In our last article for Transaction World, we touched upon the fact that approximately 35% of all people who walk into a cellular phone retail store get turned down for a post-paid contract. That being said, we certainly don't want to paint with such a broad brush as to say that every pre-paid product revolves around the segment of the population that is either credit challenged, or un-banked. The statistics that we read (depending upon the research group or publication) say that approximately 10-12 million Americans or more are un-banked with average annual incomes of approximately $18-22,000 per year; certainly this represents an enormous market.
In the last six months however, our office has been involved with a number of companies that are developing and launching exciting new pre-paid products that cater to both credit challenged individuals as well as mainstream clientele. Never before has the transaction industry been poised for new revenue opportunities as the coming years will present. Here are just a few of the pre-paid models we have been working on for terminal-based deployment on behalf of clients around the country:
- Pre-paid Gifts - Greeting Cards that deliver actual gifts, available at CVS; see www.choosegift.com, sponsored by parent company Bennett Brothers of Chicago
- Pre-paid 24 Long Stem Roses, $49.95 delivered any where in the U.S.
- Pre-paid Roadside Assistance $9.95 for one free tow over the course of 90 days
- Pre-paid Music Download services $14.99 for 16 songs
- Pre-paid Health and Dental Services for families starting at $39.95 per month
- Pre-paid Cellular Ring Tones, Hollywood Celebrity Greetings
- Pre-paid International Cellular and Residential Phone Services
- Pre-paid Retail Visa™
- POS Gateway for the Nurit 2085 to service all major Cellular Carriers
These products and others in development offer retailers margins on the order of 8%-40%, without any inventory carrying costs.
The products also offer the ISO margins measured in percentage points, not basis points - a key distinction between bankcard processing margins and pre-paid processing margins. Obviously, the ISO has to properly match the retailer that they are pitching with the potential value-added pre-paid product to complement their existing business.
That being said, we see three distinct Risk/Reward scenarios for the ISO evolving in this marketplace:
Low Risk/Lower Reward
In this scenario, the ISO is a registered sales agent. The ISO recruits retailers and works in conjunction with the service bureau or content provider to supply the merchant with point-of-sale brochures as well as inventory. One of the trends is for the service bureau to provide point-of-sale terminals at no charge to the retailer, however, usually a nominal monthly rental fee is applied. Since the companies that are providing the terminals are working on large margins (5-10%), the expense of a $300 EDC device will be covered over the course of only $3000 - $5000 worth of sales volume - a scenario that could never work today with bankcard processing margins. The ISO is a registered sales agent of the provider, signing up the merchant on the provider's merchant application - the provider handles all marketing materials, deployment of inventory, reporting, ACH functionality etc. ISO's can expect 1-3% margins based on sales.
Medium Risk/Better Rewards
ISO's with established portfolios who can segment their merchant base can upgrade existing terminals for those that are multi-application or simple memory upgrades if the terminal can handle multiple applications or split-dial functions. Here, the ISO makes an investment with their merchants on the equipment side of things, and is rewarded with higher margins from the service provider who will support the merchant with marketing materials and inventory. Margins extended to ISO's should be 50% higher.
Highest Risk/Biggest Rewards
For the ISO willing to create marketing materials and provide for the back-end processing (merchant ACH functions, monthly reporting), the rewards can be on the scale unseen since the early 80's in bankcard margins. There seem to be plenty of willing service providers out there that will "private label" a product for the ISO who will share some expenses and guarantee volumes.
Aside from the due diligence that is performed by the ISO on it's strategic partner, there are a myriad of atypical ISO expenditures - legal agreements, printing costs and actual product costs, product trademark and URL registrations, risk management and bad debt exposure. In addition, it is the ISO that is going to supply the free EDC terminal, and/or memory upgrades. For those ISO's with feet-on-the-street, there can be some lucrative niches within the portfolio of existing and incoming merchant locations. Expect gross margins available for distribution in double digits.
In the world of bankcard processing, the term value- added is tossed about with reckless abandon. The ISO that provides new revenue opportunities for merchant accounts, and creates true partnerships, will keep attrition low, while satisfaction and profitability remain high.