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Payonner : Prepaid Debitcard Issuer, gets $4M funding

The pre-paid card market is HUGE, about $2T worldwide. The debit card market is smaller but significant portion of it. In US, several companies, Greendot being the prime example, have offered pre-paid cards with Mastercard and Visa logos.

The prepaid card market is of particular interest to me, partly because last year I spent a few weeks investigating it; initially as a potential consumer and later as a potential provider of the debit cards.

From the providers point of view, the debit cards do not offer any revenue source other than the fees. A significant portion of the fees are mandated by the networks that are used to complete the transaction, generally referred to as “interchange fees”. In addition, the debit cards have limited “spoilage” (unused funds by the consumer) which accompanies a typical gift cards. The providers generally argue that the cost of using the debit card is competitive with the cost of using an unsubsidized bank account of third party check cashing services.

From the consumer’s point of view, the first issue that always comes up is the cost; the cost of using the card is not insignificant - about $150/year for average use. There is the activation fee, monthly fee, usage fee, re-charging fee, ATM fee, and the list seems unending; most card providers nickel and dime the user. Actually, nickel and dime charges would be fine, but the charges were a dollar or two for each “transaction.”

The purpose that I wanted to use the debit card was for a system that typically transferred about $1000/year to a service providers located in different countries. In the test cases, I found that the cost of $1000 transfer over 12 months was about $200. A 20% transaction cost was unacceptably high.

The Payoneer is trying to address the same market with somewhat lower fees. In March, the Debit card company Payoneer snared $4 million in venture funding.

The first round investment of $4M in Payoneer was led by Greylock Partners and included Crossbar Capital and several angel investors.

Payoneer was founded in 2005 and maintains a research and development facility in Tel Aviv, Israel. The co-branded MasterCards provided by Payoneer can be used anywhere whether it is in any store, online, or ATMs that MasterCards are accepted. There are some things Payoneer is doing right, it has partnered with several Web businesses likes Metacafe, Amie St., oDesk, and BitWine that need to transfer funds internationally on a regular basis.

The Payoneer business model revolves around enabling companies to use prepaid debit cards to pay their recipients. This goes contrary to the existing services like wire transfers or checks where funds can take few days at best to go through for international locations. Like for India it takes anywhere from 5-10 business days. So if companies need to make recurring payments to some of their service providers, they can be better off using Payoneer. They can even integrate the Payoneer payment processor into their payment platform that makes it easier and quicker to remit, reload, and manage online.

Payoneer claims that that most other forms of payments open to small Internet publishers are too complicated or costly. These publishers often need to make payments to companies that provide them with advertising, for example. A prepaid MasterCard, which does require a few set-up steps, is either cheaper or easier than using PayPal or normal credit card, the company says. Prepaid debit MasterCards are accepted at stores and ATMs worldwide.

As I noted earlier, this is yet to be proven. Payoneer charges about $3/month for the card and $2 per ATM withdrawal fee, in addition to the $10 initial fee. Assuming just one withdrawal per month, the cost is already at $60/year. There is 3.5% loading charge and there is probably about a 3% charge for currency conversion. We are back to $120/year to transfer $1000/year in a foreign account. So I am not sure if it makes sense for the segment of $1000/year transfers.

I am not convinced that in this day and age, one can’t construct a better way to transfer funds from one account to another without incurring 15% to 20% transaction cost. I wish Payoneer a success but I also hope that some new service or technology will offer an acceptable solution to the payment problem. In a way, this problem is similar to the micro-payment problem; how can one reduce the transaction cost? If you get down to it, the transfer of funds from one card to another is essentially an electronic change in an entry in some financial database; why should that cost as much?

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April 10th, 2007 Posted by Sunny Kalara | Startup, Financial/ Services | no comments