Can Carriers Do Prepaid Better than Banks?

Banks have long struggled to migrate financial relationships onto mobile devices and to attract the underserved. Carriers like T-Mobile, on the other hand, come into the market with a distinct advantage.

Carriers have the benefit of knowing which phones are in each customer's pocket. They already offer prepaid services that are used to top off mobile phone accounts, and they have store chains that can perform as branches. In the example of T-Mobile's new prepaid card, which launched today, the carrier is using its distribution network to provide free reloads to cardholders.

"Carriers can offer nearly everything that a bank has," says Richard Crone, a payments consultant, adding that in addition to retail networks, carriers also have good customer service and interactive voice response systems. "Carriers can compete at the same level or a little better than banks. Nationally, you still have 50% of banks and credit unions that don't even offer a mobile app specifically for banking. And carriers already have a covenant of trust and relationships with younger consumers."

T-Mobile's card is complemented by a mobile app that supports remote deposit capture and a surcharge free ATM network with about 42,000 locations. The Bancorp Bank issues T-Mobile's prepaid card, which is distributed and services by Blackhawk Network. T-Mobile is also involved in the Isis mobile wallet, which launched nationwide last year.

T-Mobile's prepaid pitch echoes that of many card marketers: it can provide a less expensive service than check cashers and can help avoid the surprise fees the underserved associate with bank accounts.

"In the course of doing research we found customers that mentioned they would like to find a way to avoid the heavy banking fees that they feel are unjust," says Taylor Collyer, the senior director of marketing at T-Mobile, which launched its reloadable prepaid Visa card as part of its Mobile Money initiative.

T-Mobile sees financial services as a value-add to its core mobile phone offering, Collyer says. "We're giving people another reason to use our service."

The product also allows T-Mobile, and potentially other telecoms, to grab share from banks by offering low-fee prepaid accounts. The market is early stage, but other carriers such as Boost Mobile have also introduced prepaid cards and mobile money apps.

"This makes perfect sense for a carrier. Their billing systems allow for complex, bespoke packages and real-time updating. Many banks are installing systems that have their roots in mobile," says Gareth Lodge, a senior analyst at Celent's banking group. "The creation of flexible services at low cost is where mobile networks have competed for many years."

Mobile network operators are on a constant hunt to find a relevant place in commerce, says Jordan McKee, an analyst at Yankee Group. "They don't want to miss the boat when it comes to the opportunity surrounding mobile payments," McKee says. "Their fear is being relegated to dumb pipes."

T-Mobile contends the service is a way to make it easier for consumers to perform money management tasks and to access prepaid cards. "We found it interesting that these account management fees were a pain point for consumers, that they were being charged to use and manage their money," Collyer says.

T-Mobile's history in financial services includes interest-free loans made to consumers to buy new phones. "We have some experience in that area, and know mobile phone service very well," Collyer says.

But T-Mobile is not planning to become an actual bank, Collyer says. "We won't have consumer loans."

T-Mobile is also working with AT&T and Verizon Wireless as partners in the Isis mobile wallet, though Collyer says the two products target different consumer groups — Isis users are more tech-savvy and typically have a number of existing card relationships with financial institutions.

"With the prepaid card, T-Mobile is targeting customers that are underserved by banks traditionally. Bringing those customers into the financial system at cheaper prices has to be a win for just about everyone," Lodge says. "I suspect T-Mobile's subscribers would easily make it a top five bank. More important, T-Mobile is looking for more subscribers, not to be a bank — it's pretty hard for a bank to compete against that."

Some banks are trying to compete by offering telecom services, Lodge says, mentioning Rabobank's Rabo Mobiel, a Dutch virtual network operated by the bank.

Carriers will also have sway with the underbanked, analysts say. Mobile carriers have successfully introduced financial services in developing markets by offering prepaid mobile money products, and the same model could work in the U.S. given the high percentage of underbanked consumers.

And other alternative financial services companies such as Moven use mobile technology to serve the underbanked in the U.S., gradually expanding those relationships as the consumer builds a credit history.

"The U.S., for a country of its level of development, has a pretty high level of underbanking," Lodge says, adding the U.S. has an unbanked population of about 12%, compared with about 3% in the U.K. "When you add in the underbanked, the number for the U.S. is estimated to be nearly to 30%."

Not all analysts see T-Mobile's move as direct threat to banks. Given that the T-Mobile prepaid card's depository account is with Bancorp and operates on Visa's network, T-Mobile's move is more about boosting their core business, says Phil Philliou, a payments consultant.

"This is a marketing play by T-Mobile," Philliou says. "T-Mobile is apparently willing to absorb the costs of this financial services program in order to drive traffic into their stores and presumably sell more mobile plans."

But from a consumer standpoint, what differentiates a bank from a nonbank is being blurred, McKee says.

"While Bancorp is the issuer, consumers using this service will likely more closely associate their banking relationship with T-Mobile. … Banks are not being cut out of the equation, but who consumers perceive to be their 'bank' may be problematic," he says. "In effect, that is somewhat of a threat [to banks] because users will associate the relationship more closely with T-Mobile and the bank gets their brand wrapped."

Banks see a more direct threat from carrier billing, McKee says. The technology enables consumers to bill purchases directly to their phone bill. "In effect, this allows mobile network operators to leverage their trusted billing relationship to play a more pivotal role in the mobile commerce value chain," he says.

Prepaid cards are not a slam dunk for carriers, Philliou says. "T-Mobile's biggest challenge will be to convince consumers that this is not some 'limited-time offer' and that they are committed to providing these services at no cost for the long haul," he says.

And other similar services have not survived, Lodge notes. "While it is a different market," T-Mobile's move "comes roughly a week after another telco" — O2, which included a prepaid Visa card — "shut down a very similar service," Lodge says.