Prepaid: a 'magic bullet' for retail banking?

Nobody disputes that it’s tough to succeed in today’s retail banking industry. Some would argue that only a magic bullet could transform the fortunes of ‘traditional’ banking in the post-Google and Amazon world. If such a bullet existed, what would be included in its list of superpowers? 

Ideally, it would cut operating costs. It would drive the appeal of a new range of products to existing consumers in mature markets. Simultaneously, it would open up banking to the world’s hundreds of millions of unbanked people. It would reposition banking as ‘friendly and flexible’. And it would create access to a fast-growing, multi-billion dollar revenue opportunity for banks. 

All this may sound like a daydream, but the drivers that make prepaid so desirable are firmly rooted in harsh reality. 

It costs more and more to run conventional banking. Around two thirds of operating expenses are still accounted for by corporate center costs and the organizational complexities they represent. 

In spite of colossal pressures to achieve efficiency, compliance-related projects and other on-going expenses are actually driving costs up. As an example, the cost-income-ratio of one ‘classic’ bank was 73.3 per cent in 2013; a jump of 2.0 per cent compared to 2012. 

‘Classic’ bank accounts are expensive to provide and maintain. The annual cost per customer for a checking account can be between $250 and $300 or higher. 

Providing cards free of charge to ‘classic’ account customers is growing more expensive, while interchange fees drop. 

What would positive transformation of this bleak scenario look like? For a start, cost income ratios would drop sharply. How about down to 38 per cent? Even better, make that 32 per cent.  A market worth getting on for a trillion dollars within a few years would open up. And ‘traditional’ banking would, finally, align with the real demands and expectations of a new generation of consumers. 

That’s quite a magic bullet! Can such a scenario ever be more than the fantasy of today’s hard-pressed retail bankers? Yes, in fact it can. How? Step forward, Prepaid Account Banking. 

Prepaid Accounts are rapidly achieving traction. Not just in the emerging markets of the previously unbanked but right in the ‘backyard’ of the hyper-mature geographies. There’s a whole range of consumers, from students traveling through a year off to retirees, and even high rollers looking for ‘alternative’ financial services.

They’re engaging with Prepaid’s blend of accessible service, security and informal customer relationship styles. 

Meanwhile, for Prepaid service providers, a highly efficient technology platform is cutting complexity and costs – hence those astounding efficiencies quoted above. In reality, they’ve been achieved by Capitec Bank, an institution that majors on Prepaid. Capitec reported a cost-income-ratio of 32.0 per cent (in 2014), building on an already very impressive 38.0 per cent in 2013. 

Prepaid clearly shows that the interests of two very different stakeholder groups – banks and their customers – don’t have to be permanently out of sync. A win-win situation is entirely possible. Service users are getting what they want. Service providers are achieving technology-driven economies that make tapping into vast new markets both feasible and highly desirable. And these new markets really are big. The prepaid opportunity is estimated to offer potential up to $2.4 trillion by 2020, according to Global Industry Analysts, a leading market research firm. 

Prepaid is putting retail banking on ‘re-set’. Given fast growing demand and real revenue revitalization, any bank not looking closely at Prepaid will need a robust alternative. Or a magic bullet.

References: European Commission, Capitec Bank