hosted by Cards International, delegates were given
realistic insights into the true potential of prepaid worldwide,
along with glimpses of ground-breaking research presented for the
first time. But were more questions raised than answered?
Victoria Conroy reports.
The 4th annual Prepaid Cards Summit, staged in London on 22-23
October, brought together the prepaid industry’s most auspicious
thought leaders to discuss and analyse the development of prepaid
so far. The consensus is that prepaid is rapidly expanding and
growing at an unprecedented rate across several diverse and
emerging industry sectors – but there are differences of opinion
about just how profitable prepaid really is, and how industry
stakeholders can capitalise on growth in the most efficient and
profitable way.
Go deeper with GlobalData
As the prepaid market grows, challenges and opportunities are
evolving differently across different sectors. While some
challenges remain the same, such as consumer education, regulation
and pricing structures, new developments in technology, marketing
and changing consumer awareness are giving rise to a new set of
questions for industry players. And in the current uncertain
economic climate, what role does prepaid have to play?
A slew of industry reports published earlier this year, most
notably from the US Federal Reserve, have cast doubt on the
enthusiastic growth estimates bandied around by various industry
players, saying that prepaid will not fulfil profitability
projections by a wide margin. However, delegates at the Summit
heard that while some sectors have a way to go before becoming
successful, such pessimism around prepaid may well be
misplaced.
Profitable prepaid segments
Tim Sloane, director of the prepaid advisory service at payment
consultancy Mercator Advisory Group, explored the profitability of
prepaid in a changing economic environment by reviewing the
fastest-growing prepaid segments in the US and evaluating the
different profitability factors of each segment.
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By GlobalDataOf the 33 prepaid segments in the US, Sloane identified gift
cards ($66.2 billion), government ($61.9 billion), business
incentive ($18.5 billion) and payroll and benefits ($18 billion) as
the most profitable prepaid segments.
According to Sloane, gift card profitability is driven by
savings, consumer and merchant relationships, while payroll and
healthcare prepaid programmes profitability margins are available
with proper implementation and a large volume of cardholders in
place. However, some segments, such as travel, open-loop gift cards
and purchasing cards are characterised by low margins, requiring
higher volumes and greater operational efficiency.
With direct prepaid card income being comprised of fees,
interchange, float and breakage, and ultimately being dependent on
volumes, prepaid providers must not overlook ancillary issues which
may drive adoption and increase profitability, Sloane said.
Additional income could come from additional service income,
merchant funded discounts, and changes to implementation strategy,
such as profitable low-cost acquisition of new customers, increased
ticket size and ‘consumer lock-in’, where funds are tied to
merchants. However, Sloane added that income from new services must
cover the implementation and customer service costs.
Sloane highlighted that the lines between open- and closed-loop
propositions are becoming more blurred as the market becomes more
complex.
“Open and closed-loop are competing more directly,” he said. In
relation to open-loop gift cards, Sloane said that they are
continuing to demonstrate strong consumer adoption despite consumer
watchdog warnings about fees. The strongest distribution channels
are shopping malls, and web purchases. However, Sloane warned that
such cards are characterised by thin margins, which demand volume
and tight fraud controls.
Open-loop prepaid is also penetrating some closed-loop segments,
helped by innovative merchants and manufacturers who are
recognising the opportunities and are investigating or piloting
product entry.
Sloane also cast an element of doubt over the US Federal
Reserve’s pessimistic prepaid report, pointing out that the report
had failed to include prepaid segments worth $94.8 billion in
value, such as incentives, benefits and digital media. Sloane
concluded his presentation by emphasising that most prepaid
segments continue to grow at remarkable rates, with card
distribution strategies driving very high growth in some
sectors.
The need for consumer education
With an estimated global market opportunity of $6.46 trillion
for prepaid products, as stated by MasterCard in October 2008,
Marilyn Bochicchio, CEO of Paybefore, focused on the all-important
theme of consumer education, urging delegates not to over-estimate
consumer awareness of prepaid.
“There is a low level of consumer interest in financial products
– and ‘prepaid’ is meaningless to a lot of consumers,” she said.
“Why would a consumer relate a gift card to a government benefits
card or a card to get into a football game and buy snacks? The
intuitive link isn’t there.”
Familiarity with existing credit and debit card offerings can
also act as a barrier to consumer prepaid adoption. The main reason
many European consumers had not adopted prepaid was they did not
see a compelling reason to change their current behaviour of using
debit cards, credit cards and cheques.
“Consumers simply understand that they have a piece of branded
plastic that allows them to make purchases or withdraw cash,”
Bochicchio added. “Unless you are marketing to a very trendy crowd,
the tendency is going to be maintaining the status quo – unless, of
course, you are able to identify a compelling benefit to prepaid
cards.”
The challenge in educating consumers can be hindered by the
diversity of prepaid products in the marketplace, and the
difficulty in extolling their benefits to vastly different
audiences. Some methods may work well with some products, whereas
as a more tailored approach may be required for others.
“There is no such thing as a prepaid product – it is a family of
products that may have little to do with each other. Making an
impact takes time – in some cases, a very long time,” she noted.
She also stressed the importance of giving consumers a positive
experience using prepaid. “One negative message carries more weight
than 100 positive messages.”
Urging prepaid players to look at prepaid from the consumers’
point of view, Bochicchio outlined that the keys to successful
consumer prepaid education were consistency in messaging and a
long-term execution plan, focused appropriately for the prepaid
product and its target audience.
She also emphasised the importance of getting value chain
partners and competitors involved, and most of all, to treat
customers fairly.
She concluded: “Consumer education is meaningless without
solutions for handling split-tender transactions, easy reloading,
obtaining balances and providing availability of cards where
consumers can get hold of them.”
During a special session on prepaid applications in the
government sector, Thore Vestergaard, EMEA prepaid market manager
for Citi, outlined how prepaid solutions could help modernise
public sector disbursements, such as social benefits, pension
payments, unemployment benefits, disability benefits, tax credits
and child benefits.
Prepaid in the government sector
Vestergaard noted how e-government initiatives across Europe are
aiming to reduce costs, improve communication, eliminate paper and
automate services including payments, and improve service for
end-users.
“Paper-based payments such as postal vouchers are extremely
costly and cumbersome for governments and beneficiaries,” he told
delegates, because of low levels of automation, a high number of
fraudulent, lost and stolen payments, an inability to create
reliable audit trails, a lack of control and transparency,
ineffective and inefficient delivery of payments and high customer
service costs. All of these problems could be solved by governments
migrating away from paper-based payments to prepaid cards, he
said.
Government prepaid applications occupy a particular niche, he
added, because despite technological advancements and economic
growth, many people remain unbanked and without basic banking
products.
“Depending on the market, 10 to 50 percent of all social benefit
payments in Europe are still fulfilled through postal vouchers or
cheques,” he said. “Every payment requires a voucher or cheque to
be posted to the beneficiary at high cost and to the detriment of
thousands of trees a year.”
Vestergaard said that Citi saves its public sector clients
between 50 to 80 percent in payment fulfilment costs by converting
paper payments to prepaid cards.
As an example, Vestergaard pointed to the US state of Maryland
and its distribution of unemployment benefits. The state of
Maryland makes social benefit payments to over 800,000 citizens,
with over $450 million paid annually in unemployment benefits – 100
percent of which were paid via cheque. With the state looking to
reduce the cost and operational burden of issuing cheques and move
to electronic payments, the process was migrated onto Citi
Visa-branded prepaid cards, with great success.
Moving such payments onto prepaid cards has drastically reduced
the cost of fulfilling unemployment benefit payments and increased
convenience and flexibility for beneficiaries.
Prepaid and debt management
Corporate-loaded cards have long been identified as one of the
more profitable prepaid segments, given their high-volume and
regular-loading characteristics. In the current economic
uncertainty, prepaid cards could take on increasing importance for
a number of corporates, including those in the debt management
sector.
As mainstream credit card lenders tighten up their application
and lending processes, it is probable that more and more subprime
or unbanked consumers will turn towards prepaid cards.
Russell Atkinson, CEO of credEcard, which sets up and manages
MasterCard and Maestro prepaid card schemes on behalf of
third-party clients, outlined how prepaid cards are increasingly
penetrating into the debt management segment.
“Debt management providers have a sensitive task to manage the
income and expenditure of their client, as the client is often
unable to have access to credit or debit cards and sometimes bank
accounts. Some form of control mechanism is required to simplify
the process, pay debts and provide access to funds and means of
payment,” Atkinson said. “Any prepaid application must be based
around solving this problem for the cardholder.”
“As with all corporate-loaded cards our solution has to benefit
both client and cardholder,” he added. “Understanding the process,
how it can be improved and how the debt management company benefits
is critical.
“There are 2 main drivers – increase the utility of the
proposition and/or reduce costs. The solution needs to be easily
operated by the debt management company and easily explained to the
consumer.”
Prepaid solves a problem in this space as it is a simple system
providing corporate clients with ease of administration, and a
simple, comprehensive and cost-effective solution. For the
cardholder, benefits include an effective means of controlling
expenditure, a fully functioning payment card, and an opportunity
to rebuild credit scores.
Continuing the debt management theme, John Nichols, CEO of the
H&T pawnbroking group in the UK, talked about how prepaid was a
perfect complement to companies such as his which deal with
customers that mainstream banks don’t want, such as the financially
excluded, the unbanked, subprime and credit-impaired.
“The current environment leads to potential growth for the
alternative financial services and the prepaid card industries.
Banks will raise consumer costs in the current environment, giving
alternative prepaid card products more credibility. Prepaid cards
are one of the viable solutions being delivered to service a
growing consumer need via corporates like H&T,” he said.
Nichols focused on how prepaid could bring about
‘enfranchisement’. “It aligns to our customers’ needs and empowers
our customers by giving them access to an alternative payment
method and banking solution, without getting them further into
debt. It also delivers complementary benefits, such as security,
budgeting and debit control,” he added.
Nichols stated that his company’s branded prepaid card had
converted £15 million in cash disbursements to its prepaid card,
meaning that less cash was required in-store, and eliminated the
need to turn away some customers, meaning an increase in frequency
of footfall.
“Our prepaid card has helped to generate over £92,000 of new
store transactions from customers, and brought about an increase in
new customer opportunities,” he explained. “Nearly 15,000 load
transactions from new H&T customers have been driven to H&T
from purchasing the card elsewhere, which gives us a great
opportunity to sell H&T products.”
Prepaid and transport
Turning to prepaid applications in the transport sector, Ken
Howes, a director with payment consultancy Edgar Dunn & Co,
examined the “phenomenal growth” of prepaid transport applications,
giving examples of the Octopus scheme in Hong Kong and the Oyster
scheme in London, along with other prepaid transport schemes set to
go into operation across the world over the next few years.
The opportunities for prepaid in this sector could include
accelerating the adoption of newer technologies such as mobile and
contactless, a shift towards multi-application solutions to replace
single-application solutions, and revenue generation through
improved cost efficiencies.
However, Howes also noted that there are questions to be
answered about prepaid in the sector, such as the impact of the
Payment Services Directive (PSD) on business models and the role of
the various stakeholders in the value chain. Also, the roles of the
payment schemes Visa and MasterCard need to be determined properly.
Howes also suggested that maybe transport could provide the
platform for multi-application prepaid solutions, but he asked
whether transport systems would drive commoditisation in the
prepaid market.
Innovation in technology
Innovation in technology was a recurring theme throughout the
conference, and is one of the forces that are shaping the prepaid
landscape. Sahir Anand, senior analyst at payment consultancy
Aberdeen Group, looked at the merchant perspective of mobile and
contactless technology.
According to a recent survey conducted by Aberdeen, 80 percent
of retailers surveyed are aware of this technology today compared
to 63 percent in 2007, and 52 percent of retailers are exploring
the use of mobile payment solutions within 24 months. According to
Anand, the three critical pressures driving mobile near-field
communication (NFC) technology are the need to improve customer
retention and loyalty, the need for greater convenience, and the
desire to be early movers and market leaders.
Continuing this theme, Lee Britton, CEO of Altair Financial
Services, looked at how such technology could be deployed in global
prepaid programmes.
“The ability to manage a prepaid card with a mobile phone has
become commonplace. But what happens when the mobile network
operators take the concept onboard – and why haven’t they already?”
he asked.
Exploring whether contactless and mobile capabilities could
drive growth in adoption of prepaid, Britton said that prepaid
presents new flexibility to the payment sector – prepaid does not
have to be restricted to a card and can take the form of other
objects, such as phones, watches, or fobs.
“For an innovation to succeed, it must drive value to the
consumer that can be delivered while making a profit for the
principals and the suppliers,” he said. “Many parties, including
acquirers, issuers and merchants, will benefit from innovations in
prepaid. Programmes that succeed will be the one that manage risk
and rewards effectively.”
