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The Unmet Innovation in Prepaid

Adam Rust's picture

Posted November 6, 2012

Given that prepaid debit cards have changed a lot in recent years and given that there is an expectation that they will continue to change rapidly in the future, one of the most important conversations about the product tends to be around future innovation. The questions of how and if credit will be adopted on prepaid is most closely linked to innovation, but there are better blue oceans to explore. In the last few years, no innovation has disrupted more

markets than the "share." Likewise, no prepaid company currently does much of anything in social media save for hiring a few communications staff to manage their Facebook page and their twitter feed.

For some time, innovation has been a buzzword in consumer finance.

Sometimes "innovation" leads to advancements. In prepaid, the innovation of remote deposit through smart phones will give those consumers the opportunity to avoid paying fees to cash checks and buy loads.

Other times, innovation goes spectacularly wrong. Under the banner of innovation, subprime mortgage companies created interest-only, low-doc, no-doc, alt-a, 2-28 ARMs, 3-27 ARMs and "four ways to pay" mortgages.

Even if you include remote deposit, one innovation outshines all others in prepaid. Small-dollar credit not only divides people - it also provokes passionate arguments. Consumer advocates focused their attention on the i-advance. So did many program managers. Interestingly enough, there was dissension on the topic within both those groups: some non-profits have developed research and policy materials to support "small-dollar credit" and some program managers have insisted that they will never offer credit on their prepaid cards.

Many companies see so much opportunity in gaining margin from small-dollar credit. But even as the i-advance was shuttered, new products are emerging. It is truly a whack-a-mole scenario. Tandem Money invented the integrated loan. SureCashXtra built a relationship with payment processors to interrupt an overdraft and then send transfer deposits in increments of twenty dollars to a consumer-enrolled prepaid account. It is likely that we will see a non-bank refund anticipation loan which could conceivably be offered in tax prep stores and loaded on to a bank-issued prepaid card.

Social Media is the Missing Innovation

To me, prepaid companies are missing a big opportunity to gain market share because they are not finding a means to integrate social media in to their platforms. Mark Zuckerberg famously said that all products will be social. He has even put some teeth into the scale of that claim: he says that in ten years, people will share one thousand times more information than they do today.

I don't think that I am the first to see this gap, but at this point only Green Dot seems to have a jump on bringing social media in to prepaid. Green Dot acquired Loopt for $43.4 million in March. In their most recent call to investors, Green Dot highlighted that they have been putting some of their massive pile of cash in to building out the Loopt/Green Dot product.

Steve Streit: The investments we've made in platform plays have been recent, say in the last year, including the bank and so forth, and Loopt. And we'll have to see how those contribute.

John Keatley: Some of those investments include acquiring Loopt, which is really an integral part of our new product development strategy.

Loopt let its customers use the GPS on their smart phone to learn about shopping discounts available near their immediate location.

I think Green Dot could be on the way to taking a lot of moat with Loopt. I think the key to really executing on a moat would be to create a unique set of shopping opportunities available only to Green Dot cardholders. If the use of Loopt is merely to facilitate information for deals that anyone else can get, then they have little to offer. American Express already lets its prepaid cardholders sync their cards with FourSquare. Any PM could negotiate that with FourSquare with just a few phone calls.

That said, they should not be the only PM looking to get into social. I do think Zuckerberg is right: social is the innovation.