Don’t Give up on Teen Cards

 

Components

Trae Cassell

 

The disastrous Kardashian Kard notwithstanding, it’s possible to market a successful prepaid card for teens. The key is a proper understanding of functionality, image, and fees.

 

The number of companies hoping to capitalize on the popularity of the teen prepaid debit card market is growing rapidly. However, failing to understand the prepaid card industry, as well as the pros and cons for both the teen user and the issuing organization, can quickly spell disaster. Look no further than the highly public implosion of the Kardashian Kard.

The onslaught of negative publicity about high fees and questions about their legality by Connecticut’s attorney general drove the Kardashian sisters to terminate their relationship with the card. The loss of its celebrity endorsement and poor sales from the outset ultimately forced the issuer to pull the controversial card less than a month after it debuted.

Yet neither the furor generated by the Kard debacle nor criticism from consumer-advocacy groups has damped the enthusiasm for prepaid cards for teens and young adults.

According to the Prepaid Market Sizing Report, an independent study conducted by The Boston Consulting Group on behalf of MasterCard, the total value of the branded prepaid card opportunity in the U.S. will be in excess of $440 billion by 2017. That is nearly quadruple its estimated 2009 value of $120.2 billion.

Further, Mercator Advisory Group expects the total dollar amount loaded onto all prepaid cards to hit $672 billion by 2013—more than double the amount loaded in 2009.

Staking a successful claim in the teen prepaid market requires more than appealing card designs and celebrity endorsements, however. It requires leveraging the benefits teen users can realize from the cards, while mitigating the negatives through proper messaging, ease of use, and appropriately designed fee structures.

Leveraging the Pros

To succeed in marketing prepaid cards to teens, issuers must strike a careful balance that emphasizes the positives while acknowledging the potential pitfalls.

One of the most commonly cited benefits of providing teens with prepaid cards is that they are a great way for parents to teach their kids financial responsibility. But everyone has a different opinion on this issue. Clearly, teens are highly impressionable. If not properly monitored, the money on their cards will disappear fast.

However, if properly monitored, a teen card can be a very valuable tool in getting kids started in the financial system. This is because of a number of built-in safety features.

First, prepaid cards allow teens to develop good spending habits without exposing them to the penalties incurred from being irresponsible with money in the traditional banking system. Unlike bank accounts or demand-deposit accounts (DDAs), network-branded prepaid cards do not come with the risk of overdraft or credit-reporting agencies. They do not allow teens to spend more than they have, so they can’t get into the trouble they could with a traditional account.

Many teen cards also offer parental controls that are not available to cash holders and that are greatly enhanced from what most banks offer. If properly administered by the parent, teen prepaid cards are among the most effective entry-level financial products available today.

They can also protect parents while their teen learns valuable financial lessons. Because parents must cosign for teens to get a bank account, they are liable for fees and charges associated with overdrafts and misuse. When parents are unable to cover the mistakes their teens make, the result is an unpleasant and costly experience. Prepaid cards do not charge an overdraft fee, thus eliminating a huge pitfall.

Further, because many prepaid cards have budgeting tools built in, they offer a great way to control teen spending and teach proper money management. This creates a great coaching opportunity for parents. Finally, as the industry grows and develops, competition has created cards that offer tremendous value propositions, such as college savings accounts and discounts at popular stores.

Beyond life lessons, prepaid cards actually fit the lifestyle of today’s teens and tomorrow’s adults, many of whom may never see the inside of a bank. The reality is that paper is going away, and network-branded prepaid cards are facilitating its disappearance.

At the same time, with almost all vendors accepting plastic for payment, the need for cash is waning every day. And, since most teens spend a great deal of their money online, cash isn’t even an option. Plus, with prepaid cards carrying FDIC insurance against loss or theft, cash just doesn’t stack up.

Overcoming Negatives

But touting the benefits teens and their parents can realize from prepaid cards isn’t enough to ensure success in this competitive and controversial market. Issuers face an uphill battle on three fronts: functionality, image, and fees.

The top functional complaint about any prepaid card is how to load funds. Access to reload networks isn’t a problem, thanks in large part to the footprint of Green Dot and Western Union, two of the largest networks of reload locations. However, complaints about costs and difficulty understanding the process are common.

Adding to the challenge, many teen cards allow parents to transfer money from their bank account or credit card for a small fee. But because it is an automated clearing house transaction, the bank transfer often takes about three business days. Further, the credit card load generates a processing fee. And both ACH and credit card loads carry high risk for the card-issuing company.

Complicating matters is that the prepaid teen card business in particular is suffering from a huge—and largely self-inflicted—image problem. High fees, predatory companies, and a general lack of follow-through on promises made have created negative perceptions that have to be overcome.

Many companies hire celebrities and athletes to overcome this image problem, hoping that their popularity among teens will create a halo effect for the card. And to the extent they can draw attention to the prepaid card industry and do so in a positive, meaningful way, celebrity endorsements do have the potential to chip away at the industry’s negative image. However, they can also backfire.

The real question about celebrity-branded cards is: Do they provide the right message and deliver on providing value to the users? As in most other industries with a heavy celebrity presence, the results with prepaid cards will probably continue to be mixed.

Though the Kard debacle left an ugly mark on the teen card industry, by shining a bright light on one of the biggest image problems of the prepaid card business—exorbitant fees—it also created an opportunity for companies to rehab that image by changing with the times.

Let’s face it: The prepaid card industry began with fees that were way over the top of what people were willing to pay for a bank alternative.

Yes, high fees in those early days were somewhat justifiable. Unlike banks which make money on deposits, prepaid card companies do not get float on deposit money. Therefore, they cannot afford to absorb the numerous fees associated with even the most basic of transactions involving a card they have issued.

Time and demand have, however, brought the marketplace into better balance with regard to fees for card usage. Companies that acknowledge this balance and take a more realistic approach to fees can counter negative perceptions and still generate a profit.

Fees That Work

The key to winning the battle over fees is to establish a structure that works best for a teen market. Though fees vary greatly within the industry, generally speaking, there are only two models.

First is the traditional card and/or bank model, which charges a monthly account fee and then low-to-moderate usage fees, such as ATM withdrawal charges. The second model carries a small or no monthly fee and charges slightly higher usage fees.

Which model is most appropriate depends on the customer’s usage habits. If most are frequent users, the first model is often the best. The monthly fee guarantees the card issuer a positive cash flow, enabling it to charge less for usage. For those whose customers are sporadic users, the second structure is more appealing.

Either way, every transaction comes with some costs to the issuing company. How those costs are passed along—and how much will be passed along—will vary based on the card chosen and the type of transaction in question.

As an example, ATM transactions require the card issuer to pay the acquirer a fee. As such, ATM transactions are very costly to the card issuer and, therefore, to the cardholder. Conversely, a point-of-sale transaction requires the acquirer to pay the issuer a fee. Because the card issuer actually gets paid the interchange, it can offer cardholders free POS transactions without impacting profitability.

Striking a Balance

The costs associated with launching a prepaid card are far too high to enter the teen market without a solid understanding of benefits, pitfalls, and usage patterns. Armed with this information, prospective issuers will be better able to strike the right balance between profitability and fee structures that teen customers and their parents will tolerate.

Such understanding will also enable issuers to design the kind of marketing programs that will appeal to teens and parents alike without doing further damage to the industry’s image.

The importance of getting off on the right foot, both with the systems and processes in place behind the scenes and the messages presented to the public, cannot be underestimated. It will not only drive the sales necessary to build a profitable card brand, it will also help the industry as a whole move the perception meter a little more toward the positive.

 

Trae Cassell is senior vice president, prepaid division, at CardFlex Inc., Costa Mesa, Calif. Reach him at tcassell@cfinc.com.