This story appears in the March 2009 issue of Cards&Payments.
Cards&Payments asks several leaders and observers of the prepaid industry to offer some predictions about what they expect will be the biggest trends and issues facing the industry this year.
Director of Emerging Payments
and Business Development,
Discover Financial Services
One key trend will be the emergence and popularity of multiuse cards. As prepaid cards gain popularity in emerging verticals, we will see new types of cards with multiple applications. For instance, student ID cards may combine building access and payment applications. We also will see more use of contactless capabilities with these types of cards.
Programs designed to drive specific behaviors or increase spend within a specific category or merchant also will continue to gain favor versus generic programs. To enable this, there will be increased need and interest in the control and management capabilities offered by prepaid programs such as incentive cards and mall cards. Traditionally, simple messaging (e.g. "for gas only") has been used to restrict use, but as consumers get savvier, better rule enforcement will be critical to program profitability.
Instant issuance will continue to grow as a critical enabler of prepaid programs. With payroll and incentive cards emerging as the key drivers of prepaid growth, businesses will need to gain more issuance flexibility. For instance, employers will need to issue new cards immediately to payroll cardholders on the day new employees start for immediate access to pay. Or with campus prepaid programs, schools will need to issue cards instantly to students on the first day of school.
Currently, most reloadable prepaid programs are targeted generically to the "unbanked or underbanked." However, as this market segment tends to be fragmented, programs that appeal to some will not appeal to others. As a result, we will see a stronger focus on breaking this category down into smaller, more cohesive groups such as "temporary workers," "students," "freelancers" and "immigrants" with programs directly targeted to these sub-groups.
We will see a spike in remittances on prepaid.
T. Jack Williams,
Prepaid cards will continue to move from being just payroll cards to offering a range of financial services. The payroll card will be able to offer most of the services provided by financial institutions today via a demand-deposit account debit card, such as bill payment and money remittance, easier and at less cost to the cardholder.
We will see more convergence of the prepaid debit card and mobile phone. The ease of access that a mobile phone provides the cardholder will expand. We will see the cell-phone carriers moving into the financial-services arena with offerings using prepaid debit cards in 2009.
Prepaid cards will grow as an international remittance platform. Legacy remittance providers will come under considerable price pressure to deliver funds to those outside of the country for lower fees, as lower costs for card remittances continue to reduce the costs to cardholders and their families worldwide.
We will see much-closer oversight on prepaid debit cards, both from an anti-money-laundering point of view and consumer protection point of view. Both federal and state oversight will affect how prepaid debit cards are used in the marketplace. Law enforcement will begin to recognize prepaid cards as viable money-laundering platforms and will work to counter their use as such.
State escheatment collection efforts will continue to grow because most state budgets will need funds. More states will pass legislation that will make unredeemed gift card funds the property of the state sooner.
Center for Financial Services Innovation
We'll see more processors allow advanced functionality. We'll see the first evidence of nonprofit organizations as distribution channels.
We foresee the global credit crisis creating heightened interest in prepaid programs among Latin American banks and other financial institutions, particularly in the areas of electronic benefits transfer and general-purpose cards, because of their potential for transactional, noninterest-based revenues and increased liquidity.
Given the region's historically large and untapped cash-based economies and the flattening or shrinking of traditional business lines, the case for prepaid programs looks to be aided this year by an unlikely contributor: tighter credit markets.
Open-loop cards will hit their stride because the Federal Deposit Insurance Corp. opinion on insurance for prepaid card funds legitimizes and provides consumer protection for cards. Bank staffs are becoming more comfortable with the cards, and banks are used to distributing them.
Economies of scale from state and federal benefits programs cut costs. Credit tightening and the household credit crunch will lead folks to consider prepaid cards.
The number of payroll and unemployment cards will soar as the economy sours.
There will be a shake out of marginal players. End-to-end providers will win. Having multiple parties in a transaction requires fees to be too high for prime time. Clever marketing will have network effects to help leaders pull away from smaller players.
Marketing, operations and support costs will give cost advantages to volume leaders. Brilliant marketers will corral vertical markets and lasso 'rebate' dollars.
Retail store gift cards have peaked. They will be pushed into 'customer loyalty' discount and reward card roles. Chain store closings will spook consumers. Some big names will fail and legislation will add costs that will push retailers to use open-loop cards.
The biggest issue facing all retailers is the economy. With so many retailers having lackluster results in 2008, they must find ways of improving their bottom line and growing revenue. Closed-loop gift cards are still strong in retail, but this is a double-edged sword because of the expenses in maintaining a successful gift card program.
Open-loop cards will be under further government scrutiny and that means new regulations will be imposed.
Tighter security also is needed for some open-loop processing platforms.
All participants in the prepaid value chain will push toward stability, scalability, security and reliability in systems and processes.
As barriers to entry get higher, it will be extremely difficult for new players to emerge and for smaller players to compete.
This year will be a 'back to basics' year for many prepaid participants, which will be crucial to achieve scale. While it is still incredibly important to stay on the leading edge in terms of prepaid functionality, processors in this space have got to start applying basic card-processing rigor so that the industry can achieve scale, be secure, be reliable, etc. In many prepaid segments growth is occurring faster outside of the U.S.
Private-label prepaid gift card providers will add a 'retailer-failure' redemption guarantee feature to calm consumer concerns about gift cards becoming unusable in the event of the retailer going out of business.
State and federal legislators will consider new legislation with regard to prepaid card products. Efforts will focus on fees and disclosures.
Corporate-funded prepaid incentive cards, especially rebate and consumer reward cards, will grow at a healthy pace as marketers will look for ways to differentiate their products in a sluggish economy.
Underbanked-targeted, general-spend prepaid products will show good growth.
Issuers and program managers will benefit by increased consumer awareness. Big players, such as Wal-Mart, will increase use of card-incentive programs to entice consumers to shop more at their stores–especially during peak shopping times such as Easter, Mother's Day and back-to-school.
Many innovative and exciting products will be introduced in 2009, indicating that the prepaid industry is still far from mature. One should expect significant change in the prepaid market, so it will be very important for companies to be nimble.
Prepaid will move from research and development to a strategic product–a part of the core corporate strategy. As a result, large corporations will devote much higher spend and more resources to prepaid.
The prepaid industry will continue to experience significant growth. We will see, for example, several multimillion-dollar general-purpose spend prepaid card portfolios in 2009.
Senior Vice President, General Manager. Prepaid,
Major banks are refocusing their interest in prepaid and investing in it as a core product. Because of current economic conditions, the credit squeeze, the raising of credit limits, and an increase in the subprime demographic, companies are looking for a safe way to continue to service the client base. Companies are looking to reduce the cost of existing operations and introduce new revenue drivers by migrating to prepaid products, such as, for example, payroll cards. Companies are looking to compete in prepaid directly, instead of having prepaid program managers mediating between them and their client base. Concern and speculation over credit card legislation and fee/interchange issues and their impact on corporate revenues have companies seeking alternate revenue drivers.
Prepaid programs will continue to expand internationally. Drivers of this expansion include competition, commoditization and compression in some areas of the U.S. market, a natural extension of companies' existing relationships with multinational clients, and prepaid needs and opportunities in new, emerging and underserved geographic markets.
The prepaid industry will play 'survival of the fittest.' Natural attrition of some program managers will occur in these hard financial times. There will be a migration to prepaid processors that have feature-rich solutions and help their clients drive revenues.
Companies will resolve their 'build versus buy' issues. With the freezes and restrictions on internal projects and development budgets, financial institutions will renew their focus on outsourced turnkey prepaid solutions.
Vice President, Vendor, Banking and Association Relationship,
With so many retailers going out of business lately plus bad press surrounding closed-loop gift cards, many program managers will need to educate consumers on the difference between closed-loop and open-loop cards. There is more safety and utility on the branded cards than there is with closed-loop cards.
For those companies that were successful in 2007 and 2008, finding ways to keep and leverage their existing cardholder bases to grow revenue will be an interesting challenge. Does their processing platform have sufficient functionality to support a creative marketing campaign or rewards programs? Choosing the right platform will play a more important role in 2009.
More companies will be partnering with one another to leverage the card base. Loyalty programs, rewards and other incentives started to gain traction in 2008 and will be even more significant in 2009 as ways to increase the utility of branded cards.
President & CEO,
State legislators and consumer-advocacy groups will continue to challenge the industry in the areas of fee assessments and expiration periods. Consumer-advocacy groups will criticize retailers whose point of sale systems do not encourage a good customer experience with partial authorization of prepaid cards.
Network-branded prepaid cards will be used to help consumers be more financially prudent as it relates to discretionary spending, such as establishing more-secure budgets or giving your college student access to funds but with financial controls.
Executive Chair, International Strategy and Corporate Development,
Employers in developing markets will act as a catalyst for financial inclusion. The employer channel represents the most important near-term opportunity for bringing financial services and education to new and underserved consumers in emerging markets.
In time, retail and mobile channels will join the employer channel, and each will play a critical role in building more-inclusive financial systems in developing markets.
In the early stages, the employer channel will provide an important proving ground for emerging financial services and act as a powerful starting place for improving the welfare of millions of underserved consumers.
Prepaid debit cards will play an important role in driving mobile payments adoption in developing markets. Models that successfully create new financial services networks based on mobile technology will encourage and facilitate consumers to embrace a new way to pay by fostering trust and integrating familiar bridging technologies.
The combination of prepaid cards and mobile phones offers a powerful mechanism for bringing more consumers into the mainstream financial system. Prepaid debit cards have proven themselves in other regions to be a trusted, easy and low-cost mechanism for individuals to use to enter the mainstream financial system.
Furthermore, trust in and familiarity with prepaid products–the majority of the world's mobile consumers prepay for service–suggests their high potential as a tool to aid consumers' transitions to mobile banking.
Prepaid and mobile payments proliferation will spur regulatory reform. Because these technologies and related financial services models are so new, pervasive and quickly adopted internationally, regulators must work together across borders to share experience and best practices in an effort to ensure uniformity in policy frameworks globally.
Because the developing world is generally seeing the fastest uptake with these emerging models, the priority for policymakers must be creating flexible policy frameworks that balance financial inclusion with security and consumer confidence. CP