Alex Mifsud, Founder and CEO, Ixaris
The 2007-2008 financial crisis killed off some banks. It left many, if not most, of the others debilitated with knock on effects for the wider economy. Banks, especially those in Europe, are not lending like they once were. As a recent article in The Economist points out, there are fears we may see ‘zombie’ banks in many quarters of Europe, neither strong enough to lend nor weak enough to collapse. Although this is often reported as a hardship to their customers, banks have effectively scaled back one of their most lucrative sources of revenue.
At the same time, many institutions are shrinking their investment-banking arms. With Basel III and Dodd-Frank imposing more stringent capital ratios, some banks are swinging the axe on headcount and pulling out of certain asset classes and products altogether.
In the light of these developments, banks all over the world are looking for profitable new business lines to make up for the loss of revenue. Transaction banking is increasingly seen as a more secure (and less casino-like) source of revenue in comparison to the investment banking fees traditionally seen within capital markets.
Within the more dependable, less balance-sheet intensive, payments businesses that banks are increasingly turning to for revenue, prepaid cards have become one of the most lucrative segments. The consumer prepaid market has been in the public view for some time now. Consumers who are unable to get credit or debit cards can use prepaid cards to spend online. Children or teenagers who would normally be unable to pay with plastic can use them. Those travelling abroad can also avoid the high FX fees associated with regular debit or credit cards by choosing prepaid.
What is less well known is that Corporate (or Commercial) prepaid is one of the fastest growing segments within payments. The flexibility, convenience and low fees of prepaid cards enable businesses to make all kinds of operational or mundane tasks such as payroll, corporate incentive programmes, disbursement of funds and corporate purchasing far easier and efficient.
According to Visa, corporate prepaid spend by 2015 will be €167bn with an annual growth rate of 27% (‘Market Sizing’, Visa Prepaid Forum 2011). MasterCard, on the other hand, estimates global growth of the prepaid card market as a whole at 27% CAGR, with corporate prepaid to account for $385bn of spend by 2017 (2012 Global Prepaid Sizing Study, commissioned by MasterCard).
Corporate prepaid presents banks with a sizeable revenue opportunity to make up for the diminished streams from lending and investment banking. However, while many banks are fully aware of this opportunity, they lack the financial and technical resources to take advantage. IT departments at countless institutions find their staff tied up dealing with torrents of regulation. While they would like to innovate, the prevailing mentality is one of ‘keep the lights on’.
This is also true at challenger banks and smaller, regional banks. With smaller IT budgets and fewer technical resources than larger institutions, they simply do not have the capability to develop corporate prepaid offerings in-house. The upshot is that these banks lose out on to larger banks with existing offerings or to non-bank rivals such as e-money issuers.
Other banks may already have a corporate prepaid offering under a third party programme manager. Prepaid cards work best under a high-volume, low-margin business model. While choosing a manager may seem like an attractive option, programme managers take a big bite out of profit margins.
Another factor holding banks back is that corporate companies tend to be more demanding customers than consumers. Corporates have very specific payments needs which cannot always be satisfied by the one-size-fits-all approach of traditional mainstream banking services. For instance, use of virtual prepaid cards – valid card numbers that are issued for use by clients without using plastic cards as a medium, and which can only be used online rather than in physical retail environments – by corporates has been growing exponentially. Few banks, however, are equipped with the systems to deliver and manage virtual card programmes. This is because banks, at least historically, have chosen payments processing systems capable of handling large volumes of standard transactions. These systems are far from flexible enough to provide the tailored services that corporate customers require and to keep pace with innovation in cards and payments.
A sophisticated, hosted (or cloud-based, in recent parlance) prepaid card solution can provide banks with a way out of this dilemma. Some providers are now offering ready-built platforms for corporate prepaid which enable banks to develop their customisable prepaid card offering in-house. As these solutions are hosted in the cloud, a corporate prepaid programme can be brought to market within months and at minimal capital expenditure, unlike traditional IT infrastructure projects.
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At Ixaris, for example, we have launched Ixaris Payments Server, a platform that gives banks all the tools they need to capitalise on the corporate prepaid market. Ixaris Payments Server is compliant with the highest level of the Payments Card Industry data security standards, and comes ready-made with highly customisable, market-tested apps for different payments challenges so that banks can build their own programmes for corporate customers.
Challenger banks and smaller, regional banks can gain access to a new source of revenue, win new corporate customers and gain a competitive advantage against larger banks in the region. Those banks with existing corporate prepaid programmes can increase profit margins by capturing more from the value chain, quickly expand their programme portfolio and easily adapt new prepaid applications for future needs.
With new revenue streams hard to come by, corporate prepaid is an easy win for banks. While security concerns may have stopped many banks from embracing the cloud, banks are now able to host solutions that enable them to genuinely improve their offerings to customers, without compromising on security.
Alex Mifsud, founder and CEO, Ixaris
Alex Mifsud founded Ixaris with colleagues William Lorenz and Damon Hart in 2002. Before Ixaris, Alex worked as a senior consultant in the Cambridge-based technology practice of Arthur D. Little, a global management consultancy. There, he provided technology and innovation advice to blue chip clients such as Telia, VW Group, Granville Baird and 3i. Alex holds a bachelor’s degree in electrical engineering from the University of Malta and master’s and doctorate degrees in computer science from the University of Edinburgh. He has lectured in the University of Malta’s Department of Computer Science and Artificial Intelligence.