. Do the Math: One benefit of public sector programs is that you have a much better estimate of the loads and transaction volume you can expect compared with consumer programs, since you’re directly converting check volume to prepaid. That information can give you some certainty, but certainty around the loads doesn’t guarantee overall success, especially if you price yourself out of profitability and sustainability. For example, if you reduce fee income to be more competitive in the RFP process, you can’t simply make it up by boosting cardholder acquisition to increase loads. The state isn’t going to issue more unemployment benefits to help with your profitability.

3. Drive out Inefficiency: Despite competitive pressures, you can optimize your profitability by leveraging your assets and scale (if you have other large programs) and removing inefficiencies from your workflow. For us, leveraging all of our assets as a bank has been key. Our ATM and branch footprint—more than 15,800 ATMs and 4,800 financial centers nationwide—has been invaluable to us in providing cardholders access to their funds. While it’s not free for us to use this asset, it’s less expensive than surcharge-free ATM networks. We also have the benefit of scale from several large programs, but we’re also constantly monitoring the performance of our programs and looking for ways to be more efficient—this is a bank-wide effort, not just specific to the prepaid card business. But in this thin-margin business, everyone must work vigilantly to make sure their programs are sustainable.

A prepaid card is a great solution for governments and corporations that want to streamline their payments disbursement process. If you want to compete in this large-volume vertical, the keys outlined above can help drive sustainability, which is a good for you, your clients, recipients and the industry overall.

Alex Liu is responsible for Bank of America Merrill Lynch’s commercial and government prepaid card strategy, new product development, and ongoing product management and maintenance. He has 15 years of experience in prepaid. Prior to joining Bank of America Merrill Lynch, he was responsible for global prepaid strategy and products addressing financial inclusion at MasterCard. In 2009, he was named one of Paybefore’s 5 Rising Stars of Prepaid. He may be reached at: [email protected].

¹“Report to the Congress on Government-Administered General-Use Prepaid Cards,” Board of Governors of the Federal Reserve System (2014).

In Blogs & Viewpoints, prepaid and emerging payment professionals share their perspectives on the industry. Paybefore endeavors to present many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore.

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