This column appears in the June/July 2009 issue of Cards&Payments.
The success of prepaid cards in the United States in recent years has spurred interest in pilots and rollouts of prepaid products in other markets around the world.
However, issuing banks, prepaid program managers and processors, many of which have focused largely on domestic markets but have their sights set on international opportunities, often are confronted with uncertainty and challenges in gauging new markets. Prepaid practitioners will find that their success in the U.S. cannot easily be duplicated elsewhere.
It is critical that stakeholders understand the challenges, which include disparate legal and regulatory environments, business models, industry infrastructures, market readiness, and product and market segmentation.
The idea of using prepaid cards for general payments is still new, and market readiness varies from country to country. Differing needs across market segments and countries make it difficult to transfer a successful design from one country to another.
Mercator Advisory Group has identified 33 U.S. prepaid segments in 12 categories, such as payroll, travel, campus, in-store and distributed gift, transit, utilities, open money and financial services, and digital media. In the U.S., numerous prepaid products are developed and target different customer segments in various vertical markets. But typically only a few segments will be viable in international markets because of limited market size and demand.
Selecting the right product segment to enter a particular market is crucial for deciding the viability and profitability of any prepaid program. Prepaid issuers need to develop business cases in international markets with careful consideration of the needs of consumers and merchants.
For example, consumer need for prepaid products could arise from different reasons. In some countries, such as Japan, convenience and "cool" factors play important roles in the highly popular Felica chip-based contactless card products. In the U.S., private-label gift cards and general-purpose reloadable products used for cash replacement play important roles in the booming prepaid market. In less-developed payment markets, however, basic financial needs such as remittances and payments for the unbanked might be the most outstanding factor.
In the U.S., unbanked and underbanked populations are among the target market segments for prepaid. But in most Western European countries, the numbers of unbanked consumers are significantly smaller. So prepaid cards for the unbanked, such as payroll and general-purpose reloadable cards, are less likely to gain as much traction. There are exceptions on a country-by-country basis, such as the PostePay reloadable cash card Poste Italiane issues in Italy.
Delivery channels, among other barriers, represent challenges to prepaid companies and banks that want to explore the market. The value proposition of prepaid cards in newer prepaid markets is stronger in the public sector, including social benefits, tax rebates and government vouchers.
Government efforts worldwide to facilitate the economic recovery by distributing spending vouchers also create opportunities for prepaid cards. For example, China's local governments have distributed or plan to distribute more than 1.5 billion Chinese yuan (US$230 million) on spending vouchers to their residents. These paper-based vouchers, if turned into prepaid cards, would represent a great opportunity for the underdeveloped prepaid card industry.
Tapping into social-benefits programs, however, requires prepaid card providers to reach out to government agencies with attractive proposals and valid business plans, which could be challenging for companies not familiar with the public sectors of those countries.
Understanding prepaid customers and designing the right programs are key challenges for domestic or international prepaid program managers and issuers. Leveraging local experts and partners often proves to be the more efficient and effective way as opposed to relying on transferring knowledge and experience from a successful case elsewhere. CP
Terry Xie is the director of the international practice at Mercator Advisory Group,
a Boston-based independent research and advisory services firm. Terry can be reached at Txie@mercatoradvisorygroup.com.