The prepaid card industry needs to shed its get-rich-quick image and focus more on innovation and educating customers about its advantages. So says Fiona Duncan, head of prepaid at Visa Europe, who shared her thoughts about the state of the industry with John Hill.
When prepaid exploded in the US and started to move into Europe, many thought the concept was a sure-fire winner in the UK. Consultancies made inflated predictions of where the UK market would be in five and ten years’ time, and many look likely to have significantly overestimated.
As the head of prepaid at Visa Europe, Fiona Duncan, has a better understanding of the state of the UK market than most, and admits prepaid has not lived up to expectations. A lack of government usage of the products and an attitude among prepaid issuers that the products were nothing more than “get-rich -quick” opportunities to charge exorbitant fees have turned consumers off.
“What we’ve seen is a lot of stopping and starting in some markets, especially with the recent economic changes and a tough climate,” she said.
“What this has meant is that a lot of restructuring in banks has slowed things down and changed many priorities and programmes within these organisations.
“Despite this we’ve seen steady growth, although what we’ve seen probably hasn’t met our expectations over the last two years because of this restructuring.”
The dominance of Italy
Europe has always been a prime location for prepaid, although the presence of different payment systems in different countries within the Eurozone has meant growth and development has been very country-specific. Italy is one of the countries that has adopted prepaid with relish, and still looks likely to be the market leader for some time.
“Our biggest market is Italy and has been for a long time,” said Duncan.
“It’s going to be quite some time before other markets catch up; Italy is a long way ahead of the game. The UK is starting to take off now, although it is certainly one of the most stop-start markets. In fact the O2 Money prepaid programme has been one of the most phenomenal in the UK because it’s actually helped people understand what prepaid is all about.
“They’ve made a point of not marketing it as a credit card which can be a dangerous thing to do with prepaid. For the issuers and banks this has brought into relief the fact that prepaid is not a get-rich-quick scheme and it’s not about the fees.
“To this extent there are some that believe a lot of the problems in the UK were related to some of the programmes coming out with very high fees. For instance, on the money comparison websites there are about 20 different products, some of which could be seen as extortionately high for people to get into.
“What O2’s done for the UK industry is that it has shown innovation is very important but has also shown the importance of value. People look for something that will add value, and if it adds value to them then they will be prepared to invest in it further.”
Visa’s product offering in the UK started in commercial fields, with insurance cards, incentive cards for employees and travel cards to replace traveller’s cheques. Consumer prepaid has struggled because there remains a lack of availability of everyday general purpose cards. Those that are on the market tend to have high fees, putting off prospective consumers.
“As well as this, banks in the UK weren’t as keen on prepaid,” added Duncan.
“It didn’t hit with the credit market and didn’t hit with the debit market. Also, because banks were restructuring, they were under a lot of pressure [during the financial crisis]. It’s a big investment to get prepaid up and running and it wasn’t going to give them the sort of returns they’d get from the rest of the market. So for the UK the difference is getting the big brands involved as well as getting the smaller players.”
“I think the UK will continue on that basis for a period of time; it’s a different kind of market, while if you look at places like Italy and Poland they started from a different customer base and were looking for different things.”
Both Italy and Poland’s prepaid markets started off with government programmes which issued benefits and aid to citizens on cards rather than through vouchers or cash handouts. This has become the benchmark for pushing prepaid products because it means consumers are forced to use the products and learn about their features. They then become more likely to buy other consumer prepaid products offered by commercial card issuers for spending categories, such as online and travel currency cards.
“In Poland we’ve had a scheme out for about four years now with the Polish government – one of the first ones out there – and the UK government is also starting to do quite a bit too,” said Duncan.
One of the best-known schemes in the UK is Lewisham County Council’s partnership with Citibank. When youths under the scheme leave care and live by themselves for the first time, they get an allowance.
“What used to happen was they all used to come to a defined location every week and the government worker would then have to take cash out to that location and pay it out to those who needed it,” said Duncan.
This caused a number of problems. First, all the youths had to pay for travel to pick up their allowance.
Another issue was security, which is a common theme in prepaid. Carrying cash can make people vulnerable. This is particularly true when the youths were carrying cash from the benefit pick-up point. Moving these transfers on to prepaid cards allows benefit recipients to have cash paid straight on to their cards, and means that even if the cards are stolen, they are able to recover the funds.
Duncan said the biggest schemes were in Turkey where there is a large government benefit programme, Poland where there is a government benefit programme, and Italy, which is just starting out with a benefit scheme.
“I think benefit schemes help prepaid as a source of social inclusion because firstly it enables people to be one of the mainstream – having access to cards as a payment method,” she said. “The second thing is that it really helps people to manage money.”
The prepaid market has always been a hub of innovation, with many issuers seeing the platform as a way to launch a multitude of different consumer cards, from foreign exchange to credit-building products. This approach was seen as attractive in the opening stages of prepaid development, when issuers were trying to establish which products were most attractive to consumers.
The onset of the financial crisis changed this emphasis on frequent product launches for two reasons. Firstly, prepaid cards require heavy marketing and, as issuers profit margins became squeezed, budgets were cut.
Secondly, the financial crisis has created a new focus on transparency in the financial industry that was not well served by offering consumers card portfolios with 10, 20 or even 50 different products. There has been a trend towards more focused, clearer product offerings for consumers.
“It has been really interesting in prepaid over the last few years, and what we’ve found is that innovation is really starting to catch on,” said Duncan.
“There is no longer the attitude that you can simply put cards out there, forget about it and they’ll work for you. Prepaid products have to have investment and innovation behind them.”
Educating consumers about prepaid is an important part of driving usage. Prepaid businesses are using a number of initiatives to try to achieve this. Duncan believes that integration with mobile phones is one of the most important.
“I think integration with mobile phones is one of the key ones,” said Duncan. “The reason for this is that when people use their mobile phones to pay (for example the O2 scheme in the UK) they get used to seeing how much money they have when they load up the prepaid card on the phone or spend money with the card, and they can also check the balance at any time.
“This is especially important in helping people manage their money and then also provides a similar experience to cash.”
Prepaid is comfortably the fastest growing payment form in the markets where it has been introduced. The opportunity for prepaid spend is in the ‘multiple trillions’, according to some estimates, in terms of gross dollar volume. Separate research, produced by Visa Inc, showed global personal consumption expenditure was $23trn, excluding Europe. Cash and cheques represented 41% of this, giving a crude cardable opportunity of $9.5trn.
Of more concern to the banking industry is the potential for prepaid products to cannibalise revenue from credit and debit cards. Credit cards in particular have higher margins for banks and some are concerned the offer of prepaid cards could cause consumers to switch to prepaid.
Duncan said she saw prepaid as a substitute product, rather than one which is vying for share-of-wallet spending with credit and debit.
“Importantly you can use prepaid in places where you can’t use debit or credit, and I think that’s why it’s important,” she said.
“Things like paying benefits, incentive payments and all those sorts of things – you wouldn’t do them on a debit card and you wouldn’t do them on credit.
“I think it could replace cash in some instances, but it’s going to be a long time before it penetrates all of cash… and people are different.
“Take spending on the internet. What prepaid does is it allows people to define the amount on the card they want to spend on the internet, particularly if they don’t have access to debit or credit.
“It may also be because they don’t feel comfortable using debit or credit online.”
Better financial management
With advantages such as financial inclusion, security and the ability to help consumers manage their finances better, prepaid should be able to gain traction in markets throughout Europe.
If governments, prepaid businesses and card associations start to educate consumers better about these, the industry should have a bright future, and make up some of the lost ground over the last few years.
“What we’ve found in the last 18 months is that everything is taking off again,” said Duncan.
“We are seeing a major acceleration and we are expecting our growth next year to be double what it has been in the last two years.”