The prepaid card market has come a long way over the past two decades, and T. Jack Williams has been there since virtually the beginning. As director of membership services at Blockbuster Entertainment, Williams played a key role in creating the world’s first merchant gift card program in the spring of 1994. He later went on to help launch the Kmart Cash Card in 1997 while at Stored Value Systems, at the time a division of National City Bank (see bio). This was the first merchant gift card that also included AT&T long-distance minutes.
Now president of his own consultancy, Paymentcard Services Inc., Williams is involved in designing and implementing prepaid and mobile-payments programs for clients throughout the world, including most recently the International Red Cross’ Haiti mobile/prepaid disbursement program. He also is involved with some of the newest alternative payments technologies and processes in use today.
Over the years, Williams has seen his share of products and events affecting the prepaid market, both the good and the bad. And that includes programs such as Mondex, Beans and the recent bankruptcy-protection filing by Springbok Services Inc., an Englewood, Colo.-based prepaid card provider, that left many cards offered as incentives unusable (see story).
“At a time of increased government scrutiny, we didn’t need the negative publicity that Springbok brought to the industry,” Williams laments.
Still, Williams sees many bright spots for the prepaid market as well as some rough times ahead for various players and industry sectors. PaymentsSource.com Editor-in-Chief Jeffrey Green spoke recently with Williams, who reflected on lessons learned from past events and provided some predictions for the future of the prepaid industry.
PS: Looking back some 15 years or so since retailers started exploring debit card-based products to replace paper gift certificates and store credits, any surprises in how the prepaid market has evolved?
JW: When we started this at Blockbuster, gift certificates were a necessary evil in the store. It was something merchants had to have, and they usually kept them in the back room. They didn’t really do anything to focus on gift certificates. Gift cards are now offensive weapons, and they are everywhere. You never saw that with gift certificates.
In 1990s, merchants were hesitant to embrace the gift card. Now they view them as the ultimate loyalty card. At Best Buy, for example, gift cards drive a significant percentage of the retailer’s transactions today. In August 1997, I helped Kmart introduce the Cash Card, convincing the management team there to make the fundamental change to providing the cards instead of cash back for returns lacking receipts. It was my idea that Kmart convert the $900 million in cash it was giving to customers for nonreceipted returns to gift cards instead as a way to not only increase sales but also to preserve sales, and that’s still really the process today. I don’t know of any merchant that has thrown away their gift card program and gone back to using paper gift certificates.
PS: How do you see the future of store gift cards evolving over the next five years?
JW: Gift cards took a hit last year for two reasons. So many of the consumer-protection people said ‘be careful with a gift card because the company might go under, and you’ll lose your money and be careful of any fees and short expirations.’ And people are still apprehensive.
I see the merchant gift card market remaining flat, and I don’t see it growing. And now that the market is reaching maturity, merchant gift cards are becoming a commodity.
The market also has to be careful to avoid the ‘S&H green stamp phenomena.’ That product died almost overnight, not because people didn’t like licking stamps, but because the stamp vendors decided to go everywhere. Now you can buy gift cards everywhere for just about everyone. So there’s no real excitement anymore. It’s just a nice gift option.
PS: Financial institutions over the years have tried to promote their own network-branded “gift cards,” but with little success. What went wrong?
JW: Banks made a fundamental decision that it wasn’t worth their time to make the card available internally, and American Express Co. became a major player providing the service to banks. The program potential was far too small for banks to invest their own BIN infrastructure, so they decided to sell AmEx gift cards instead. It was like the paper gift certificate mentality before gift cards–they never saw that the cards had far more uses than just as a gift.
What’s missing is a champion for prepaid. We don’t have anyone who has taken ownership of the category, though AmEx would be the winner at this point. Banks have never really seen the opportunities, and they have never thrown their A team marketing staff at prepaid like they do their credit portfolios. For example, there’s a huge need for EMV-compliant prepaid cards for consumers who travel to Europe and other countries that have converted to smart cards. Why aren’t U.S. banks offering these types of cards?
PS: Where are banks succeeding most right now with network-branded prepaid cards?
JW: Bank may not have succeeded in offering nonreloadable gift cards, but some have succeeded in the reloadable prepaid market. Most banks, for example, have deemed underbanked and unbanked consumers as undesirable, so they acquiesced ownership of that population. Banks that have had successful reloadable card program are those that sponsor programs to this constituency. Palm Desert National Bank is clearly the leader in this area. But it’s just a handful of banks, not everyone.
In the prepaid space, the ownership and marketing duties have gone mostly to program managers, such as Green Dot and Netspend. Payroll cards also have become an important part of employers’ HR quivers. Paper payroll checks are going to become less prevalent for any employer with more than 25 employees.
Government programs and cash disbursements also are viable markets. Comerica just cleared 1 million cardholders in its Social Security program. Assuming about $1,000 a month is disbursed on those cards, and that’s a pretty profitable program for Comerica.
Banks are beginning to reassess their commitment to the prepaid market, but only a handful have seen the financial opportunity. The others have just given up and decided to focus on other products to drive revenue.
PS: Some third-party processors have found success in the prepaid market. What have they done right?
JW: They aligned with quality program managers. TSYS, for example, is aligned with Green Dot. Green Dot and Netspend have to be the top two program managers, in the U.S. at least. The processor, issuer and program manager are the three necessary elements of a successful prepaid program. TSYS provided Green Dot with the processing capability it needed. So the processors that are successful are financially strong, big, and they are aligned with banks that had an appetite early on for prepaid.
PS: Others have not been so successful. Where did they go wrong?
JW: They really did not know the business, nor did they have the contacts. The prepaid space is a not a huge industry, so it’s about relationships. They didn’t have relationships or the expertise to create and win over the big program managers.
Then some of the processors tried to be their own program manager. They tried to be everything to everybody instead of focusing on being something to somebody. They never spoke the language of prepaid. It’s not just payments. It’s a whole different mentality.
For example, knowing how to accommodate a split-tender transaction, balance inquiry and activation transaction is alien to a credit expert, and only a handful of people that know how to do it exist in the industry. There are only so many program managers that know the industry. Small processors generally don’t know the industry and don’t have top-notch professionals at the helm. And with Fidelity National Information Services and TSYS pushing price compression, the small guys will have difficulty competing with reduced revenue. They also will have difficulty getting program managers that know what do and that have the capital to do what needs to be done.
PS: One prepaid marketer/processor, Springbok, filed for bankruptcy recently. Does this suggest trouble ahead for some prepaid players
JW: I only know what I’ve read in the press, but it seems like it was a lot of money that was involved. I believe Springbok represents a precursor of what other small processors that don’t have the financial wherewithal to handle the price compression will see in the future. Transaction margins used to be 10 to12 cents for a network-branded card. Today, it’s 2 or 3 cents. So there have to be a significant number of transactions to make the program profitable.
My view is that Springbok tried to be everything to everybody–the program manager and processor. The biggest problem with Springbok is the negative publicity. Here in Texas, it’s been front-page news, with utility customers being interviewed on camera saying they got $200 Springbok cards that were declined. That painted an ugly picture of incentive cards as a prepaid category. There’s some pretty mad people. At a time of increased government scrutiny, we didn’t need the negative publicity that Springbok brought to the industry.
PS: What prepaid markets have proven to be the best for banks, and have any reached a saturation point?
JW: The two best areas for the future are payroll and government cards. They’re reloadable, and substantial amounts of money are loaded into the card accounts. Payroll cards are just beginning to catch on with employers, and they will be the star of the reloadable prepaid business. As soon as we can get a well-known, visible champion and validate the product, it will really take off. We’re right on the edge of that happening.
All states also soon will try to find ways to get money-driven disbursements on prepaid cards. It doesn’t really work for EBT because there’s too many rules for where cards may be used. But states and local government will migrate from paper checks to cards for all kinds of programs.
One of the biggest disappointments is teen cards. What hurt those were banks setting up tables selling credit cards to college freshmen, and that created a negative perception of bank-issued cards in general.
Health care cards face a difficult road ahead when health care reforms kick in. Consumers used to be able to buy over-the-counter drugs with flexible spending account cards. Now you’ll only be able to use them to buy insulin in 2011 as an over-the-counter drug. All bets are off on new rules of engagement with the new health care law coming. It might not be as profitable for the issuers.
PS: Looking ahead, which market–closed loop or open loop–do you believe third-party processors will have the most success and why?
JW: As the prepaid market evolves, the networks processors use to support proprietary, closed-loop services use will be the next generation of networks best used to support alternative payments. As merchants look to reduce their cost of payment acceptance, they’ll need a network and they’ll need processors. Those processors that go from offering a gift card to becoming a provider of virtual cards that use the processing rails used for closed-loop gift cards will be the ones that succeed in the future.
The real opportunity is alternative payment strategies, whether mobile, key-entered or whatever. The big processors will win in providing open-loop card processing for payroll and government prepaid initiatives because they have the credibility and breadth of functionality that open-loop clients will require. As such, smaller, closed-loop processors need to look for other markets to compete.
There’s a whole world of virtual accounts in the multimerchant environment. Whether that’s a township with a vision to use a parking card to drive sales for downtown merchants or some other strategy, alternative payment strategies that run on existing closed-loop rails will be the opportunity of the future. You have to have the expertise and understanding of the prepaid world, both physical and virtual. It will require a high understanding of the payments infrastructure to win in the years ahea
PS: Congress has passed the financial-reform bill, and reloadable prepaid cards are exempt from the debit-interchange rules. What effect might that have on bank-issued prepaid cards?
JW: That means banks will look at reloadable cards as a viable income stream. Smart banks will say this is a reality whose time has come and should start looking at this as true initiative to gain share. And by making reloadable cards exempt, it allows greater revenue for issuers so governments can provide outstanding programs to those who need it most. If you reduce the interchange income for governmental cards, it would require the individuals who need it most to receive much less than the do today on the card. So there are two benefits to carving out the prepaid side. Banks are in search of income to replace income lost via insufficient funds fees on debit accounts, so they will continue to evaluate the opportunities with prepaid debit.
PS: How might prepaid best take advantage of the movement to mobile phone-based payments?
JW: Mobile to me breaks into two categories–remittance and commerce. Prepaid is the hub of the wheel in both genres.
Mobile remittance is here today. When you look at the Philippines and Pakistan, for example, that export citizens to the U.S., they require that some of their income be sent back home. But what drives that is a virtual account, not a physical account tied to a phone. A mobile phone is really for prepaid an access device. Mobile phones are instructional devices that tell the core account what to do–transfer funds from this virtual account to that virtual account.
When you begin to look at the prepaid account as a virtual account, then mobile, plastic cards and the Internet in the future become the instructional devices that tell the account what to do. For example, an ATM requires a card to withdraw funds today, thus the car is the access device. In the future, you may not require a plastic card. Other access devices will be implemented, perhaps key-entered, biometric or one we have not seen.
Mobile commerce will empower merchants to accept a payment using the telecommunication infrastructure, not the payments infrastructure to process commerce. The dilemma is the mobile guys don’t understand the payment guys. They operate in different universes.
What is on the horizon is mobile commerce, and what will change is the use of the SMS text-messaging system rails to transact. And what will drive that market is merchants striving to lower the cost of payment acceptance. Mobile commerce will get good traction. But it requires a prepaid account handled by a processor as the hub. The mobile phone, prepaid card and the Internet all will serve as devices to access your money.
Processors that can support mobile commerce will be successful in the future. It’s not about gift cards anymore. It’s about virtual accounts accessed by multiple methodologies.
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