The third annual Prepaid Cards Summit,
staged by VRL KnowledgeBank in late October, reminded delegates
that despite the hype and optimism over prepaid, regulation and
profitability models present challenges, and sometimes a reality
check may be needed. Truong Mellor reports.

While the prepaid card market in the US has thrived in a myriad of
forms including gift cards, remittance and corporate cards over the
past decade, it has only just begun to establish a cultural and
financial foothold in Europe. Sensing the opportunity for customer
acquisition and branding in previously untapped markets, a
multitude of financial players have been entering the prepaid space
recently either as issuers or co-branders.

Nevertheless, numerous speakers at the recent 2007 Prepaid Cards
Summit, held in London in October by VRL KnowledgeBank, were quick
to point out the challenges that exist within the prepaid cards
market alongside the current opportunities for growth. The third
annual Prepaid Cards Summit took place at a time when there has
been a flurry of activity within prepaid, across all sectors. New
companies have started up, new programmes launched and new
applications introduced. Some of Europe’s largest and best-known
banks are now getting into the market, having witnessed the success
that non-banks have had in the prepaid space over the past few
years.

A sobering effect

If there was an overriding theme for the summit, it was one of a
reality check for the industry, with the exit of major companies
such as Western Union and American Express from the prepaid space
perhaps having a sobering effect on the sector following the hype
surrounding the market in recent years.

Potential obstacles for the prepaid industry would most notably
come in the form of both regulation and profitability. As the
sector grows in volume, it has begun to attract the attention of
financial regulators across the globe. The issue over breakage fees
and card expiration in the US as well as compliance concerns
regarding the varying purse limits across European countries both
serve as good examples of this.

Chris Reddish, group head of prepaid in Europe at MasterCard
Worldwide, spoke of the need to change ingrained consumer
psychology to combat the prevalence of using cash for
payments.

At the summit’s inaugural presentation, Reddish saw the
opportunities presented by continued acquisition within the prepaid
sector as key to enabling further development. He saw a market
saturation level of 10 to 12 percent by 2010, driven by several
factors. The past 12 months have seen the first wave of
acquisitions within the industry, with Capital One acquiring
prepaid marketer NetSpend and Accor Services purchasing PrePay
Technologies, a specialist in the design and development of prepaid
cards and management payment authorisation platforms. Reddish also
spoke of the importance of immigration as a key driver for prepaid
growth in Europe, claiming this “increased transience” as well as a
desire for financial inclusion would be a “key cornerstone” of the
market.

New offerings from MasterCard

MasterCard announced that it is launching three new prepaid cards
for the corporate and government sectors, allowing companies to
improve the management of funds through increased control and
efficiency. Reddish saw “fantastic opportunities” for prepaid
cards, most notably in the government and transport sectors and was
upbeat about the current state of the European prepaid market.
Citing the recent acquisition of PrePay Technologies by Accor
Services, Reddish noted that such buyouts are an indication of how
serious some of the larger organisations are taking prepaid within
Europe. “It’s an opportunistic time for the smaller players in the
industry, and it’s also a great cherry-picking time for the larger
players as we go forward.”

Kevin Phalen, senior vice-president at JPMorgan Chase, believes
that future opportunities for prepaid, especially within developed
markets, lie with consolidation and joint ventures. He stressed the
potential of partnerships between the public and private sector,
citing JPMorgan’s own ventures with the UK Post Office as well as
its NavyCash financial system, allowing sailors and marines to
access checking and savings accounts at ATMs around the world, as
well as to purchase virtually anything they need on or off ship
without carrying cash. In the case of JPMorgan Chase, partnership
is essential for schemes of an international scope, as the bank has
no global reach in terms of POS providers.

According to Fiona Duncan, vice-president of innovation and
acceptance at Visa Europe, the future growth of the industry lies
with younger consumers, who now have more buying power than ever.
Banks are keen to form relationships with these teenage consumers,
hoping to develop them over the years into profitable customers.
She cited the example of an initiative taken by a Spanish member
bank to capture youth prepaid spend through a youth-specific
division and an online community that can now boast membership of
one in five Spanish youths. “With so much spending now taking place
online, cash just isn’t up to the job,” she said.

A virtual prepaid Visa account pioneered in Ireland was designed
specifically for online spending, aimed at consumers that do not
have a payment card, while a member bank in Germany has begun a
prepaid online gaming initiative. With these new avenues for
spending, it seems as though financial institutions are still only
scratching the surface of prepaid’s potential for new payment
solutions.

At Visa Europe, over half of its top 20 issuers are currently
rolling out prepaid or finalising their market entry strategies.
This brings a new dimension to the prepaid market, as the larger
corporations are not inclined to look at the prepaid industry as a
stand-alone business. Instead, they are assessing how prepaid can
be integrated with the bank’s wider strategy. In particular, the
potential for customer acquisition in the youth and migrant
segments through prepaid presents many opportunities for
growth.

“In the early days, prepaid was definitely a niche business,” said
Duncan. “Most issuers concentrated on the low-hanging fruit – the
gift cards, the travel cards, the corporate reward cards – where
the implementation wasn’t too demanding and the profit potential
reasonable. It’s niche no longer. I can easily imagine a scenario
where over the next decade, prepaid ranks right up there with debit
and credit.”

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Challenges and potential solutions

Potential obstacles for the prepaid industry would most notably
come in the form of profitability, as well as increased attention
focused on the market from financial regulators as well as tighter
media scrutiny. Speaking at this year’s summit, Edgar Dunn and Co.
director Ken Howes pointed out that in many cases the profitability
challenge for organisations was a case of uncertainty regarding the
prioritisation of a prepaid programme.

“When you look at profitability, there are some organisations that
are struggling to break even, right through to some that say ‘yes I
have a business case, but it may not be the one I want to invest in
at the moment’,” he said.

Card fees are a potential source of profit, but prepaid business
models must take account of the pricing for other payments products
within local markets. The likelihood of consumers paying prepaid
card fees is heavily dependent on the existing pricing structure
for alternative propositions within their domestic market. Implicit
to this is the idea that cardholders will pay for services they are
used to paying for, but the utility has to be there.

Substitution economics as opposed to simple revenue generation has
been in many instances a key driver for prepaid card growth, in the
form of either cash or vouchers. However, Howes noted that it is
the non-bank institutions that have up until now proven to be more
innovative, targeting a variety of consumer sectors that have
struggled with profitability. Howes believes that banks, having had
their fingers burnt previously with stored value initiatives, are
proving to be slow adopters when it comes to general spend prepaid
cards.

Additionally, consumer fees are a key issue, as in some markets
these remain unsustainable without any significant added value. To
solution to all of this, according to Howes, is for institutions to
partner up with third party organisations to provide additional
customer value through their products. He pointed out that by
introducing partnerships into the prepaid proposition, programme
managers will be able to share or even reduce their fixed and
variable costs while at the same time generating increased value
for the consumer, citing both merchant driven travel and shopping
cards as well as co-branded prepaid models such as Cetelem Orange,
a France-based initiative that offers bank and credit services
managed by Cetelem, the specialised subsidiary of the BNP Paribas
group, as well as online services linked to Orange mobile.

Howes refers to these types of value added products and
partnerships as “prepaid by default”, and stressed the importance
of redefining prepaid as not just for the under-banked but also for
customers that are budget conscious.

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Regulatory challenges

However, the increasing number of non-financial institutions
entering the prepaid sector also presents a fresh set of regulatory
challenges in some cases, as these companies tend to be less aware
of financial regulation. This may potentially impede growth, or in
some instances create legal problems for any joint initiatives that
are not on top of their compliance and regulatory game. As the
sector grows in volume, it has begun to attract significantly more
attention from regulatory bodies across the globe.

Within the European prepaid market, some of the key aspects of
compliance relate to EU governance and the Payment Services
Directive (PSD) in particular, which is scheduled to be implemented
by member states of the EU by November 2009. For institutions that
provide payment services, the PSD will enforce a new licensing
requirement as well as a set of prudential and capital adequacy
requirements in order to create a level playing field. Beyond the
licensing requirements, there are also operational requirements for
organisations involved with processing, as their clients will
require compliance with the PSD.

Mobile technology

One other interesting recent development that was highlighted at
the summit is the growth of mobile technology within the prepaid
space. This is particularly notable when dealing with emerging
markets, where mobile phones are more common than bank accounts,
according to Stuart Butler, head of business development and sales
at prepaid card provider Altair. He cited mainland China as a prime
example of this – 60 percent of the population own a mobile phone,
while only 20 percent have a bank account.

This also presents great opportunities for remittance payments to
these emerging markets, according to Butler, who believes that
mobile technology – through various other channels such as
contactless payment and mobile foreign exchange – will begin to
make serious inroads into the prepaid sector by early 2009.

During a panel discussion, delegates heard that, although economies
of scale are a huge advantage when entering the prepaid market,
smaller players need not be put off. End users of prepaid products
will be prepared to pay for the product if there is value in that
solution. The issue is whether the cost structure for that solution
demands a level of scale. Depending on the products, some may
demand scale while others may not. Howes told delegates: “I do
believe there is a role for smaller players. Scale is a factor, but
it’s not the most important factor. The most important factor is a
value proposition that the consumer, or the corporate, is willing
to pay for.”

Overall, the theme of reality was a recurring one throughout the
conference, notably the reality of the opportunities and growing
segments such as corporate, public sector and new markets. There is
also the opportunity to make prepaid part of an integrated product
set. Delegates learned that the other side of this reality is the
challenges, of which there is no shortage. Legal and regulatory
issues, distribution and profitability challenges came up several
times, along with the ongoing issue of educating consumers about
prepaid. However, as was demonstrated at the conference, these
challenges can be met, managed and overcome.