Turning Convenience Stores into Banks: Greendot, Incomm, Visa, MasterCard Race to Build Reload Networks for Prepaid Cards

Implications:

The Greendot service allows prepaid card holders to pay merchants (for example Safeway) anywhere from $2 to $4.95 to “load” or “reload” cash to their card. The alliance announced is likely a preemptive competitive response to Visa and soon MasterCard who are have recently begun to offer a similar facility directly. Visa and/or MasterCard will likely drive prices downward to invite larger more frequent card loads and usage.

The creation of the referenced load networks may be an advanced step towards the creation of an entirely new platform for the distribution of financial services to middle and low income segments of the population around the world. This latest announcement is evidence of a growing trend that may represent a threat to established financial institutions and an opportunity for upstarts.

Analysis:

Essentially these "reload" networks, "Greendot" in the case of the newly announced Incomm /Next Estate alliance and "ReadyLink" in the case of Visa, allow participating retailers to accept deposits (they are not considered "deposits" by regulators but in this case the differences between a “deposit” and a “load” would appear to be mainly semantic) to re-loadable prepaid Visa or MasterCards.

Reload networks appear to be advancing a clearly established trend that is beginning to impinge upon the role traditionally played by financial institutions. Other markers delineating the trend have included:

• the advancement of prepaid cards as an alternative to pay checks;
• payroll direct deposit services to cards;
• recurring and one-off online bill payments via cards;
• automatic debits and credits;
• FDIC deposit insurance for card balances;
• the adoption of reloadable card products for the disbursement of government benefits such as social assistance payments; and,
• the development of card-to-card transfer facilities that allow cross border transfers of funds between card holders at a fraction of the cost of traditional wire payment mechanisms.

The demand for these cards is greatest among those classified as either “underbanked” (those who are deemed to be underserved by the banks) or unbanked (those without a checking account). These two groups taken together or individually represent a large proportion of the population globally. In the US estimates range from 11 – 30 million unbanked and 20 – 40 million unbanked. It could be argued that these customers have not traditionally been profitable for banks in which case prepaid cards are really a boon to the global economy that in aggregate actually increase bank deposits on the wholesale level, increase money supply and reduce the cost of cash management globally.