Prepaid cards in Europe are well on
their way to becoming one of the fastest-growing payment methods,
but different regional markets and different card sectors require
very different approaches, as was outlined at the recent Cards
& Payments Europe 2007 conference in Berlin. Victoria

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

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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

“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

“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

“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

“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.”