Saturday, November 21, 2009

It’s more than just technology

I’ve had some interesting conversations with a very innovative mobile technology company over the last few months. The group has built a pretty cool mobile payments platform which enables prepaid card issuers to essentially “bolt” on SMS based mobile banking services via a robust API. Almost all services made available through a traditional browser based online banking system such as balance inquiry, transaction history, deposit history and card-to-card transfers are accessible through a customizable set of SMS commands. The company’s strategy is simple – board as many new issuers to drive transaction volumes then enable inter-issuer transfers to dominate the money remittance space. WAIT! Say that again please. “Enable inter-issuer transfers”, says the savvy business owner.

This scenario represents the mindset of many new entrepreneurs in the prepaid space. The thought process is typically, “if we can technically do it, why not?” Based on the company’s strategy, it’s clear that at some point their platform will access APIs for dozens of issuers with the ability to sling value loads and unloads across multiple issuers like there’s no tomorrow. In theory it seems like a super deal. However, this represents a fast way for a prepaid related initiative like this to die in the start-up phase. It won’t matter how well you’re funded or how progressive the venture is.

Here are some reasons why:

- There is a difference between what each issuing bank, issuing processor and association will support. Banks and processors are governed by associations and federal guidelines in addition to internal policies. In some cases, the bank or processor may choose to not support initiatives fully endorsed by associations or the Feds as part of their respective business strategies.

- Card programs are highly compartmentalized. The issuing bank and association will approve a new program launch based on a set number of attributes. Everything ranging from program type (e.g. payroll, gift, general purpose) funding guidelines, authorization guidelines and KYC rules come in to play here. Launching a program with a set of attributes then doing something else will earn you a call from someone in the food chain. And it won’t be a warm and fuzzy call.

- Performing transactions on the issuer’s authorization host is only part of the puzzle. It’s all accounting entries followed by a physical movement of funds based on pre-established processes. For everything to work properly it’s ultra-critical to work within these processes. To transfer value from one issuer’s platform to another without considering the regulatory and business implications is suicide.

Here are some ways to help bring a vision like this to reality:

- First and foremost – understand the mindset of the institutions governing payment systems.

- Learn where the existing “rails” are and ride them when possible. Why recreate something if it already exists? If it’s not core to the business, piggy-back on someone that has already blazed the path. Your competitive advantage could be based on how you assemble existing infrastructure to meet a market need.

- Stop and look around frequently. Engage your issuing bank at all levels so you’re never considered a renegade or make costly mistakes.

Prepaid cards are starting look more and more like traditional demand deposit accounts in terms of how they are regulated. This means new players must understand the entire ecosystem to make it to first base. It’s more than just technology.

Randy San Nicolas is the author of Prepaid Enterprise. On his blog, Randy takes a look into the world of prepaid and all things payments, sharing his experiences and ideas.

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