Consultancies have not had much luck predicting the
growth of the prepaid market in recent years. The majority of
estimates have proved over-optimistic, with variances of hundreds
of percent. Will Cain reports on the problem


Prepaid spending: Consultancy and Fed estimates for US prepaid spending, 2008

Over the past three years, many and
varied estimates of prepaid market volumes have been published
creating a confusing picture for those trying to build their
businesses strategies.

Why have the estimates varied so
much? And what are the consequences for the prepaid industry?

New figures from Boston Consulting
Group, working on behalf of MasterCard, estimate the current
European open-loop prepaid market is worth $22billion per year in
gross dollar volume. Three years ago, BCG, again working with
MasterCard, was estimating a 2010 European prepaid market (this
time including open and closed loop) worth $164bn per year. As
CI went to press, no figure was available for the
breakdown between open and closed loop.

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UK-based PSE Consulting also
performed research on behalf of MasterCard and its partners Link
and First Data. Its 2007 estimate of the European prepaid market in
2010 was that open loop would be worth €75bn ($100.9bn), 416%
higher than BCG’s most recent estimate for the European open-loop

A PSE spokesman said that PSE is
working on an update of its 2007 report and will publish a
new-market sizing report later this year. BCG declined to

MasterCard spokeswoman Louise
Herbert said that the differences between the PSE and BCG research
are down to different methodologies and that estimates are becoming
more accurate as the industry matures and develops.

And it is not just the European
prepaid market that is difficult to size. The US Federal Reserve’s
electronic payments report in 2007, in a section on prepaid, said
“separating out the hyperbole from the documented results has
proven to be a far greater challenge than anticipated”.

The Federal Reserve estimated that
GDV in the open-loop US prepaid market was $36.6bn in 2008.
Mercator estimated $197.9bn for the same period and Aite estimated

One payments professional
interviewed by CI, who did not want to be named, said she
had some sympathy with the consultancies making the estimates.

Any prediction made before the
financial crisis, she said, can effectively be discounted because
of the far-reaching effects it had on the banking industry.

Others, notably Rich Wagner, an
entrepreneur and CEO of UK prepaid business APS, say they never
thought the predictions would be realised.

“The projections have absolutely
not been met,” said Wagner. “To be honest even when I saw them, and
as euphoric an optimist as I am, I never thought those projections
could be reached.

“I felt that sometimes the research
PSE and others did was almost fuelled by the associations to get
people involved because the growth was going to be so great and it
would be the next big thing.

“I think from my standpoint, I took
it with a grain of salt. There was going to be growth, there is

Open loop predictions: BCG and PSE research – 2007 and 2010

BCG’s most recent estimates predict
open-loop GDV will increase to €127bn in Europe by 2017, a compound
annual growth rate of 26%. MasterCard said it has confidence in the
estimates, and also stood by the figures in BCG’s 2007

“The research has been done by
estimating volumes by year to 2017,” said Laura Kelly, head of
prepaid at MasterCard in the US.

“It is done by triangulating a lot
of different information on the market and it has been extremely
useful to our customers because it helps guide them on their

In markets where there is
significant prepaid volume, like in the US or Europe, Kelly said
quantitative projections had been made based on the forward
projection of historical data.

Qualitative factors were also
considered. They included the impacts of regulation, the number of
unbanked and the development of card acceptance infrastructures in
different countries.

In less developed markets, BCG
looked at the factors like the percentage of unbanked or unbanked
population, the likelihood of governments to migrate from cash and
cheques to prepaid.

“For example, in the Middle East, they mandated no more cash
payrolls, and that was a big factor in the market,” Kelly said.