Debit Cards for the Sub-Prime

Debit Cards for the Sub-Prime

By Sean Roth

Real Estate Editor

Cliff Wildes' Morgan Beaumont isn't greedy; it only wants a dollar, a quarter or as even little as a nickel per transaction. It just wants to repeat those transactions a couple 100 million times. With a potential audience on the conservative side of 33 million Americans, the Bradenton-based company is more than willing to take a small-bite strategy while providing services to people that most financial service companies would ignore by choice.

Publicly traded Morgan Beaumont (MBEU.OB) is designed around putting plastic in the hands of people with bad credit or limited financial history - the financial no-man's land known as the sub-prime market. To balance out the high-risk, high-reward scenario used by sub-prime credit card lenders, such as the now defunct NextCard or Metris, Wildes and his team have added a governing rule to their business model: require all of the company's different business lines to deal only with prepaid-card products.

Morgan Beaumont provides ATM/debit and gift cards to anyone legally entitled to them. The company also owns the back end of a phone system and can sell local and international prepaid phone cards. It hasn't done much with these systems in the marketplace yet. Since its founding in 2000 and continuing through its merger with a public company in August 2004, Morgan Beaumont has mostly been in the development stage. Along the way it has gone through nearly $9 million - all part of the investment that goes into a startup.

"I come from a technology background, and $9 million in those terms is not that bad," Wildes says. "This is really a technology company. The last five years, we have just been putting all the technology pieces in place."

From that startup capital, Morgan Beaumont has been able to create an open-network transaction system called the SIRE Network.

"This is really what makes us different," says Jeffrey Kratsch, director of marketing. "With most of our competitors, you have to mail in a money order or cashier's check to charge your card. People hate it. The average lifespan of a debit card like that is just six to eight weeks. People use it once and then throw it away."

In conjunction with its retail partners, the SIRE Network allows a consumer to bring in cash and have his card charged at 73,000 stores in the United States.

"Everybody loves it," Wildes says. "Even our competitors love it. It's an open network, and they're free to join. So their customers can load their cards on our network too. Retailers love it because they get money when the card is purchased, and they get paid again whenever a consumer comes into their store to top-up. On top of that it brings in a potential customer for their other goods."

Wildes says and current SEC documents report that the company plans to grow that to more than 100,000 retail locations nationwide by the end of 2005.

In addition, that $9 million also went into certifications and forming additional relationships with the major ATM network providers: Interlink, Plus, Cirrus, PULSE and Star; two of the biggest credit card brands, VISA and MasterCard; and five different banks. The banking relationships are especially important because as a third-party processor, Morgan Beaumont asks these institutions to be responsible for holding the consumer's money.

With most of the SIRE system and card approvals in place earlier this year, Morgan Beaumont's management was able to begin marketing the cards aggressively in January.

"Before now, we were less focused on selling cards and more focused on developing the network," Wildes says. "Now that that is in place we can make sure our card programs get in the hands of consumers."

Morgan Beaumont has already launched three debit cards and four prepaid phone card lines. Another three debit and seven more phone card programs are scheduled to debut before the end of the year.

Some of the company's early cards are targeted at the most easily identifiable unbanked group, namely foreign workers, especially Hispanics. In addition, Morgan Beaumont has introduced two-card sets specifically designed to allow easy and relatively inexpensive money transfers to foreign ATMs.

"All anybody has to do in the states is buy one of the cards and mail it to their family members in say Mexico," Kratsch says. "There is a small ATM fee to deposit the money in the states and a foreign ATM charge for the individual to withdraw the money. (Hispanics and other foreign worker) are definitely the most obvious group. Beyond that group, the unbanked consumer is really hard to quantify. It can be just about anyone."

At the same time that Morgan Beaumont is rolling out cards under its own company name, it is also talking to banks and celebrities about creating specific private-label debit cards. Celebrity debit cards featuring R&B singer Usher, actress Hilary Duff and even cartoon characters such as Hello Kitty have been promoted by banks and other companies seeking one of the more desirable unbanked groups: teenagers. Morgan Beaumont has an especially close connection to these celebrity cards; the company's vice president of business development, Scott Matthews was chief executive officer and founder of Platinum Financial Group LLC, the company that created the popular Usher Debit MasterCard program.

The company also has developed a payroll system for businesses that allows companies to deposit paychecks directly to each individual employee's debit card account.

Wildes expects this card to produce enough revenue for the company to make Morgan Beaumont profitable in the first quarter of 2006.

Morgan Beaumont is the latest adventure for serial entrepreneur Wildes. In 1985, Wildes co-founded Microtech International Inc., a manufacturer of memory and mass-storage devices. He then sold that company to ADO Electronic Industrial Inc., a Japanese publicly traded company in 1995.

In 1996, Wildes founded Nova Interactive Inc., a company that distributed computer components, peripherals and systems. He sold that company to GlobalNet Systems Ltd. in December 1997. He stayed on as acting COO for GlobalNet and its subsidiary, Online Entertainment Network, until June 1998.

Simultaneously, in 1997, Wildes started Meridian Capital Inc., an investment bank and consulting firm, which assisted Internet and technology companies with organization and operations. The company specialized in mergers and acquisitions, reverse mergers into public shells and general business consulting.

Wildes, who has had a winter home in Sarasota since 1995 incorporated his first company here, Morgan Beaumont, in 2000.

"Morgan Beaumont was a company we had at Meridian Capital to pay one of the employees," Wildes says. "I took the company with me when I left Meridian. I thought it had a good financial sounding name so I kept it."

In 2003, Wildes and Morgan Beaumont jumped-started the business plan through the acquisition of Typhoon Voice Technologies and its staple of products, mainly targeted at point-of-sale software and software technology for phone-based customer relationship management. Morgan Beaumont also brought on Erik Jensen, Typhoon Voice's co-founder, as company president.

Until 2004, Morgan Beaumont operated with nine employees, but as the technology and certifications neared completion and the card program rollout began, the company has grown to about 50 people. In response, the company has leased additional space at its headquarters building 6015 31st Street E. in Bradenton, growing from occupying about 10,000 square feet to more than 20,000 square feet.

"The market they're in is certainly hot," says Wayne Johnson, a transaction processing equity analyst located in Atlanta with Raymond James Financial. Johnson, who doesn't cover Morgan Beaumont for Raymond James and is not specifically familiar with the company, says the statistics he has seen of the number of households unbanked or under-banked run from 15% to 20% of American households.

"That's roughly 120 million people," Johnson says. "Now some of that number is voluntary. Some people - such as immigrants - have an innate suspicion of banks and authority. They didn't have a bank account in their country of origin and figure they don't need it here. But this means they can't get a cell phone, rent a car or even access the Internet."

Asked about the viability of the business plan for Morgan Beaumont, Johnson says the concept makes sense. "It sounds like an attractive market," Johnson says. "There are competitors though. From Western Union to Global Payments or Debitman (Card Inc.). There are a variety of prepaid options out there. There are already some 50,000 Western Union locations across the U.S. where people can add to prepaid cards with cash. It is a growing sector, and it's going to become even less fragmented and more consolidated. Some of these companies are not going to be able to compete."

Although declining to talk about any competitor specifically, Kratsch says he knows of no other debit value program that has all the pieces of the Morgan Beaumont program. Nor does any of them have what Jensen believes is the greater competitive edge - Morgan Beaumont's open network.

"I don't think we will ever give up our prepaid cards totally," Jensen says. "That will always be part of what we do. But it is pretty clear that the SIRE network has the greatest potential for future growth. Any company can use it, and we just take a piece of the transaction."

HOW THE CARDS WORK

The Bradenton-based company specializes in marketing and handling the back-end operations of debit cards and prepaid phone cards in the sub-prime market.

Buying

Because of the Patriot Act financial rules, Morgan Beaumont is responsible for verifying its customers' identity and address. The company says its method for verification is proprietary, but here is what the consumer sees. For example:

1. Grocery store customer service counter. A customer takes an packaged card to the customer service desk. He pays for it, typically about $10. During that transaction, the customer provides his name, address and government issued ID. The cashier swipes the card through a magnetic card reader and records what the customer wants to deposit in his account.

2. Convenience store, etc. ... In this instance, the customer purchases what Morgan Beaumont calls a "bogey" card - it's essentially a brochure with a plastic dummy card that is only used for activation. A customer takes a packaged card to the cashier and pays for it. The cashier runs the card through the scanner and takes the setup fee amount and the minimum initial deposit (usually $10). The customer then registers the card via the Internet or mails in an application form and Morgan Beaumont mails an active card within 10 days.

Paying

A consumer walks into a retail store displaying the SIRE Network logo and hands the cashier his card and an amount to deposit. The cashier swipes the card, puts in his private password and deposits the money (minus a fee). The cashier hands back the card and it is fully charged. The customer also receives a printed receipt of the transaction.

COST PER TRANSACTION

Like most financial service companies Morgan Beaumont structures its debit-card programs for small but regular reccurring income. The following is a sample it uses in its most recent 10-K SEC filings to show the typical card structure for consumer payments:

Monthly Maintenance $4.95

ATM Domestic $1.75

ATM International $5.00

ATM Decline/inquiry $1.00

POS Domestic $0.75

POS Domestic Decline $0.75

POS International $0.80

POS International Decline $0.80

Balance Inquiry Online Free

Live Call with CSR $1/Minute

Lost or Stolen Card $20.00

Card Liquidation $10.00

Research Requests up to $25/HR

Dormancy Fee $7.50

Retail Load $4.95

Ach Credit/Debit $1.25

Transfer From $1.00

Transfer To $1.00