21 July 2017
Chris Brown

Trusek Technical

Chris Brown - Trusek

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Fintech innovation and startups

Fintech innovation and startups

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Banking on a pre-paid card platform

14 July 2017  |  5614 views  |  3

In recent years there have been a significant number of new "neo-banks" or "challenger banks" launched with much hype, here in the UK. Many of these appear to have been brought to market quickly, on the back of a pre-paid card platform and are buying customers now with a plan to build a revenue model in the future.

 

Whilst I am not planning to comment on that as a business model I do wonder at the wisdom of starting from a pre-paid card platform when building a financial institution that will later become a bank. Such a platform fails by its very architecture to allow for multiple access to one account, one person with more than one account, non-card transactions etc. This is a path that is, by definition, a development cul-de-sac.

 

Surely, if you’re coming to market with a brand new proposition for the customer, flexibility is going to be the cornerstone of your success. 

 

Every time you fail to provide an expected feature you reduce your potential market. If you are offering business banking but can’t allow multiple access to accounts with differing permissions for each user, clearly you are limiting your audience. If you are providing personal banking but can’t provide a way for people to segregate funds off into another account or have a joint account with their partner then you are limiting your audience.

 

Almost worse than that though is the fact that every transaction on a pre-paid card platform is a card transaction, every account on the platform is another card and each must be paid for as such, even if the transaction has nothing to do with the card or the account has no need of card access. This makes creating a business model that funds itself extremely difficult and limits growth of the platform into other areas. 

 

What happens when, after you have attracted customers to your financial institution with your new user experience and low fees, you wish to offer savings, loans, overdrafts, credit cards etc? Perhaps you wish to start charging fees for some of these services. Are you now looking at a complete system rebuild? If you are operating on a pre-paid card platform I can’t see that you could have any choice.

 

What’s the alternative? You could look instead at an account platform. Clearly you will still need cards but they become an access point to the account. Any transaction that doesn’t use the card (e.g. deposit, transfer, payment) attract only operational expenses rather than card charges. Any account that doesn’t need a card, doesn’t have one and in the business model there is no charge for that. As a result you can give your customers a current account (with overdraft), savings accounts, loan account. You can even let customers create their own accounts as they start to save for a special purpose, and close them again when they are done. Joint accounts and company accounts can be shared with those who need access and appropriate user access can be granted (a partner may be given equal access to a joint account while a tax accountant may be given read only access for example).

 

Your basic account management platform will allow you to integrate into any payments network and support any currency (even BitCoin), as long as you have banking to support it. Some will even allow you to store multiple currencies in one account (but that’s a bit niche). They provide double-entry ledgers, manage KYC/AML, apply any fees or limits the business requires, manage your call centre and provide all security and logging.

 

So, given that account management platforms exist, why are there so many neo-banks running on pre-paid platforms?

 

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Comments: (4)

Emily Baum
Emily Baum - MasterCard Prepaid Management Services - London | 17 July, 2017, 08:59

Very interesting article - however I would disagree with the comments made around functionality restrictions from using a prepaid card as the foundations of a banking product. I personally have worked on multiple projects that offered the business and personal account requirements you outline above. Prepaid processing platforms are incredibly versatile these days and can accomodate jam jarring, primary and secondary accounts on a multiple level and offer faster payments and direct debits. I do agree that a fee free model is not sustainable, but understand from talking to those using prepaid as a banking platform alternative - they will look to subsidise costs with the sale of morgages, loans and credit - exactly the same way banks do. Prepaid platforms give Challengers the opportunity to test and learn whilst utilising functionality that gives them the edge in the banking marketplace.

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 17 July, 2017, 11:57

I don't know how many challenger banks are running on prepaid card platforms but, assuming that there are many of them, the reason for their choice is obvious: The TCO of a Tier 1 prepaid card platform is around 1/5th that of a Tier 1 core banking system. And, for the current range of products that challenger banks offer, a prepaid card platform offers comparable functionality as a CBS. So there's no point in spending for a CBS upfront. Now, I know an "account management platform" is not the same as CBS but, in this day and age, no one wants to go back to the 60s era of having a disparate account managment platform from a CBS.

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Chris Brown
Chris Brown - Trusek - Amersham | 17 July, 2017, 17:58

Thank you both for taking the time to comment on my article. I think the terminology I chose was making me unclear. Perhaps if I define my terms it will make more sense.

A "prepaid platform" is one where the card is synonomous with the account. There appear to be many such systems in use. I fully accept that you can use a pre-paid card as an access point for an account and, if you're using an account platform, such a system would provide all the features described above and allow induction of mortgages, loans and credit as part of a continuous development. Within my narrow definition of a pre-paid card platform that would be impossible.

An "account management platform" then, is one which separates people, from accounts, from access mechanisms for those accounts. It's "core banking lite" if you will. But they will run your entire financial instituion from accounting to customer service. And the prices for such systems are much lower than you might imagine.

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 17 July, 2017, 18:43

However low the TCO of a core banking lite application, I still tend to believe it would be at least 5X that of a prepaid card platform. But I'm open to changing my mind if I get concrete TCO comparisons.

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Co-founder and CTO of Trusek (trusek.com). Trusek is a FinTech development house with 3 products: a multi-currency core banking platform. A connections hub: for connecting FinTech service providers to...

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