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New Strategies for Prepaid Profitability: A Pro Forma Analysis

Mercator Advisory Group creates a base-level prepaid portfolio pro forma utilizing data from study by Federal Reserve Bank of Philadelphia's Payment Cards Center and the Center for Financial Services Innovation



Mercator Advisory Group has created a pro forma for the analysis of prepaid portfolios based on averages in the study "Consumers' Use of Prepaid Cards: A Transaction-Based Analysis" by the Payment Cards Center (PCC) of the Federal Reserve Bank of Philadelphia. The Mercator research report, New Strategies for Prepaid Profitability: A Pro Forma Analysis identifies key metrics within the PCC study specific to general purpose reloadable (GPR) cards market. It also identifies key insights associated with operating such a portfolio with different values for fee structures and average card life for banks exempt from the Durbin Amendment.

"A common problem for program managers in evaluating a prepaid solution is predicting what values to enter into the business model for cardholder transactions and merchant locations needed to derive interchange and ATM fee income. Equally challenging is determining average card life. This report documents the values determined by the Federal Reserve Bank of Philadelphia's Payment Cards Center report and identifies the impact of different fee structures and average card life values on the profitability of portfolios of different size. Using a live pro forma model to evaluate portfolios helps expose outcomes that are not intuitive," comments Tim Sloane, director of Mercator Advisory Group's Prepaid Advisory Service and author of the report. "This report explains how new network interchange rates have overturned long-held dogma, charts the impact of average card life on card acquisition, and shows the impact of various fee structures on portfolio profitability."



Highlights of this report include: 

  • The top merchant categories frequented by prepaid cardholders and the average ticket value for each location, as derived from the Federal Reserve Bank of Philadelphia's Payment Cards Center (PCC) research
  • Calculation of interchange revenue (for the merchant categories identified by the Federal Reserve Bank of Philadelphia's PCC) and for interchange income derived from a portfolio
  • Comparison of impact on portfolio income of cardholders' adoption of PIN versus signature debit
  • Impact of direct deposit enrollment on a portfolio's active card life and profitability
  • Implications of processor point-of-sale transactional costs associated with PIN and signature authorizations offsetting the network interchange rates
  • Metrics regarding the card acquisition levels needed to maintain a stable portfolio across multiple average card life scenarios

This report is 32 pages long and contains 11 exhibits.

 

Members of Mercator Advisory Group's Prepaid Advisory Service have access to this report as well as the upcoming research for the year ahead, presentations, analyst access, and other membership benefits.