Electronic prepay challenges paper vouchers

2nd February 2004

CI's Tony Morbin spoke to Philippe Dufour, chief executive, PrePay Technologies, as the company was launching a new version of its SplashPlastic prepay card. Dufour explained how he sees prepay as primarily a non-standardised, non-bank product.

Credit cards have become the de-facto payment mechanism for internet purchases. But that leaves the unbanked - and in particular internet savvy teenagers - unable to engage in internet purchasing. Philippe Dufour explains how he sees prepay products filling the void, with his own company seeking to carve out a series of niche offerings. Dufour says that prepay is his company's focus, whereas other companies simply use prepay as an additional revenue stream, but he points out that prepay is more complex than transactions. "Its not something you can just copy. Delivery is key and we know of one signed contract that had to be re-tendered due to lack of ability to deliver," comments Dufour.

Dufour does not believe that prepay growth will be coming from mainstream banks. He believes that it will be coming more from the retail side of the industry. Why ? "Because it's a market made of niche applications - sometimes large niche such as pre pay mobile phone, lunch or gift vouchers, but still niche. And front end requirements are very different from those for debit or credit, which have been standardised by industry-wide payment schemes. We don't see prepay being standardised as quickly because there is no risk on the issuing side - therefore it will follow more the trend to serve horizontal markets."

CI asked: But the back office skills across those markets are very similar, so presumably once you become a player in once niche, you can provide many niches?

PD: "That's absolutely true because the back office is broadly similar to what you would see with debit or credit. But when we launched into the market about three or four years ago no-one saw the requirement to modify the back office and have real-time transaction processing - which is what prepay back office is about.. We had to build our own processing capability based on payment industry standards as our objective was to get into the market place and not wait for our partner to be ready to do so."

CI: How do you compete against larger players who have huge advantages, particularly banks with large scale processing?

PD: "We don't see prepay as a market for the existing customer groups targeted by mainstream card issuers although on the acquiring side, some banks might find a limited route to market. Therefore traditional issuing banks will find that prepay addresses different needs from their traditional customers and therefore they will not be able to leverage their operations as much as they would like. "

CI: How would you describe the typical prepaid target audience?

PD: "There is not one typical audience, there are many. For example the gift card market is one audience which is the retail sector; Universal bank, lunch vouchers mobile phones and transportation are other prepay sectors targeting different consumers either vertically (for content purpose only ) or horizontally (payment purpose). SplashPlastic targets another sector, again very different from the others. Those groups require functionality, services and capability which are different. That's the reason why it's not standardised and it requires different customer interfaces and technologies, most likely to develop around existing infrastructures."

CI: Do you see the unbanked as a particular target audience for prepay?

PD: "When we talk about the Universal bank, that is covering several unbanked markets. There are reasons these people are unbanked, for example they may be too young or they don't have the right risk profile to join the bank although the bank would like to get them on board at a later stage in their life. Banks don't have the right message, they don't have the right brand image, they don't have the relationship - and they did not make the effort to get those customers because they were not profitable. However we can demonstrate that prepay can be a profitable business. Even if you are not a bank they can be profitable for those market segments.

"In Europe you have an increasing demand for a product that can pay for an electronic transaction - such as Splash Plastic - but not necessarily targeted at people who are eligible for bank current accounts. That's where we are coming from. Most of the banks want to get into this market but realise that their culture, cost and shareholding structure pre-empt them from tapping into this market. The economics of a prepay card doesn't work with the mainstream financial businesses they have been running for the last ten or twenty years."

CI: Surely the risk is greatly reduced and in fact a certain percentage will never be redeemed?

PD: "This depends again on which market you are talking about. In some markets that's true, with money not redeemed referred to as 'breakage'. You cannot build a prepay strategy based upon the market immaturity, assuming a business will be profitable because breakage is high, because this will change over time. In France 20 years ago the prepay phone market had breakage of up to 20 percent because of lack of knowledge, the product itself etc, but this has changed. You can't base a sustainable strategy on the ignorance of the customer because the customer is learning fast."

CI: Notwithstanding the fact that you have been around four years, why are you saying that the market is ready for prepay products now, when previously products such as Mondex failed?

PD: "Mondex was ahead of its time. The infrastructure was not ready and the business case was not strong enough for both the banker and the retailer to change infrastructure. For many years the concept of removing cash from the economy has been floating around. It does not really work! Products like Mondex, Proton and Moneo are facing the same two issues. One is that cash is expensive to be partially removed because there is no margin on cash - so who is paying for such removal? And second, these models rely on the roll-out of an infrastructure, which I accept can be a temporary problem. . Moneo in France is a similar product to Mondex but the issue it is facing is that retailers don't really want to pay for this, although the infrastructure is there. Moneo business models rely on retailers to pay the equivalent of an interchange fee for the transaction. Finally, it takes time for a consumer to change habits with regards to using cash for small transactions. How long cash has been around? . I don't think the failure of Moneo and Mondex to capture market share reflects the potential for prepay. Because on the other hand you have some very successful prepay products. The lunch voucher is a prepay product, the money transfer business is a prepay product, the gift card market is a prepay product."

CI: The economies of scale at companies like First Data must make these processors potentially formidable competitors.

PD: "You are absolutely right. But to make a business successful you need to have the right business programme and the right execution - and in our business execution is key. Our focus as a company is always to execute well. You can do anything with technology today, you can do anything with transaction processing, it's about how well you execute in the market place, the detail you offer your clients. And size (and therefore legacy) can sometimes go against the execution."

CI: So what is the USP of PrePay that you believe enables the company to deliver better execution than your competitors?

PD: "As I said, prepay is made up of large niche markets and I think this requires the ability to be flexible and creative in a simple way. You need to be able to tweak the way you operate, your business models, each time you enter a new niche. Large organisations are focussing on economies of scale and sometimes that leads to standardisation of process, which in turn is against flexibility of business model - and that is where we see we have a game to play. In the UK gift card market we are running two major accounts, Debenhams and Comet and recently won three other very large clients against serious competitors because we understood the customer requirements and could adapt to those requirements while large corporations with large transaction processing and large -everything you can imagine - would have to spend a lot of money to adapt their system and models to serve just one client - which then would not have served the next client. That's where we see the effect of prepay not being based upon a standard model. It's a portfolio of models which we wish to standardise but the client is driving the demand here."

CI. How would you characterise the size of the various prepaid market segments and how important are they to your company?

PD: "Today we are running three businesses. One processing, and two products, or solutions, these later two supported by the first. Today about 50 percent of our business is electronic stored value and 50 percent is SplashPlastic. We consider those our two important drivers for the development of the company. One is giving us the relationship with the retailers. The other is giving us the relationship with the consumers. We believe there will be a convergence of those two relationships at some stage. There is no one business more important than the other. Especially as we will be launching another business line soon - that's the expansion of what we call prepay debit cards. That will be targeting a different audience again - leveraging what we have today, the relationships and knowledge that we have in the prepay industry."

"The processing supports a number of products. Without having good control of the processing it's not possible to deliver the product because you need flexibility. You have to adapt your processing functions to the market place."

CI: What levels of growth are you seeing in the various sectors?

PD: "In the electronic stored value business we are seeing growth of 25 to 30 percent per year for the next five to six years. We have produced research showing 30 percent growth per year in the US prepay market - moving from $11 billion of paper vouchers in 1996 to $40 billion last year (2002) of which 90 percent was in electronic plastic cards. We should see 25 percent growth per year in the UK for the next five years even with Chip and PIN conversion slowing down the growth for 2004, with a lot of projects being cleared as retailers focus on Chip and PIN. It has not affected SplashPlastic which is a product we control. But we see prepay growing tremendously in 2005. We have pretty much concluded our discussions with payment schemes and acquirers today to expand the acceptance of Splash Plastic."

CI: You have touched on increased acceptance by retailers - can you expand upon what is happening?

PD: "Although I cannot disclose what we are about to do, we do know what we want to do. Splash Pastic will move from a well proven 'lab stage' to mass market consumer acceptance. I expect this to be done by Q4 2004."

CI: Despite Wal-Mart, MasterCard and Visa have high global acceptance; it must prove a formidable challenge to any new entrant in the cards arena, to try and replicate that level of acceptance?

PD: "Unless you team up - unless you partner. Because it's a new product we have to go through a step-by-step phase."

CI: Do you have figures to release on volumes of cards and value of transactions?

PD: "We have NDA's with the retailers so can't reveal those figures other than saying it is successful. Talk to Debenhams and Comet! We can talk a bit more about SplashPlastic - the latest figures are 400,000 plus cards in the market. Average transaction on the internet is £10. So far the product is successful enough to take it to the next stage."

CI: While I understand the need for focus, I was still surprised when you said you would never move into credit given that, say SplashPlastic, as a youth oriented product, will give you a relationship and credit record of people who will soon be eligible to apply for credit cards.

PD: "You are absolutely right but it doesn't mean we will move into credit. We can have a relationship with a credit house. There is clearly a requirement to carry on and leverage this relationship to the benefit of ourselves and our customer. Because we don't want to be a bank or credit house, doesn't mean we won't work with one. For those partners we are a channel to market."

CI: Any plans for geographic expansion?

PD: "We are looking at continental Europe as some of our clients are taking us there. We use the facilities we have today and can cooperate with clients in another country. It's not difficult to provide that facility, the difficulty is to understand the requirements of the customers in each country. So we are now looking at the French market."