Merchants, Your Customers Shop Around for the Best Price—Why Don’t You?

A Mercator Advisory Group Research Brief Sponsored by PULSE

M O D U L A R C A R D M A N AG E M E N T S O F T WA R E
F O R P R E PA I D P RO G R A M M A N AG E R S :

B U I L D I N G P R E PA I D P RO F I TA B I L I T Y

A Mercator Advisory Group Research Brief Sponsored by TAS Group

September 2018
 Modular Card Management Software for Prepaid Program Managers: Building Profit ability
A Mercator Advisory Group Research Brief Sponsored by TAS Group

Contents

Introduction................................................................................................................................... 3

U.S. Open-Loop Prepaid Card Market Forecast, 2017–2021............................................................ 4

Understanding the Prepaid Value Chain ........................................................................................ 5

Where the Revenues and Income Come From ................................................................................ 7

Open-Loop High and Low Performers ............................................................................................. 8

Cash Access Category ............................................................................................................................. 8

Money / Financial Services Cards………………………………………………………………………………………………………………8

Payroll and Benefits Category ................................................................................................................. 8

Payroll Cards…………………………………………………………………………………………………………………………………………….8

FSA/HSA Cards………………………………………………………………………………………………………………………………………….9.

Government Category ............................................................................................................................ 9

Open-Loop Temporary Assistance for Needy Families………………………………………………………………………………9

State Employment…………………………………………………………………………………………………………………………….………9

Conclusions ............................................................................................................................................ 9

References ................................................................................................................................... 10

© 2018 Mercator Advisory Group, Inc. 2

 Modular Card Management Software for Prepaid Program Managers: Building Profit ability
A Mercator Advisory Group Research Brief Sponsored by TAS Group

Introduction
The prepaid account/card value chain involves many players, and so margins are thin for any one player. For a
prepaid program manager, the goal is to gain as much revenue share as possible to support the program, increase
offerings, and keep shareholders happy. One way for program managers to control costs is by managing multiple
processes within the value chain, thereby retaining more of the revenue. Another is to structure the program using
as many variable-cost components as possible to counter the volatility of many prepaid segments, which can
change from year to year.

As shown in the taxonomy of prepaid card types in Figure 1, the prepaid market is split between closed-loop and
open-loop cards as well as a mixed market with both open-loop and closed-loop card types. Closed-loop cards are
usually issued by an entity other than a financial institution, do not carry a network brand, and are typically
accepted by only one merchant. For financial institutions, the real opportunities lie in open-loop cards—those that
carry one of the four major payment network brands—Visa, Mastercard, American Express, or Discover. Open-loop
cards connect to one of these major payment network rails to complete transactions.

Figure 1: Mercator Advisory Group’s taxonomy of prepaid cards: 11 categories, 26 market segments

• Cash Access • Government

– Travel – Social Security
– Money / Financial Services – Nutritional Assistance
– Open Gift – Temporary Assistance for Needy
Families (TANF)
– Remittance / P2P
•Open – Court-Ordered Payment
• Business Time and Expense
– Transit
•Closed – Events and Meetings
– Tolls
– Employee/Partner Incentives – State Unemployment
•Mixed
– Consumer Incentives • Insurance Casualty Claims
• Campus • Payroll and Benefits
• Digital Content – Payroll
• In-Store Gift Cards – Benefits
– In-Store Gift Cards – FSA / HSA
– Store Credits/Returns • Petroleum
• Utilities
• Telecom
– Prepaid Mobile Minutes and Data
– Prepaid Long Distance

Source: Mercator Advisory Group

© 2018 Mercator Advisory Group, Inc. 3

 Modular Card Management Software for Prepaid Program Managers: Building Profit ability
A Mercator Advisory Group Research Brief Sponsored by TAS Group

U.S. Open-Loop Prepaid Card Market Forecast, 2017–2021

The U.S. open-loop prepaid card market is made up of funds loaded into accounts associated with prepaid
payment devices. For the sake of convenience, the term “card” is used to refer to all prepaid types, but the
payment device may be a plastic card or some other form factor or a code. An example would be a wrist band
worn at a theme park or a mobile wallet. Prepaid cards differ from debit cards in that a debit card draws on an
account owned by the cardholder. They differ from credit cards in that they do not draw on a line of credit
established in the name of the cardholder.

Mercator Advisory Group issues annual forecasts for the U.S. open-loop prepaid card market (see Figure 2) and
closed-loop market. These forecasts are based on market knowledge derived from research performed by
Mercator since 2004 that includes input from issuers, processors, and program managers. However, even this
archive of more than a decade of historical data provides little guidance for forecasting the future of markets that
are growing rapidly. Prepaid categories have been experiencing double-digit growth for the last decade while
facing disruptive technology and services and historic new regulatory constraints. (New prepaid regulations in U.S.
that will take effect April 1, 2019 will affect person-to-person, or P2P, payments and extend Regulation E coverage
for error resolution to most open-loop cards.) These factors, combined with a dependence on funding sources
tightly coupled to the economy and consumer sentiment, mean that the prepaid market is volatile and varies from
one segment to another. Given the current robust economy, a potentially rising interest rate environment, and the
new regulations staring April 1, 2019, prepaid segments are likely to undergo dramatic shifts in 2018 and beyond.

Figure 2: Total amount loaded on open-loop prepaid cards in the United States, 2012–2021(f)
Amount Loaded onto Cards
($Billions)

$450 $427.8
$395.6
$400
$368.1

$350 $344.3
$323.8
$295.0
$300 $287.1
$263.7
$250 $242.8
$207.9
$200

$150

$100

$50

$-
2012 2013 2014 2015 2016 2017 2018(f) 2019(f) 2020(f) 2021(f)

Source: Mercator Advisory Group

© 2018 Mercator Advisory Group, Inc. 4

 Modular Card Management Software for Prepaid Program Managers: Building Profit ability
A Mercator Advisory Group Research Brief Sponsored by TAS Group

In Figure 2, the load values for 2012–2017 are derived from Mercator’s annual research, while the load values for
2018–2021 represent Mercator’s forecast for all market segments that use open-loop cards. Total open-loop loads
in the U.S. grew 10% in 2017, to $323 billion. Mercator forecasts that total open-loop loads will have a compound
annual growth rate of 10% through 2021, when they will total $428 billion.

Understanding the Prepaid Value Chain

In addition to the cardholders, seven major players are a part of operating an open-loop prepaid card program.
They are the issuing bank (the issuer/BIN sponsor), the issuing processor, the payment networks (Visa, Mastercard,
Discover, and American Express), the program managers, the service providers, the card distributors, and the
acquisition points. Figure 3 shows how these players interact in the prepaid value chain.

Figure 3: Market structure of the basic prepaid value chain model

Meta Bank
Wal-Mart Help desk First American State
Simon Malls Rewards Bank of Internet (BOFI)
ACE Cash Express Remote deposit capture The Bancorp Bank
Verizon Rebates Bill pay Citi
Dollar Store Reload JPMorganChase
etc. etc. Green Dot
Metropolitan Bank

Acquisition Program Service Issuing Issuing Payment Merchant

Cardholder Distributor
Point Manager Providers Processor Bank Network Processor

Retail Outlets Simon Malls First Data Amex

Simon Malls Green Dot Fidelity Discover
Websites ADP eCommLink MasterCard
Mail JPMorgan (Gov.) FSV NYCE
etc. Netspend/TSYS Fifth Third STAR
PSCU Visa

Source: Mercator Advisory Group

Financial institutions provide the connections that allow transactions and money to flow between the various
participants in the value chain. The chain may be composed of fewer players if one company performs multiple
functions (issuer/program manager, program manager/issuing processor). Having the right partners is critical to
the success of any prepaid program. Having experienced partners can shorten the time it takes to get a program
up and running and typically reduces costs.

© 2018 Mercator Advisory Group, Inc. 5

 Modular Card Management Software for Prepaid Program Managers: Building Profit ability
A Mercator Advisory Group Research Brief Sponsored by TAS Group

Figure 3 is a simple diagram, but the prepaid value chain is extremely complex because it involves so many
partners. The issuing bank works with an issuing processor but also with other service providers to add ancillary
services to its product. Partnerships with other companies may be needed to provide services such as ATM access
and card-reloading. Banks or credit unions that are issuers need to vet and manage all partners and be aware of
the risks involved in each part of the business and aware that the actions of their partners may affect them.
Typically, the prepaid program manager sets the fees and controls the program, but the financial institution must
manage these connections.

Figure 4 represents the prepaid value chain reconfigured so that the program manager and the issuing processor
are one segment. Combining these segments can be accomplished by a program manager using modular, cloud-
based software as a service (SaaS). Such software is typically offered with flexible licensing terms that can
dramatically reduce per-transaction costs and set cost minimum volume requirements as well as ongoing costs.

Figure 4: Market structure of the basic prepaid value chain model with modular licensed SaaS

Wal-Mart Help desk Meta Bank

ACE Cash Express Rewards First American State
Verizon Rebates Remote deposit Bank of Internet (BOFI)
Dollar Store capture The Bancorp Bank
etc. Bill pay JPMorganChase
Reload Green Dot
Issuing
etc. Metropolitan Bank
Bank

Bank Supervisory Functions

Program
Acquisition Service Manager Merchant
Cardholder Distributor with Payment
Point Providers Network Processor
Processor
Platform

Retail Outlets TAS Amex

Simon Malls Discover
Websites MasterCard
Mail NYCE
etc. STAR
Visa

Source: Mercator Advisory Group

A modular card payment software processing platform (SaaS) connects the issuing bank and payment networks,
basically turning the program manager into a processor, “a program processor.” With this method of processing,
transaction costs with large guaranteed minimums are avoided and control remains with the program manager.
According to TAS Group, “TAS Group has a competitive edge due to its vast experience and expertise in modern
software architecture that is robust, modular, scalable, cloud-ready, easy to customize and integrate with other
functionality through the use of APIs. This approach decouples the volumes from the fees and effectively gives

© 2018 Mercator Advisory Group, Inc. 6

 Modular Card Management Software for Prepaid Program Managers: Building Profit ability
A Mercator Advisory Group Research Brief Sponsored by TAS Group

money back to the program manager.”i For large issuers/processors/program managers, this structure can result in
cost reductions estimated to be around 40%. Small and medium program managers will potentially see even
greater cost reductions. This means increased revenue generation for program managers of any size.

Where the Revenues and Income Come From

Prepaid is a volume-based business because there are so many players in the value chain, which equates to small
margins, as previously noted. Typically, all the revenue of a prepaid card program flows through the issuing bank,
but the actual net income earned by the issuer is not a simple matter of revenues minus expenses. It is customary
in the prepaid industry for the sponsoring/issuing bank to collect all cardholder fees and interchange amounts and
net the network and bank fees against these revenue items, providing the program manager with the net amount
on a monthly basis.

The revenue equation for an issuer/BIN sponsor (which is illustrated in Figure 5) is as follows:

Revenue (cardholder fees, interchange, float, etc.) – pass-through expenses – fees charged to the program manager =
net value returned (or amount charged) to the program manager on a monthly basis by the issuing bank.

Figure 5: Income equation for issuer/BIN sponsors

01
Money Collected from All Sources
Cardholder fees
Interchange
Float on balances
Network fees from program manager/processor Stage 1
Transaction fee from program manager
Implementation fee from program manager
New program fee from program manager
Monthly program fee from program manager
02 Stage 2
Fund Payouts to Partners
Cardholder fees to the program manager
Interchange to the program manager
Float often shared with the program manager Stage 3
Network fees to the networks/processor

03BIN Sponsor Income

Transaction fee from program manager
Implementation fee from program manager
New program fee from program manager
Monthly program fee from program manager

Source: Mercator Advisory Group

© 2018 Mercator Advisory Group, Inc. 7

 Modular Card Management Software for Prepaid Program Managers: Building Profit ability
A Mercator Advisory Group Research Brief Sponsored by TAS Group

Open-Loop Prepaid High and Low Performers

Based on the performance of the segment(s) a prepaid plan offers, it is important to set up the costs to be as
variable as possible, meaning costs scale up with growth and cost scale down with reductions. Presented below are
Mercator Advisory Group’s market forecasts for some important prepaid card segments.

Cash Access Category

The Cash Access category measures the loads placed by U.S. consumers onto open-loop prepaid products that they
purchase as a replacement for cash. This category has four segments: Travel, Money / Financial Services, Open-
Loop Gift, and Remittance/Person-to-Person Cards.

Money / Financial Services Cards

The Money / Financial Services segment of the Cash Access category includes general purpose reloadable (GPR)
cards, which are not marketed or otherwise dedicated for a specific use such as travel. Examples are the GPR cards
offered by PayPal, Walmart, American Express, and Green Dot Inc. Although the GPR segment is mature, it is also
now a mainstream alternative financial service product available through many outlets, including online and at
retail locations, check cashing services, and banks. This segment continues to advance as it seeks its place as an
ongoing product in the financial industry. The Money / Financial Services segment also includes tax refund cards
such as offered by H&R Block and other general spending cards like teen cards.

Mercator Advisory Group measures load value for this segment using reporting by processors, issuers, and
program managers combined with the filings of public program managers like Green Dot and Netspend, a division
of TSYS. Loads in this segment grew by 12% in 2017, to $107.9 billion with forecasted growth in loads in this
segment with a compound annual growth rate of 9% through 2021, when Mercator Advisory Group forecasts that
loads will total $141.5 billion.

Payroll and Benefits Category

This category includes the Payroll, Benefits, and Flexible Spending Accounts/Health Savings Account segments. It
measures pretax plans that allow employers to set aside tax-deferred funds for employees’ various child care
expenses. The category also includes 401(k) loans disbursed through prepaid cards.

Payroll Cards
The Payroll segment of the Payroll and Benefits category measures wages paid to employees and 1099 workers
using an employer-provided prepaid card. It does not include Money/Financial Services cards purchased directly by
consumers and used for direct deposit of paychecks. This segment is the second largest in the U.S. open-loop
prepaid market after the Money/Financial Services. Loads in this segment grew 8% to $40.3 billion. Mercator
Advisory Group forecasts that loads in this segment will have a compound annual growth rate of 8% through 2021,
when they will reach $50.9 billion.

© 2018 Mercator Advisory Group, Inc. 8

 Modular Card Management Software for Prepaid Program Managers: Building Profit ability
A Mercator Advisory Group Research Brief Sponsored by TAS Group

FSA/HSA Cards
Dollars loaded onto prepaid cards as part of flexible spending and health savings account programs are measured
in this segment. In 2017, loads in this segment grew at 65%, to $36.2 billion, indicating the continued adoption of
high-deductible healthcare programs by employers. Mercator Advisory Group does not attempt to estimate the
total dollars in health savings accounts or flexible spend plans nationwide because many Health Savings Accounts
are truly debit accounts, not owned by the program manager, thus creating noise in this data. Mercator Advisory
Group anticipates a CAGR of 35% through 2021 for this segment, with loads forecast to total $88.4 billion.

Government Category
The open-loop Government category measures loads primarily by government agencies (federal, state, and local)
in the United States onto prepaid cards in the Social Security, Temporary Assistance for Needy Families (TANF),
Court-Ordered Payments, and State Unemployment Cards. Although both open-loop and closed-loop cards are
used in many of these segments, only open-loop cards are the focus here.

Open-Loop Temporary Assistance for Needy Families

The TANF segment measures the loads by state governments onto cards for cash assistance programs that help the
poor. Rapid growth has occurred in this segment as states have adopted open-loop cards in place of closed-loop
cards tied into the government’s electronic benefits transfer (EBT) system, which also allowed for withdrawals
from automated teller machines. A report by the Federal Reserve states that 2017 loads in this segment were $6.4
billion, which is down 25% from 2016.iii Based on government projections of the number of recipients, Mercator
Advisory Group forecasts that loads will decline at a compound annual rate of -11% through 2021. Mercator also
believes that this segment will not be a priority in the federal budget and is likely to decline from reduced funding.

State Unemployment
The State Unemployment segment measures loads onto cards for distributing unemployment benefits. At least 42
states have adopted prepaid cards as a way to distribute benefits to those recipients who don’t have bank
accounts or do not want their benefits directly deposited into their bank accounts. Loads in this segment are from
the same Federal Reserve report cited above. Mercator Advisory Group expects loads on the unemployment
segment to continue to decline, with a CAGR of -9% through 2021, when loads will total $15.3 billion.

Conclusions
The open-loop prepaid card market has its ups and downs, as shown by the benchmark results presented in this
research brief. The disruption in segments is an ongoing concern for program managers as their revenue is directly
related to economic conditions causing segments to vary from year to year. A cloud-based platform has benefits
whether the market is hot or not. It allows continued scalability without additional cost when market segments are
hot. And it enables the program manager to cut production and processing back to whatever the current
environment demands when they are not. The key to profitability is the ability to increase revenue when the
economy is hot as well as cut costs and hence keep revenue on par with activity when the segment(s) slow(s). If
you are a program manager, it may be time to rethink who is in your prepaid value chain.

© 2018 Mercator Advisory Group, Inc. 9

 Modular Card Management Software for Prepaid Program Managers: Building Profit ability
A Mercator Advisory Group Research Brief Sponsored by TAS Group

References
Related Research
15th Annual U.S. Open-Loop Prepaid Cards Market Forecasts, 2017–2021 (September 2018)
14th Annual U.S. Closed-Loop Prepaid Cards Market Forecasts, 2016–2020 (November 2017)
BIN Sponsorship of Prepaid Card Programs: Benefits for Financial Institutions (April 2018)

Endnotes
i
TAS Group website, www.tasgroup.us.com
ii
Devenir Research, 2016 Year-end HSA Market Statistics and trends,
http://devenir.com/health-savings-account-assets-22-2017
iii
Report to the Congress on Government-Administered General-Use Prepaid Cards, July 2017,
https://www.federalreserve.gov/publications/files/government-prepaid-report-201707.pdf

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Copyright 2018, Mercator Advisory Group, Inc. Reproduction without written permission is completely forbidden.

© 2018 Mercator Advisory Group, Inc. 10

 Modular Card Management Software for Prepaid Program Managers: Building Profit ability
A Mercator Advisory Group Research Brief Sponsored by TAS Group

About Mercator Advisory Group

Mercator Advisory Group is the leading independent research and advisory services firm exclusively focused on the
payments and banking industries. We deliver pragmatic and timely research and advice designed to help our
clients uncover the most lucrative opportunities to maximize revenue growth and contain costs. Our clients range
from the world's largest payment issuers, acquirers, processors, merchants, and associations to leading technology
providers and investors. Advisory services include Credit, Debit and Alternative Products, Prepaid, Merchant
Services, Commercial and Enterprise Payments, Emerging Technologies, and Global Payments practices, which
provide research documents and advice. Primary data services include the CustomerMonitor Survey Series, which
report and analyze data collected in our biannual consumer surveys, as well as the Customer Merchant Experience
Survey and the Small Business Payments and Banking Survey. Consulting services enable clients to gain actionable
insights, implement more effective strategies, and accelerate go-to-market plans; offerings include tailored
project-based expertise, customized primary research, go-to-market collateral, market sizing, competitive
intelligence, and payments industry training. Mercator Advisory Group is also the publisher of the online payments
and banking news and information portal PaymentsJournal.com. Visit www.mercatoradvisorygroup.com.

About TAS Group

TAS Group is a market leader in payments technology, delivering innovative software solutions for cards and
payment systems for over 35 years. With a global reach and offices in 7 countries spanning Europe, North and
Latin America, customers around the world rely on our advanced technology and secure, flexible and seamless
payment solutions. Our systems handle millions of financial messages each day for the European Central Bank and
over 100 million cards are managed on our platforms – also used by one of the largest issuers of prepaid cards in
Europe.

cashless 3.0® is the innovative processing platform that empowers clients with a one-stop-solution for card
issuance, transaction processing, acquiring, and fraud management. The cloud-ready platform with its modular
design and open APIs, integrates seamlessly with legacy systems and is scalable and flexible to fit business needs as
payments evolve.

© 2018 Mercator Advisory Group, Inc. 11