I've been writing a lot about prepaid debit cards recently, much of it critical, echoing some of the same issues many in the financial press have with prepaid cards, including relatively high fees, limited features and a lack of meaningful savings accounts.
But I do believe prepaid cards represent both an increasingly popular alternative to traditional checking accounts for the underbanked, and a glimpse into how banking is going to be changing in the near future. Specifically, I think well-intentioned regulations constraining the ways large national banks used to make money off low-income consumers, including "opt-in" for courtesy overdraft and limiting swipe fees under the Durbin amendment, will lead those banks to target fees designed to recapture that revenue from those same customers.
Some of that has already happened, as the Javelin report I cited last week noted. Many of the biggest banks have raised monthly maintenance fees, or raised the monthly balance required to avoid those fees. Their customers who can't meet that threshold will either conclude that they need the national network of ATMs and branches they're paying for through those fees, or they'll seek out a cheaper alternative.
Prepaid debit cards are one such alternative, and although most are not a very good deal, even when compared to the checking accounts offered by large national banks, I think there is potential there for a product that provides basic banking services without the expense, and the corresponding fees, of the national banks.
So in an attempt to better understand prepaid cards, I've been interviewing some of the players in the prepaid industry. This week, I spoke to Bertrand Sosa, cofounder and president of prepaid debit card provider Mango Financial, about prepaid pricing, his target customer and the benefits of having an endorsement from George Lopez.
There's been a lot of criticism of the prepaid card industry in the financial press recently. How do you respond to that, and how do you think Mango is different?
We certainly don't view ourselves as part of the pack. And having been around the industry from inception, I not only know the differences, but I can tell you our mission is the primary driver of the main difference, which is, we're not a prepaid card company, we're not a piece of plastic, we're not even just about transactions. We're about a real relationship with the end consumers. And I think that's where everything stems from and points to.
When you talk about building a company on the long-term value that you can deliver to the end consumer, that changes the dynamics of everything. You're not just chasing a transaction amount, you're not just chasing fees, you're not just chasing getting more cards in the market just for the sake of having more pieces of plastic in circulation.
There's been a lot of activity in our space, and with good reason. You're talking about the easiest form of banking. You can just go into a retail shop or over the Internet and in a few seconds you can be considered banked.
How do you think the cost of using a Mango card compares to the cost of a conventional checking account?
It's significantly lower. We've looked at the various banking relationships the end consumer can get into, and none of them compare, because you're talking about annual fees and NSF fees and different network charges when added together over the course of a year are significantly higher than when you bank on your own terms with a prepaid vehicle. Now, within the prepaid space, there's certainly a wide range of providers, and I would say the bulk of them are overpriced, and are really more comparable to traditional bank accounts.
But that's one of our core areas of focus, in terms of delivering value. It's not only about the experience, customer service, feature functionality, but it begins with how much you charge for the service that we deliver. Back to the relationship concept: I don't need to charge you to get a piece of plastic or to load it or per transaction as much as the next guy because what I want to do is put it on myself to innovate additional product features, so that over the course of the relationship, it makes financial sense to me but I'm not nickel-and-diming you.
Who do you see as your customer base?
We have always seen it as a mainstream product. It really does apply to a number of customer types. I mean, you're talking about teenagers that are getting discretionary spending money, you're talking about the underbanked who don't have an alternative and are right now resorting to check-cashing locations and various alternative financial service modes to transact, you're talking about college students that are getting financial aid from their parents or some other source to meet their expenses.
As you know, prepaid takes a lot of different forms as well, from gift cards and travel cards to employment benefit cards. The spectrum is pretty wide. I think the biggest opportunity continues to be those that are underbanked. And there's a big difference between unbanked and underbanked, in our opinion, because underbanked means that you've had a relationship of some sort and have a bank account at some level. But for some reason, you're dissatisfied with that relationship, whether it was because you bounced too many checks, you got charged too many fees, it was inconvenient for you to transact, the location wasn't necessarily ideal, the banking hours weren't necessarily ideal, whether there was a feature or a function that you were expecting that maybe wasn't there and you were charged for it. We see out of our customer base, over 60 percent are in that situation, where they had or have a bank account.
You're talking about middle America, what we call here the "Walmart customer." That's the biggest opportunity: those that are on the fringe and those that just want to try something that gives them a little more control, and prepaid is synonymous with that.
What do you see as the advantages of prepaid over traditional checking?
I think the main advantage you have with prepaid is it's a new platform for how banking is going to evolve in the future. The short answer you have for the here and now is, it's more flexibility, more control. It's banking on your terms, which is really a paradigm shift from what we've seen in traditional banking, where you have the glamorous brick-and-mortar that they use to show stability. That's why you have the marble counters and floors. That's behind us. No longer do people really look to that as one of the fundamental check-offs, in terms of how they make the decision to bank with somebody. We're living in the world of PayPal and different Internet-driven technologies that allow for the financial relationships to change. That's the here and now: control, convenience, security, you don't have to carry cash.
But for the long-term, in the future, what prepaid represents is an entirely new era of what can be. How can we completely redefine banking? I see it more as a platform that is going to get us in that direction. On our product Mango, we've already added mobile payments -- you can text money to anybody, independent of whether they have a Mango account or not. We offer 6-percent savings, which is the highest savings APY in the country today. Everybody asks, "How do you do that?" Well we're doing it because we're banking on our ability to innovate additional functions to this product platform that in the long run of the relationship are going to yield that return on investment that we seek. That's the promise for prepaid.
Think of it as a comparison between a TV and a cell phone. What the cell phone has evolved to today is exponentially better and faster than a TV. Traditional checking, think of it as the TV, and prepaid as the cell phone. It's a more portable, convenient, fast-evolving tool that I think in the next two or three years you'll see at the center of mainstream banking relationships.
What do you see as some disadvantages of prepaid for customers?
There's going to be what I call, "the good, the bad and the ugly." Prepaid is sort of in the early days, where people think it's just a product that they can make available to customers overnight, and anybody with a server is going to try to get into the business. We're already seeing some of that.
I think you're still seeing a product that's at its infancy. I think the benefits and the reach have not necessarily reached a critical mass. I think of it like the ATM networks in the late '80s and early '90s, in that all these prepaid providers are going to somehow band together and reload networks are going to become a little bit more cohesive.
Do you think that a lack of physical infrastructure, and with that, the inability to accept cash, is going to be a disadvantage for prepaid customers?
Today there are some limitations on how you get funds into the accounts. But I don't cite that as a big challenge even today, because that's very quickly going away. Today you can get money into a Mango card from your bank account, with cash, even with a simple text message; there's a lot of ways that you can access the system. And this space is evolving so quickly that if we talk this time next year, it's going to be drastically different.
I see awareness as really being the limiting factor to this thing taking off in a big way.
What are going to be some prepaid cards going forward? What's going to differentiate the best players from the ones that won't survive?
In many ways, it sort of mirrors the evolution of credit. And by that I mean you're looking at niche-relevant discounts, whether it be airline miles or grocery discounts. Because consumers are adopting this as their everyday method of payment, then the value we deliver to them has to be relevant to their everyday lives. Either you're helping me save more money, which we do in the case of providing a 6 percent APY, or you're helping me get better value out of the money that I already have.
And that points us into rewards programs and discounts and loyalty programs that can be tied to prepaid that currently is severely underserved, in terms of a product platform. There are hardly any players doing it, and those that are doing it are doing a poor job of it. What you're going to see over the next couple of years, is a lot of these providers are going to have offerings that are not only compelling but in many ways better than what even credit and existing debit card products offer.
What do you think of celebrities endorsing prepaid cards? Why has Mango gone that way?
I feel good about that, because it raises the awareness to the product and the product benefits and the availability. One of the things that gets a little bit under my skin having been in the industry from day one is that, going back to "the good, the bad and the ugly, there are some providers out there that see the market opportunity and they see the dollar benefits to their enterprise, but they're not thinking about it strategically and they're certainly not thinking about it from a consumer standpoint.
You see these celebrity endorsement deals that really have no relationship to the end consumer. It's just somebody had a relationship with somebody and somehow ended up convincing the celebrity to endorse this type of product and the celebrity has no clue what this product does. That's very, very bad for everybody, because everybody ends up doing pushups (to correct the perception of the industry) when these guys do it wrong. And I don't have to tell you any names for you to figure out who I'm talking about. We ourselves are going to be making an announcement on a partnership we're going to have with George Lopez.
Everybody asks me two things: One, "Why are you doing it, especially when there's a pantheon of failed relationships when it comes to celebrities?" and two, "Why George?"
The reason we chose George because he is 150 percent aligned with our mission of empowerment. We walk the talk, not by signing people who are aligned with our mission of empowerment, but by delivering par value. The product has to stand for itself in order for it to truly deliver that empowerment. George just happens to be a megaphone for us. Because he's aligned and he understands why we're doing it, he's the right partner for us.
We actually had an opportunity to partner with a lot of these guys that ended up doing cards with somebody else, but we never did it because we never felt they were authentic, we never felt like they understood the product, and we certainly didn't feel like they had not grown up as a potential customers. So George, having grown up with no money and having worked hard for what he has not achieved, certainly understands and has not forgotten where he came from, and that was very important to us. We decided, hey, we've been in this space for over 10 years, we've never really done something like this, but because everyone's doing it so bad, we figured, let's just do it right, let's do it ourselves, and let's make sure we're helping the industry move in the right direction, as opposed to just sitting back and looking at how others are messing it up.