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April 4, 2008

Prepaid industry ‘smaller than anticipated’ – Fed

Prepaid card spending in the US is lower than many experts had predicted, according to research from the countrys central bank, the Federal Reserve. In its Electronic Payments Study, the Fed said the total number of prepaid transactions in the country for 2006 was around 3.4 billion, with a value of $49.9 billion.

By Verdict Staff

Prepaid card spending in the US is lower than many experts had predicted, according to research from the country’s central bank, the Federal Reserve.
In its Electronic Payments Study, the Fed said the total number of prepaid transactions in the country for 2006 was around 3.4 billion, with a value of $49.9 billion. The study quotes various analyst estimates of the industry, including some from consultancies Mercator, Aite Group, Comdata, TowerGroup, Accenture and First Annapolis, which said total spending was higher.
For 2006, Aite Group reported there were a similar number of transactions to the Fed, 3.6 billion, but its total spending figure was almost double, at $95.4 billion. Mercator said the total load for all prepaid segments in 2006 was $197.9 billion, a figure that had been revised down from its initial estimate of $259.2 billion.
The report says: “Separating the hyperbole from documented results has proven to be a far greater challenge than anticipated. The reluctance by industry participants to share data suggests that there are some concerns about releasing information publicly.”
The Fed report said part of the reason for the different figures was because its study focused on transaction value, rather than card load value. Card load values will naturally be much higher, because prepaid cards have to be loaded before they are used. It is estimated around 20 to 40 percent of prepaid card load value is unspent at any given time. Breakage, where funds on a prepaid card are not spent or expire (see sister publication PCI 15), was also another potential source of difference.
The report says: “Many of the prepaid studies that have been conducted within the industry have placed a large focus on the volumes loaded onto prepaid cards. In some of the studies, it may also be the case that both loads and purchases are being counted to come up with some of the larger estimates that have been floated in the industry.”
The Fed said its report took extra care to ensure all transactions were counted only once, by only taking figures from processors. The report said closed-loop cards continued to dominate the prepaid market. They accounted for 3.1 billion, or 91.2 percent, of the 3.4 billion total prepaid transactions, with a value of $36.6 billion. The remainder were the 321 million open-loop prepaid card transactions in 2006, 88.4 million of which were through government prepaid programmes.
Closed-loop prepaid card programmes had been increasing because of a “compelling business case”, the report said. They provide incremental sales, reduce the need for post-holiday price discounting, speed up check-out lines and provide short-term working capital as well as long-term profit because of breakage.
Many in the prepaid industry expect most future growth to come in the open-loop market and the report makes reference to that trend. It also talks about government programmes in some detail.
The report says: “Government use of prepaid is gaining popularity as an increasing number of states are transitioning towards electronic disbursement of benefit funds. States are showing interest in the lower cost and higher efficiency of the prepaid card achieved from savings on postage and check printing.”
“Furthermore, faster funds transaction adds value to the prepaid mechanism. In addition, fraud among government prepaid benefit programmes is relatively low: prepaid cards are typically deemed lower risk than check payments.”

Consultancy and Fed estimates for US prepaid

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