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Concept paper on Prepaid Visa Debit Cards.

Concept paper on Prepaid Visa Debit Cards.

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    Prepaid Debit Card Concept Paper Prepaid Debit Card Concept Paper Document Transcript

    • Introducing the PrepaidVISA/MasterCard Debit Card In Collaboration with
    • ContentsContents...................................................................................................................21.0 Introduction: Definition .............................................................................3 1.1 Usage of Prepaid Visa/MasterCard Debit Card................................... 4 1.2 Advantages of Prepaid Visa/MasterCard Debit Card......................... 5 1.3 Disadvantages:......................................................................................... 72.0 Trends and Growth .....................................................................................83.0 Example: ........................................................................................................94.0 End-to-End Value Proposition .................................................................105.0 In-house System Requirements for Prepaid ..........................................126.0 Product Features.........................................................................................137.0 Business Model ..........................................................................................158.0 Conclusion – Cashless Society Vision ....................................................17 2
    • 1.0 Introduction: DefinitionThe Prepaid Visa/MasterCard Debit Card (also known as a bankcard or check card or reloadable debit cards or reloadable prepaid cards)is a plastic card which provides an alternative payment method to cash whenmaking purchases at all merchants showing the VISA/MasterCard logo. Thepayer loads funds to the cardholders card account also allow for the deliveryof international payments without the delays and fees associated withinternational checks and bank transfers. Functionally, the plastic card can becalled an electronic check, as the funds are withdrawn directly from eitherthe bank account (often referred to as a check card), or from the remainingbalance on the card. In some cases, the cards are designed for use on theInternet, and so there is no physical card.The use of debit cards has become widespread in the developed world (e.g.United States of America, United Kingdom) and developing world (e.g.Malaysia, Pakistan, Philippines, Vietnam, Kenya, Nigeria, South Africa) andhas overtaken the cheque, and in some instances cash transactions byvolume. Like credit cards, debit cards are used widely for telephone andInternet purchases as well. Debit cards can also allow for instant withdrawal ofcash, acting as the ATM Card for withdrawing cash and as a chequeguarantee card. Merchants can also offer "cashback"/"cashout" facilities tocustomers, where a customer can withdraw cash along with their purchase. 3
    • 1.1 Usage of Prepaid Visa/MasterCard Debit CardThe prepaid debit card has varied potential uses which have emerged indifferent parts of the world which can be broadly categorized as: • Consumer initiated — Cards that people purchase for their own use or the use of others, including public transport, road tolls and parking, gift cards or youth spending cards. Pre-paid mobile accounts also fall into this category; • Business initiated — usually payroll cards that act as a replacement for cash and cheques, particularly for employees without bank accounts. Expense accounts, bonuses and corporate gifts can also work in a pre-paid card format; • Government initiated — to reduce opportunities for fraud and to streamline the issuance of benefits, many governments are starting to issue pre-paid cards. 4
    • 1.2 Advantages of Prepaid Visa/MasterCard Debit CardAs debit cards have become widespread in both the developed anddeveloping world numerous advantages and disadvantages have beenrevealed to the consumer and retailer alike. Advantages are as follows (most of them applying to some countries, but the countries to which they apply are unspecified): • A consumer who is not credit worthy and may find it difficult or impossible to obtain a credit card can more easily obtain a debit card, allowing him/her to make plastic transactions. • Use of a debit card is limited to the existing funds in the account to which it is linked, thereby preventing the consumer from racking up debt as a result of its use, or being charged interest, late fees or fees exclusive to credit cards. • Brand Recognition for the Issuing bank • For most transactions, a check card can be used to avoid check writing altogether. Check cards debit funds from the users account on the spot, thereby finalizing the transaction at the time of purchase, and bypassing the requirement to pay a credit card bill at a later date, or to write an insecure check containing the account holders personal information. • Like credit cards, debit cards are accepted by merchants with less identification and scrutiny than personal checks, thereby making transactions quicker and less intrusive. Unlike personal checks, merchants generally do not believe that a payment via a debit card may be later dishonored. 5
    • • Unlike a credit card, which charges higher fees and interest rates when a cash advance is obtained, a debit card may be used to obtain cash from an ATM or a PIN-based transaction at no extra charge, other than a foreign ATM fee. 6
    • 1.3 Disadvantages: • Some banks are now charging over-limit fees or non-sufficient funds fees based upon pre-authorizations, and even attempted but refused transactions by the merchant (some of which may not even be known by the client). • Many merchants mistakenly believe that amounts owed can be "taken" from a customers account after a debit card (or number) has been presented, without agreement as to date, payee name, amount and currency, thus causing penalty fees for overdrafts, over-the-limit, amounts not available causing further rejections or overdrafts, and rejected transactions by some banks. • In some countries debit cards offer lower levels of security protection than credit cards Theft of the users PIN using skimming devices can be accomplished much easier with a PIN input than with a signature- based credit transaction. However, theft of users PIN codes using skimming devices can be equally easily accomplished with a debit transaction PIN input, as with a credit transaction PIN input, and theft using a signature-based credit transaction is equally easy as theft using a signature-based debit transaction. • When a transaction is made using a credit card, the banks money is being spent, and therefore, the bank has a vested interest in claiming its money where there is fraud or a dispute. The bank may fight to void the charges of a consumer who is dissatisfied with a purchase, or who has otherwise been treated unfairly by the merchant. But when a debit purchase is made, the consumer has spent his/her own money, and the bank has little if any motivation to collect the funds. 7
    • 2.0 Trends and GrowthThe card payment industry is undergoing tremendous growth in the debitcard and prepaid card segment worldwide. The trends are hard to ignore, ananalysis based on the VISA platform suggests that: • In 2003 Visa International reported that over $1.48 trillion was spent on debit cards, outperforming credit cards for the first time. For the year ending December 2005: • Visa regions around the world also saw double-digit growth in total debit and prepaid sales and cash volumes: -Visa Asia Pacific reported US$116 billion in transaction volume, a 49 per cent increase over 2004. • Visa CEMEA (Central and Eastern Europe, Middle East, Africa) reported US$170 billion, a 40 per cent increase. • Visa Europe reported US$1 trillion, a 18 per cent increase. • Visa LAC (Latin America and the Caribbean) reported US$236 billion, a 19 per cent increase. • Visa USA reported US$601 billion, a 16 per cent increase.What drives this change are the consumers and merchants. Consumers wantconvenience, security; merchants want the extra sales and lower-costtransactions. This win-win combination has driven a transformation of the cardpayment industry as we know it today. These trends presents an opportunefor Zimbabwean banks alongside the major card networks, to adopt a“Cashless Society Vision” in a bid to provide banking solutions for as muchpopulation as possible, maximising on growth, cost-efficiency, and security. 8
    • 3.0 Example:1. User swipes card and enters PIN at the point of sale device.2. The request is encrypted and then goes to the acquirer switch provider (that Big Box Audio uses).3. The acquirer switch examines the BIN and routes the transaction to Friendly Bank’s switch (the issuing switch).4. The issuing switch verifies that the PIN is correct and accesses Friendly Bank’s host computer to determine if there is enough money in the account for the debit transaction.5. The issuing switch then sends notification back to the acquirer switch indicating whether the transaction was successful.6. The acquiring switch then notifies the point of sale device at Big Box Audio whether the transaction was successful. 9
    • 4.0 End-to-End Value PropositionThe basic model behind these prepaid card mechanisms includes somecombination of retail distributors, consumers, merchants, and prepaid cardprovider. Each has their own role to play in the total end-to-end system andtheir own value proposition. • Retail Distributors. Retail outlets and convenience stores are recruited and signed up to engage consumers, distribute cards, and collect funds from consumers for payment to the prepaid card provider. Retail distributors keep a commission on the collected funds. • Consumers. Consumers are recruited into the payment system through online advertising, by online merchants, in person through retail card displays, and indirectly through strategic partnerships and alliances. Consumers benefit from the anonymity associated with prepaid cards, if purchased with cash, and generally participate in the payment system at face value. Prepaid cards may also be presented as gifts to friends or family members. • Merchants. Online merchants are recruited based on their desire to reach a new untapped audience of consumers that are not credit/debit card enabled or willing. Merchants are also drawn towards the financial benefits of prepaid funds without the risk of downstream chargebacks. Depending on the systems provider, there may also be additional incentives in the form of low transaction fees or affiliate fees for capturing new online consumers. Merchants are paid on a regular basis by the prepaid card provider for goods sold using prepaid cards. In some cases, brick and mortar merchants may use the same prepaid cards, and this can be used to enhance consumer appeal as well as support click and mortar retail strategies. • Prepaid Card Provider/Bank. The prepaid card provider takes responsibility for the deployment and ramp up of the overall system in the marketplace, acts as the payments processing hub for all transactions, and financially benefits from the control of the whole 10
    • system. The clear objective of all prepaid card providers is to establish themselves as the preferred alternative payment provider on the Internet—i.e., the payment provider that is always offered to consumers alongside major card brands such as Visa, MasterCard, American Express, and others.Not all prepaid card schemes follow this exact model, but all embrace somevariations of these participants, motivations and goals. 11
    • 5.0 In-house System Requirements for Prepaid CardAt a minimum a Bank will require the following to implement a prepaid debitcard program. • A computer host that can be accessed securely from a switch provider (e.g. Virtual Private Network). • Retail banking software (e.g. Portfolio Plus Retail Banking Module). • Web banking software with retail capabilities (e.g. Portfolio Plus Portcullis). • A web server and requisite firewalls. • Retail banking software and database. • A switch provider partner. • A BIN (either yours or a BIN from another financial institution). • Operator(s) (somebody has to create and manage the cards). • Cards (your switch provider can usually supply these for you). • Marketing communications effort: you will need to communicate the features of your debit cards to your existing (or new) customers. • Project management: you will need to create a project plan with milestone and test plans • Disaster recovery plan. 12
    • 6.0 Product FeaturesThe prepaid system has a number of features that may encourage fastercustomer adoption: Maybank Prepaid Card – Issued by a Malaysia Bank• Customers using the prepaid system do not need to have bank or credit card accounts;• There is no need to transmit any details of bank or credit card accounts across open networks which may be vulnerable to interception;• Users do not have to invest in any kind of technology or to download special software;• Prepaid scratch cards work in the same way as telephony cards thus cutting the customer learning curve; This payment mechanism can potentially be used on a range of platforms, including PCs, mobile phones and other hand-held devices, and set-top boxes;• The system is well suited for low-value or micro-payments: micro- payments are payments of $5 or less, such as for downloading digitized content including news items, articles, academic papers, videos, MP3, software, games, and pictures;• As long as the system can support payments in different currencies, cross- border transactions will be enabled. Thus, after buying your card in Nairobi 13
    • for Kenya shillings, you can buy a product from a merchant based in South Africa who may then retain the proceeds of the sale in his or her online account or withdraw the cash in the form of South African rands, United States Dollars. Backing the system with major convertible currencies, such as the U.S. dollar or the Euro, appears to be one way to enable cross- border transactions;• The system does not necessarily have to be restricted to scratch cards. Prepaid accounts may also be created via the Internet, using electronic banking, direct debiting, credit cards, or even cheques. This will enable potential users anywhere around the world to use the system, giving businesses in Africa the opportunity to tap the global marketplace. 14
    • 7.0 Business ModelThere are a number of potential revenue sources from merchants such asaccount activation fees, account maintenance fees, transaction fees, andperiodic settlement fees. In addition, large merchants may be willing to pay foron-card advertising or retail display co-branding. Branding can also beextended to the Web pages used for activating cards and checking accountbalances.Payment system providers will enjoy float from the prepaid value they hold onaccount between the time of card activation and merchant settlement.Although “breakage”, the funds held on account that are never spent oraccessed, is considerable, it is doubtful that prepaid card providers can retainthose funds indefinitely without being claimed as abandoned property rightfullybelonging to local government. Payment system providers with strong brands,particularly those with existing terrestrial-world brands, will also be able to levyupfront fees on consumers in exchange for the comfort and trust associatedwith the brand.On the expense side, the most significant line item is the cost to acquire fundsthrough the retail distribution channel. In addition to the cost to produce—ormore typically acquire—the prepaid cards, there are also costs to physicallydistribute the cards out to POS. More problematically, the hidden cost in thedistribution channel is the 8-10% commission retained by the retailer. Aprepaid card provider/Bank who nets over 90% of the face value of the card isdoing exceedingly well.In aggregate, physical card costs, distribution costs, and the retailercommission take a sizeable piece of the inbound cash flow. Yes, these costscan be somewhat offset with the revenue sources mentioned above, but theprepaid card providers are still forced to charge high transaction fees, farabove standard 2- 3% credit card transaction fees if they are to have aprofitable business. This is hard to do with merchants who are constantly 15
    • trying to lower their payment processing costs. Prepaid card providers willhave to bring more incremental consumers and more transactions tomerchants to justify the increased costs associated with retail distributionthrough brick and mortar distributors. 16
    • 8.0 Conclusion – Cashless Society VisionN-Development and ProgramDNA are working in partnership in introducing aCashless Vision Society to the Zimbabwean Nation. We believe that the worldis rapidly moving into a cashless environment and the internet will be one ofthe natural platforms and catalyst for the future of payments. In this day in thedeveloped world, cash is being handled in micro payment businesses andfinancial institutions anywhere from 5-9 times before the physical moneyactually reach its final destination. The cost of handling cash in someindustries sometimes is more than the value of the cash itself. A Cashlesssociety is one where there is no movement of physical cash to performcommerce transactions. Nations such as Singapore have a stated aspirationto be a cashless vision by the end of 2009, but where cash transactions stillaccount for more than 60% of the transactions today. The vision is to usemultiple devices to transact with different sellers when making a purchase.This is already happening to varying degrees when paying for highway tolls,parking, gas/petrol, groceries and general transportation. In Asia, Japan,Hong Kong, Korea and Singapore are in the forefront of emergingtechnologies that support a cashless society.However as the pre-paid card concept matures, and becomes just asentrenched as debit and credit accounts have in many countries, there is nodoubt that this concept brings in new opportunities for banks and consumersin Zimbabwe. The Prepaid card can be in great demand considering thatbusinesses and individuals that do not qualify to have bank accounts couldleverage more making it possible for Bank Issuers to tap into untappedmarkets. The total size of this opportunity is hard to estimate.By monitoring what is happening with pre-paid in other parts of the world, andworking closely with the card networks, there is a chance to extendZimbabwean Banks traditional range of financial services to governments, thecorporate sector and consumers. And by keeping a close eye on pre-paiddevelopments in other industries, there may be opportunities to use the bank’s 17
    • channels, card issuance and management expertise to form new partnershipsand branding opportunities.For More Details about the Prepaid Debit Card System:Email: n.development@nworksgroup.biz 18