Which Way, Prepaid?

As the prepaid market grows in multiple directions, smart ISOs follow the money.

By Bryan Ochalla

"The question at this point isn’t,‘Will prepaid grow?’ but, ‘What part of the prepaid market will grow?’” offers Ben Jackson, a senior analyst with MercatorAdvisory Group’s Prepaid Advisory Service.

The affirmative answer to Jackson’s first question has been a given for some time, of course. According to his employer, Maynard, Massachusetts-based Mercator Advisory Group, prepaid products have seen double-digit growth every year since 2004--a trend likely to continue through at least 2013 (when total dollars loaded onto prepaid cards are expected to climb to $672 billion, which is more than double the $330 billion loaded onto those cards in 2009).

The answer to Jackson’s second question isn’t as straightforward, although a succinct way to sum it up would be to say, “It’s going to depend on the economy.”

Prepaid as Financial Tool
In Jackson’s opinion,if the economy remains in the gutter,the prepaid space likely will see continued growth related to government benefits cards--as, say, more unemployment cards are disbursed or more funds are loaded onto Temporary Assistance for Needy Families (TANF) and Women, Infants, and Children (WIC) cards.

Another option that will provide a boost to the prepaid space regardless of the economy revolves around the recent U.S.Department of theTreasury rule that requires most government benefits to be paid through direct deposit by March 1, 2013. Americans who receive such benefits but don’t have banking accounts will be paid using prepaid cards--Direct Express Debit MasterCard cards, specifically--issued by Comerica Bank under contract with the Treasury.

If the economy turns around, however, Jackson suggests the prepaid space may see growth related to general purpose reloadable (GPR) cards, which he sees consumers using as a budgeting tool, or growth related to payroll cards.

Rod Boyer, president of Columbus, Georgia-based TSYS’s Loyalty and Prepaid divisions, agrees with both of Jackson’s assessments. There’s little doubt the prepaid space will continue to grow in the coming years, he says, especially since, in the wake of the recent economic downturn, prepaid cards “are becoming an important financial tool for a growing number of Americans who are without a banking relationship or who have had difficulty with credit.”

Specifically, Boyer believes some of the best opportunities for growth in the space will come from “certain well-defined segments” that include corporate and government disbursements and GPR and payroll cards.

He’s especially keen on the future of GPR cards, as more and more consumers are turning to them in an effort to change their spending habits. “Branded GPR cards provide users with convenience, flexibility, and safety,” he says, “and are becoming an important budgeting tool for a growing number of Americans.”

The current economic environment has played an important role in consumers’ increasing attraction to and adoption of GPR cards, he adds. “When consumers lost access to credit cards, they found the answer in GPR cards--which allowed them to pay their bills and make online purchases.”

Another reason GPR cards could see a considerable amount of growth in the near future, according to Jackson: Financial institutions may start using them to entice customers away from free checking accounts.

Thanks to the Durbin Amendment to the Dodd-Frank (Wall Street Reform and Consumer Protection) Act, “low-dollar checking accounts are about to become less profitable” for financial institutions, he says. “So it’s likely a number of them will try to move some of these consumers to prepaid cards--because prepaid cards are exempt from those interchange restrictions.” There are a number of possibilities, Jackson says, with the most likely being that “some banks will try to sell these prepaid accounts as an upgrade of sorts from the free checking accounts they used to have.”

That’s not to suggest the idea is without issues. For instance, many prepaid cards have more features than your typical financial institution’s checking accounts. “The question then becomes,” Jackson says, “‘If we move our low-end people onto these feature-rich prepaid cards, how are we going to justify to our more profitable account holders that they’re not getting these same features and services?’”

Another issue with this idea: Sen. Dick Durbin (D-IL) recently asked Elizabeth Warren of the newly created Consumer Financial Protection Bureau to protect consumers from attempts to circumvent the Dodd-Frank Act by pushing consumers to less regulated products like prepaid cards. “With [the recent] release by the Federal Reserve of draft rules to bring down the excessive interchange fees charged on debit card transactions, the big banks and card networks are likely to start steering their customers away from traditional debit cards and toward less-regulated products, including reloadable prepaid debit cards,” he wrote in a letter to Warren. “I urge the Bureau to closely monitor the marketing, fees, and terms of these products and alert businesses and consumers about deceptive and abusive products.”

Regarding a possible boost in the use of payroll cards--should the economy improve--Jackson suggests the segment’s growth could be spurred by a number of situations, such as “if people who currently don’t have bank accounts are employed by companies or organizations that no longer issue checks.”

Donna Embry, senior vice president at Louisville, Kentucky-based Payment Alliance International, also views the payroll segment of the prepaid space as a prime candidate for growth and opportunity. For example, she says, program managers could target restaurants or retailers that have a small number of employees, some of whom are likely to be unbanked or underserved. “That segment of the market could really benefit from payroll cards,” she says.

Spins on Gift Cards and Incentives
Gift cards are another area of opportunity for those in the prepaid space, especially if the economy--and the way such cards are used--improves.

The segment has stagnated, Jackson says, because, for the most part, gift cards “simply serve as a plastic version of a paper gift certificate.” As gift-card producers and sellers add more functions to the products and do a better job of engaging and enticing consumers to use them, “I think the growth will pick up again,” he suggests.

A good example of how gift cards could get a shot in the arm can be found in Sears’ Christmas Club card, which allows consumers to store their holiday-spending money on retailer-branded cards. A minimum of $5 is needed to activate one of the cards, and once a card is activated consumers can add additional funds--which can be used to pay for layaway, in-store, or online purchases--to the card online or by visiting one of the retailer’s stores. Additionally, Sears has offered, for the past two years, to add an extra 3 percent--which is applied toward the final card value--at the end of each season’s promotion.

“Programs like that provide a great opportunity because they help people with a need--budgeting for Christmas--and they also give people a bit of a bonus,” Jackson says, “which helps retailers lock in their money, lock in that spend.”

Corporate and consumer incentives represent another area that’s ripe with opportunity for folks in the prepaid space, suggests Boyer. “The power of prepaid for incentive programs is hard to beat.” After all, “prepaid cards are highly brand-able, come in carriers that can convey important messages, and are linked to Web sites on which the program organizer can continue the dialog with the recipient.”

In addition, he suggests, prepaid cards “are much easier and less expensive to implement than merchandise or checks. It’s definitely an area we’re seeing tremendous growth potential in right now.”

Regulatory Impact
Are there other factors--aside from the economy--that could affect or impact which segments of the prepaid space see the most growth in the coming months and years? According to the industry veterans interviewed for this article, regulations aimed at the payments industry could be one of them.

That hasn’t really been the case so far--as Boyer says, although the CARD Act took aim at gift cards by stipulating that they can’t expire within five years from their issue date and that their terms of expiration must be clear and conspicuous, “most gift-card providers were already adhering to those regulations even before they took effect”--it could be an issue in the future.

Jackson, for instance, warns that “there are a lot of folks--like the Consumers Union--who think that the fees are too high and the terms and conditions are inadequate when it comes to prepaid cards, and they’d like to see the Fed introduce regulations that would control fees and regulate disclosure. If that came to pass, it could end up making life more difficult for prepaid-card providers.”

Another concern, he adds, is that some segments of the federal government seem to be worried about a possible relationship between prepaid cards and money laundering. “There’s this impression among law-enforcement agencies that you can somehow load $1 million onto a prepaid card and move it, undetected, from the U.S. to any country in the world,” Jackson adds. “That’s not likely to happen, and it certainly wouldn’t happen without there being red flags raised, but there’s this impression that prepaid cards are completely anonymous, completely outside of the law--and it’s just not true.”

Should Congress decide it could be true, though, “they may try to put some sort of restrictions on prepaid cards through regulation,” he suggests, “and that could be troublesome for the payments industry, too.”

(Transaction Trends, Feb. 2011)

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