PRETORIA – In the US, prepaid cards represent a booming growth market that celebrities are queuing to endorse these cards. Last week, finance personality Suze Orman launched her prepaid card as a way to stay debt-free and avoid high banking costs. In launching the card, she follows in the footsteps of hip-hop mogul Russell Simmons and the famous Kardashian sisters.
In South Africa we haven’t gotten to the point yet where local celebrities are clamouring to get their names branded on prepaid cards, but it is a market that is showing so much growth potential that the widest represented prepaid industry organisation in the world, Global Prepaid Exchange, established an office in Cape Town late last year. It also represents a big enough market opportunity for the big banks in South Africa to sit up and take notice, expanding their prepaid offering to get a slice of the cake. According to Global Prepaid Exchange, the market is worth R29.4bn annually – almost half the current market capitalisation of Nedbank, South Africa’s fourth largest bank. The term “market opportunity” is used to describe the estimated maximum potential annual load value that could be achieved in the market on prepaid products given current market conditions.
These cards, which come with a variety of applications that range from forex cards to gift vouchers to payroll cards for large corporates, are seen as a unique way to draw the unbanked masses of Southern Africa into the sphere of sophisticated financial services. Interestingly, though, with some of the cards presenting a cheaper option than a bank account with the grudge payment bank charges attached, even some already banked individuals are seeing these as a viable alternative.
In the South African context there are major prepaid opportunities in government disbursements, gift cards, corporate incentives and benefits, and payroll – each of which according to Global Prepaid Exchange, has a current market potential in excess of R2bn annually (see table for estimated values). Other opportunities are in the transport sector with, for example, pilots underway to introduce prepaid card payment options for the taxi industry.
Absa is already trying to tap into the first of these opportunities through government disbursements, via its subsidiary AllPay. AllPay makes payments to social welfare beneficiaries either in cash using biometric technology for security or on to the Sekulula (meaning “now it’s easy”) prepaid card. In November last year Absa reported that for the year to date R10bn was paid out in cash and R6.3bn on to Sekulula cards.
In its 2011 medium-term budget policy statement National Treasury stated that social welfare grants support 15.2m South Africans, almost a third of the total population. This is up from 2.5m in 1998.
In 2012 Treasury estimates that spending on social protection, paid out monthly to millions of South Africans, will amount to R160bn. Quite an opportunity if you can get the contract to have the money paid on to the prepaid cards that you issue. And the amount is expected to rise to R182bn in 2014.
Simon Just, head of consumer cards in Absa’s card division, told Moneyweb that prepaid cards provide complete certainty up-front of what you are paying in charges. Absa launched its general purpose prepaid card three and a half years ago and its customer base has been growing at more than 100% per annum ever since. These cards are even being snatched up by clients who qualify for or have other bank accounts already, due to the transparency of the costs attached. With the Absa prepaid card you pay one upfront fee of 2.5% when you make a deposit on to the card, thereafter there are no transactional fees.
“Different consumers are looking for different things. Sometimes we even have midrange customers asking for a simpler banking option as they know what they pay and their balances can’t be eroded (by bank charges),” Just told Moneyweb.
Bar chart. Source: Global Prepaid Exchange
In South Africa, where crime is a reality, the ability to provide corporate companies with a mechanism where they can transfer wages on to a card for their employees, especially seasonal workers, and thus taking the risk of cash out of the equation for both employer and employee offers a major opportunity to prepaid card issuers. Absa supplied the cards that census workers were paid on for the 2011 census. Standard Bank has an offering for seasonal workers who don’t have bank accounts. FNB offers eWallet, allowing its corporate, commercial and public sector clients to electronically pay their employees directly to their cellphones or into a prepaid debit card.
“The safety aspect of a prepaid card is huge in South Africa,” Pieter de Wet, chairman of Global Prepaid Exchange Southern Africa said. To demonstrate he uses the example of the almost R2bn that is transferred on a yearly basis between Shoprite stores in the country. “About 50% of that money is money that is sent by one client to himself from where he works to where he lives, so that he doesn’t have to carry the cash.”
De Wet said fraud and fraud prevention is one of the major concerns raised by players in the prepaid market and they are addressing it aggressively.
“From an open-loop product point of view I don’t know of any programme that is not pin-based. Some are even chip and pin based. It is one of the products that could be made the most secure against fraud.”
In open-loop programmes, the cards bear the logo of a payment network, such as Visa and are accepted and processed at any merchant location that accepts the payment network’s cards. In a closed-loop programme, card acceptance is limited to specific locations, for example a gift card that can only be used in one store. Hybrid programmes are expanded to a wider range of unrelated merchants, but there are limiting requirements, such as that all the merchants should be in one mall.
According to Sughendree Reddy, head of banking products at Standard Bank, the bank offers hybrid cards such as the Sandton City mall gift card, microlending cards where the microlenders partner with the bank to distribute loans on these cards, insurance and travel cards, incentive cards and payroll cards.
Reddy says Standard Bank considers itself the leader among the banks in the prepaid market, where in December last year the bank saw R215m in prepaid card sales, with the majority being incentive cards.
The concept of prepaying could theoretically be applied to almost any transaction.
“Only imagination and buyer willingness to adopt prepaid, restrict what can become a prepaid service within a framework of cultural, technological and regulatory conditions that apply to a given market,” states the Global Prepaid Exchange report.
There is a lot of innovation and interesting applications for prepaid cards. One such example is the My City My Connect card, also by Absa, that is used in Cape Town. It is a tap and go card with a maximum value level of R3 000. It is a low-value payment card that can be used in retail and transport up to purchases of R200 and is totally FICA-exempt up to those limits with the limitation that the user can’t draw cash from it.
As the values on the prepaid card increases, so do the FICA requirements. On the Absa general purpose prepaid card, for example, the maximum value limit is R25 000 and exemption 17 pertains where the user only has to provide a copy of his or her ID (see table for further explanation).
According to Global Prepaid Exchange, prepaid sales are expected to grow even more when third party distribution takes off, for example when gift card malls are rolled out in major retail destinations. In the US approximately one in five gift cards are sold already via gift card malls.
Philip Cooper, business development executive at Opengate, a South African company that is a leader in this space, believes that prepaid retail gifting currently represents a R2bn annual market opportunity, but that it will “grow significantly” in the next year or so.
Opengate is involved in helping retailers merchandise their own gift cards, but have also already rolled out the prepaid card mall concept where you have a dedicated display in a premium retailer that offers a wide variety of prepaid cards.
“These prepaid card malls are already in selected Pick n Pay and Dis-Chem stores and will be available in CNA during the course of this year,” he told Moneyweb. Opengate provides the services and technology enabling issuers of prepaid products and services access to new channels and markets.
“One of the advantages of these cards is that they introduce recipients to the world of electronic banking, which will hopefully result in greater trust and acceptance of formal banking,” says Rowan Suchard, head of products at FNB eWallet Solutions. A Finscope study released in 2010 states that 12.4m adults in South Africa still remain unbanked and that of these, 11.1m adults have never been exposed to any type of formalised banking practices.
The Financial Intelligence Centre Act (FICA) requires a bank to identify and verify a customer’s identity as a prerequisite to entering into a single transaction with that customer. There are three types of cards that can be issued, the functionality of which is restricted according to the level of Know-Your-Client (KYC) that has been completed prior to opening the account.
Circular 6- Cellphone Banking Product
Full FICA allows for a totally unrestricted card to be issued to the applicant. In order for a consumer to be able to apply for such a card, they need to provide details of their identity number/ passport number and details of their residential address. Thereafter, valid certified copies (preferable) of both proof of identity and proof of residential address have to be supplied in order to complete the verification element of the FICA.
FICA ‘Exemption 17’ exempts the bank from KYC verification obligations in respect of residential addresses (only) for certain natural persons, who are South African citizens and/or South African residents who are considered to be mass market clients, in cases where there is no reasonable means to verify residential addresses. This means as long as a verified or certified copy of the applicant’s photographic ID has been received, financial institutions are exempt from verifying proof of address. However, the residential address should be identified (that is noted and held on file). Any customer completing the application process for purposes of the exemption must adhere to restricted account transactional activity, including maximum daily withdrawal limit of R5,000 (for all transactions , POS, ATM withdrawal, Internet and cellphone banking; excluding bank charges) and monthly deposits (credits) not exceeding R25,000 (excluding interest accrued on credit balances) .
The South African Reserve Bank (“SARB’s”) ‘Circular 6- Cellphone Banking Product’ allows for financial institutions to complete KYC obligations in the absence of face-to-face contact. In this instance, the only actual KYC due diligence that needs to be completed is identification and verification of the applicant’s name(s) and surname and National ID Book/ passport number through a 3rd party database, such as XDS, with access to the Home Office database. Any customer taking advantage of this exemption must adhere to the restricted account transactional activity – namely a daily withdrawal of R1,000 and monthly deposits (credits) not exceeding R25,000.
Source: Global Prepaid Exchange Southern Africa