Prepaid usage is continuing to grow
strongly in the US, with both open- and closed-loop programmes
seeing rises in loading volumes. But are growth rates living up to
the expectations of the prepaid industry? And is open-loop growth
still being held back by merchant resistance? Charles Davis

Economic uncertainty might slow the US
prepaid card market, but its growth is expected to continue, thanks
in large part to the inertia created by the macroeconomic movement
away from credit and towards cash and cheque alternatives. Mercator
Advisory Group’s Fifth Annual Closed-Loop Market Assessment,
released this month by the Massachusetts-based payments
consultancy, reports healthy growth in the closed-loop segment.

The report estimates that the amount of
funds consumers loaded onto closed-loop prepaid cards in 2007 grew
to $179.6 billion, up 5 percent from the $171.2 billion loaded in
2006. The total loaded onto prepaid cards – both open and
closed-loop – was $218.3 billion last year, up 10.3 percent from
$197.9 billion in 2006. The amount of funds loaded on open-loop
cards totalled $38.8 billion in 2007, up 45.3 percent from $26.7
billion in 2006.

Spurred by government

The biggest news in the report is the
rapid adoption and roll-out of network-branded cards for government
disbursements. State unemployment benefits dispensed through
prepaid cards grew 150 percent in 2007 compared to the year before,
while court-ordered payments grew 82 percent. Even with these
mind-boggling rates, the government sector is slowing when compared
to the past few years, as many state programmes have taken an
open-loop approach.

US government prepaid programmes,
particularly food stamps, represent a large portion (32 percent) of
the entire closed-loop market and these segments are experiencing
very slow growth. As a result, the government category is a drag on
the overall growth of the closed-loop market.

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By GlobalData

Tim Sloane, director of the Prepaid
Advisory Service at Mercator Advisory Group and one of the report’s
authors, said that the overall growth rate associated with the
network- branded prepaid market has slowed somewhat, but still grew
by 44.5 percent from $26.8 billion in 2006 to $38.7 billion in

“While this represents an enviable growth
rate by almost any external standard, it will likely still
disappoint an industry that has come to expect triple-digit growth
rates,” Sloane said. “This slowdown in growth rates should not be
surprising since the increase in total market dollar value simply
makes triple-digit growth rates increasingly difficult to achieve.
The $11.9 billion increase for the open-loop load is a very healthy
increase in market size.”

Incentive applications on the

Another market sector of note is the
business travel and incentive segment, which grew to $18.51 billion
from $14.82 billion in 2006, a growth rate of 25 percent in both
open-loop and closed-loop volume. The real story regarding this
category is that incentives dominate the category and that both of
the incentive markets – employee, and partner and consumer – are
rapidly adopting network-branded solutions to their portfolios.

Closed-loop solutions restrict the
consumer’s spending to a specific merchant and utilise the store’s
own infrastructure to operate. The open-loop card delivers a
card-based product that is perceived to be almost as good as cash
from the cardholder’s perspective. The downside is that the value
chain needed to operate the open-loop product involves many
external suppliers (banks, processors, etc), which in turn
increases costs.

Mercator said that it has talked to many
merchants that fail to see a benefit to using anything but their
own gift card for their incentive programmes – consumer, employee,
or partner, despite the fact that there are three different
incentive programme scenarios these merchants could consider. They
can use their card for their own incentive programme, use a
different issuer’s card for their own incentive programme, or sell
their card for use in someone else’s incentive programme.

“The vast majority of merchants are so
focused on costs and savings associated with their own gift card
that they typically opt for using their own card for their own
programmes,” the report said. “These merchants fail to recognise
the unique advantages possible for customers, partners, and
themselves when they partner with other issuers to support their

For example, one merchant that Mercator
Advisory Group is working with saw their cost cut in half when they
partnered with another merchant on a promotion because the other
merchant valued the opportunity to be exposed to new customers and
substantially discounted the cost of their card to win the

“It is clearly time for closed-loop
programme managers to re-evaluate both what cards should be used
for internal incentive efforts and how their existing closed-loop
gift card programmes can be modified to better compete with
open-loop solutions,” the report said.

Benefits of open-loop

To truly appreciate the inroads being made
by open-loop network-branded cards into both the consumer and the
employee and partner incentive markets, Mercator notes that
open-loop solutions are growing at 83.4 percent in the employee and
partner market while closed-loop gift cards are losing market share
at the rate of -3 percent, dropping in total load from $7.13
billion in 2006 to $6.90 billion in 2007.

In the longer term, Mercator concludes
that closed-loop suppliers must become better informed of the
benefits associated with open-loop solutions. Some closed-loop
suppliers will find that their existing channels and customers are
ideal candidates for open-loop products, and that satisfying that
demand can be highly profitable.

Open-loop solutions change both the cost
and income equations that will prove compelling for some
businesses. Open-loop solutions lower the cost and effort
associated with deploying card acceptance by utilising the POS
devices already deployed for open-loop solutions, and they will
increasingly be used to co-ordinate business between co-operating

This leads Mercator Advisory Group to
believe that the majority of financial institutions will therefore
be locked out of the retail channel unless they either greatly
expand the footprint of their ATM or add kiosk functionality to
implement a full range of unattended financial services, or expand
their branch presence down market to a level previously considered

“Regardless of which approach is taken,
time to market favours the closed-loop distributors and the few
financial institutions they decide to partner with,” wrote