For SmartyPig LLC, it's the 10% solution.
The company, an online consumer savings service, is releasing a prepaid card for the banked that offers its users not only low fees, but also high — and highly unusual — cash-back rewards.
In doing so, SmartyPig is betting that the card, backed by MasterCard Inc., will stick with users better than its traditional gift cards, crucial for a company whose business model revolves more around volume than margins.
The card's only fees will be the initial cost, $4.95, and a automated-teller-machine fee, $1.95, imposed for out-of-network ATMs.
Meanwhile, the card, in its first, local rollout, will feature cash-back rewards of up to 10%. A more typical example of reward levels would be the Walmart MoneyCard, operated by Green Dot, which offers 1% cash back on gas purchases. The card will eventually be bundled with a smartphone application that can locate where users can gain rewards.
Most prepaid cards are marketed to the unbanked, and while so-called stickiness is always a goal, expectations are that cards are likely to be used just once, leaving fees as a main source of income.
SmartyPig's "customers are anything but unbanked. They have a very nice income, they aren't used to fees," said Bob Weinschenk, SmartyPig's chief executive, of the card that will be issued by First National Bank of Omaha. "There really hasn't been a product that we've seen out there that they would gravitate towards."
The concept, unveiled Tuesday, contrasts with seemingly high-fee cards like the recently discontinued Kardashian Kard, which carried with it up-front costs as high as $99.95.
The only barrier to the card is a MasterCard-mandated $10 initial load minimum.
"We had the debit card originally and people liked that. The concept of having this in their wallet; you reach your goal and you buy what you want," said Mike Ferrari, one of SmartyPig's founders.
The rewards will be completely merchant-funded. Initially, there will be 9,000 regional and local retailers. Eventually national retailers will join in, and some of these will offer cash-back rewards of up to 20% on purchases. Executives would not say which retailers would eventually enter the program, but they would be in the league of companies such as The Gap and the Nordstrom department-store chain.
Still, SmartyPig isn't the only one offering a prepaid card with rewards.
AccountNow Inc., a San Ramon, Calif., prepaid card marketer, began offering its cardholders a cash rewards program last month using Cardlytics' service, said Jim Jones, AccountNow's chief executive. He said rewards make users more likely to reload the prepaid card multiple times.
"It's an issue with everyone in terms of the cost of acquiring an account. It's meaningful, hanging on to good customers," Jones said. "That's been the focus of our business. … Not so much the one-time transactions [but] trying to establish a relationship with customers over time."
Indeed, SmartyPig could leverage this card further to offer greater rewards for its customers using MasterCard's overarching loyalty programs, said Brian Riley, the research director for bank cards at TowerGroup in Needham, Mass.
The card could be profitable for SmartyPig if volumes support it.
"They are not going to reveal this kind of stuff, because it's definitely their secret sauce, but they are trying to drive up more volume," said Ben Jackson, a senior analyst for prepaid advisory services at Mercator Advisory Group Inc. "We have not seen a lot of this yet. But I expect that there will be more of it in the future. It's just more cost-effective to do this through prepaid."
Analysts applauded the possibility that SmartyPig is hedging against lower revenue from debit interchange, related to regulatory reform, that could hurt the revenue from its reloadable debit card.
Meanwhile, the app for Apple Inc's iPhone with geo-location services designed specifically for the card will roll out within the next month. A Google Inc. Android platform application will debut about a month or so after that.
SmartyPig deposits are held by BBVA Compass Bank, the U.S. unit of Banco Bilbao Vizcaya Argentaria SA, which began U.S. deposits for SmartyPig earlier this year.