Now in its 20th year, the Cards & Payments Europe conference, held by VRL KnowledgeBank, hosted a series of sessions dedicated to the growth of Europe’s prepaid market, in which issuers and industry analysts came together to explore the huge potential that awaits prepaid over the coming years.
Tilo Schurer, head of marketing for German card issuer Landesbank Berlin (LBB), told delegates about Germany’s burgeoning prepaid market and how his organisation had learned lessons along the way concerning how to develop and market prepaid programmes. LBB has extensive prepaid co-branding relationships with major organisations such as online retailer Amazon and with Microsoft’s Xbox games console and is also branching out into gift cards.
“The major revenue driver for me in prepaid cards is the yearly fee. Prepaid cards have to be more expensive in terms of fees than credit cards. There are some minor revenue drivers such as interchange, foreign transfer fees, float interest and ATM fees but they are minor compared to the yearly fee. The cost per new customer is relatively small, compared to new customers acquired via credit cards. From the business case perspective, the main objective is not really to make money out of the prepaid game. Some margins are there but they’re not huge; it’s more to do with acquiring cheap new customers and upselling them later to credit cards,” he said.
“In the gift card segment the business model is slightly different. The major revenue driver is a one-time set-up fee and breakage, and minor revenue drivers include fees for value-added services, interchange, float interest and ATM fees.”
Replacing credit cards in Germany
In relation to target segments, there are four main categories that LBB is targeting with its prepaid and gift card range, and some factors are exclusive to the German market. “One of the major consumer target markets is minors aged between 12 and 18. Internet payment is the major driver for the youth segment as credit cannot be offered to minors in Germany. Design of the cards is very important to young customers, so we have a range of over 400 designs,” he said.
“Another target segment is the student segment between the ages of 18 and 23 – credit can be offered to these customers but the credit scoring process is very stringent in Germany, so those customers usually get low limits on credit cards. There are some underscored people in this segment we can sell prepaid cards to.
“Risk-averse adults who want to control their spending are also a target market, along with adults who have bad credit scores. Risk-averse adults can include people who already have a credit card but are wary about using them for internet payments.”
Ulf Geismer, a director of global strategy company Edgar Dunn & Company, highlighted a geographical area that offers significant opportunities for prepaid cards – that of Central and Eastern Europe (CEE).
“Prepaid card products provide opportunities to reach out to untapped markets and client segments. That definitely is a profile that will fit many central and eastern European markets. The most recent studies from MasterCard indicate that 25 percent of global prepaid spend is going to be in Europe, and it also indicates that most of the prepaid card spend growth will be in the Eastern European markets,” he said.
“We expect that prepaid products in the CEE region will offer a lot of potential for the government, municipality and social welfare segments. These are areas that are not automatically related to credit cards or card payments in general, but they are seen as huge growth areas for prepaid. We also see the insurance, money transfer and remittance sectors, as well as the corporate sector, as prime growth markets.”
However, Geismer said that there are very different driving factors behind prepaid in the CEE region as opposed to Western Europe. “The less developed payment markets are being driven by very basic infrastructural needs. It is not the pure convenience factor seen elsewhere, but governments and municipality institutions trying to overcome the lack of POS payment infrastructure. The implementation of the Single Euro Payments Area [SEPA] will create one of the largest payment areas in the world, and also one of the most advanced. However, the important thing is to look at individual markets,” he said.
“If we compare the CEE markets within the European Union [EU] with the rest of the EU, it is generating a very interesting picture. These markets, although part of the EU, already show extreme discrepancies in their payment infrastructures compared to the other European markets. If we look at card transaction levels per inhabitant we see they’re about six or seven times lower in these markets than we see in the rest of Europe. ATMs and POS infrastructures are a prerequisite for using prepaid cards in an EMV environment, and their development in these areas are much lower than in the rest of Europe.
“Other factors like mobile phone usage are important, and how familiar people are with using prepaid cards for mobile phones. Internet penetration is also a factor – it is much lower in these markets.
“It’s easy to see that there’s huge potential for increasing electronic payment transactions over the next few years. The assumption is that for those countries already in the EU, the average transaction value per inhabitant is probably going to move towards the EU average. That in itself generates the potential for 5 billion additional transactions just in these markets. In these markets, the business model will not be driven by cardholder fees, but by cost savings on the issuer side. Probably the biggest opportunity for prepaid is in providing banking services to those parts of the population that do not have access to them.
“Other opportunities lie in improving payment efficiency in these markets and in reducing the risk for certain customer segments with no credit history. For a lot of these people, there is not enough background on them to be able to issue them with a credit card. Prepaid cards in these markets will probably not be used mostly at the POS; the most common usage will probably be at the ATM to withdraw cash, and that also needs to be included in the business model.
“Most importantly, the business cases for prepaid cards in these markets need to consider consumer requirements and also what issuers and merchants need. Last but not least, with the CEE region, there is no homogeneous Central and Eastern European market – each market is very different, and the speed of development of each will be very different over the next few years.”
Opportunities for banks
The conference also looked at how banks could adopt a range of roles in Europe’s prepaid market, given that non-banks have so far taken a leading role in prepaid. John Goodale, director of retail, prepaid and value added products at payment processor TSYS Europe, explained how banks could be missing out on lucrative opportunities in Europe’s rapidly growing prepaid market.
According to Goodale, there are three main routes by which banks can participate in prepaid programmes. The first, bank identification number (BIN) sponsorship, provides the bank with the capability to access their association or scheme membership in order for a non-member to issue cards. Goodale said: “BIN sponsorship is an easy, low investment route and provides potentially great volumes, particularly for small banks – you can go from a couple hundred cardholders to a couple hundred million in a few years, just by having the right relationship. However, there are significant risks associated with it. The volumes have to be there to make any sense. What it also does is divest responsibility in a lot of cases.”
The second possibility lies in product/programme management, whereby the bank develops a number of prepaid card programmes and offers the full capability to the client, which owns the product, servicing and distribution.
“That’s an area of much higher value – you have more control, you can build better relationships. But forming those relationships takes time. The level of control the bank has over the business case can be an issue. If you move further up the chain, there are more costs involved. And if the business case isn’t owned by the bank, and the distribution isn’t owned by the bank, if it doesn’t make its numbers, how does the bank then position that? What if one of the partners loses interest?” he said.
The third option is that of full marketer, in which the bank develops a prepaid product for its own target business to consumer or business to business market. The end-to-end product is owned and managed by the bank. “The bank offers the product to the client itself, and the consumer has no confusion as to who’s offering the programme. But a lot of organisations aren’t well geared up to offer prepaid. Where does it fit into the organisation? What sort of reach do you have to the customers? Can you offer products through the same channels that you’ve been offering previously? Banks want to be able to offer those products but there’s no point if they haven’t got the salesforce or customer service functions or outlets to sell to the customer at the end of it,” he said.
Goodale stressed that prepaid should not be seen as a panacea. “The important thing with prepaid is that you treat it like any other product. It isn’t a magic product, it doesn’t invent customers. It needs to go through the same processes that any other product does before you get to the point of launching,” he said.
“Three or four years ago, BIN sponsorship was all the rage. A lot of banks saw it as a fantastic way to move from where they were to a massive volume of cards in a short space of time. But now, very few banks call themselves BIN sponsors. What they’ve done is try to move further up the value chain. The whole concept of divesting responsibility to a third party is something that’s not seen as a sustainable business model.”
Robert Courtneidge, global head of cards and payments at law firm Salans, focused on the regulatory and legal issues potential prepaid issuers need to consider. “The E-money Directive, which was the precursor to the Payment Services Directive, is where we have our basic guidance on how to run e-money schemes. Implementation across the EU is not uniform. Different countries have interpreted the directive differently, as they’re entitled to because it’s a directive and not a regulation. This has ended up with an uneven playing field,” he said.
“The other regulations that impact prepaid are the anti-money laundering regulations. A year ago the third anti-money laundering directive came through, and it will be put into law in most countries by the end of this year. That has created a little more scope for a risk-based assessment of knowing your customer (KYC) and anti-money laundering, but it’s going to take a while for that to happen. Money laundering checks at the KYC level at the beginning of a process in prepaid are always going to be a disincentive to customer acquisition.
“Equally, data protection laws are always a bugbear in any card or payment industry, especially where you’re collecting personal data on people.
“Buying a gift card is probably the least regulated aspect and the cost of producing and running a gift card programme is one of the lowest. However, it has its deficiencies in that it’s restricted to that single issuer. With a full e-money licence, there are heavy capital requirements. You’ve also got to hold 100 percent of the float in ring-fenced accounts. On top of that scheme, rules apply. The actual costs of running the business can be quite high. The cost is to the issuer and programme provider, it’s not the cost to the end consumer. We need to look at how we can reduce the regulatory burden in order to make the business cost-effective, and try and create a more level playing field.
“Pricing is obviously a key issue. Division of obligations, and service levels are far more important if you’re at the BIN sponsor end than at the marketing end, and liability depends on how much of the responsibility you’ve picked up. The key thing that everyone needs to look at if they’re entering a contract with a bank or other BIN sponsorship agreement is how to exit. It’s very important to sort that out at the beginning of the relationship.
“Prepaid is moving extremely fast, and I see more and more new concepts coming through the door. It’s going to be device-agnostic – it doesn’t matter whether it’s card-based, phone or virtual. The whole point is the utility, it’s what you can do with it. It’s going to be application-agnostic – it doesn’t matter if it’s mag stripe, chip, contactless or biometric. Biometrics is certainly the way forward and the least invasive method is going to be the most useful.
“Prepaid is borderless – with SEPA coming in it’s going to be borderless for Europe, but it needs to be borderless globally. With Visa and MasterCard there are no borders to what you can do. Most importantly, it’s got to be customer-centric. The customer will drive this product. It’s unlikely to be the banks. Look at what the customer needs and wants and push it through.”