Sometimes when predictions finally come true, the result is a lot different from what anyone had expected.
Take prepaid or stored-value cards. Five to 10 years ago, many payments experts were predicting the rise of a new pay-ahead card that would primarily replace cash payments. But then, they were talking about an all-in-one card. Based primarily on smart card technology, consumers would carry one card that could be used for almost any kind of imaginable payment-from vending machines to highway tolls to fast-food purchases. Many said the card also would be used as a driver's license, personal identification card and even a house key.
But the tests of multi-application, stored-value cards in 1990s, such as those during the 1994 Olympics and on the Upper West Side of New York, were largely unsuccessful. Few consumers liked them and merchants often found it difficult to operate the required systems and process the transactions.
Now, however, stored-value cards have come back with a vengeance. But this time, they don't look much like those cards once predicted. Nearly all rest on magnetic-stripe technology and they're typically being used for a single, or at least a limited number of applications.
The use of stored-value cards is being led by the rapid growth in the popularity of gift cards-primarily private-label ones-but there appears to be no limit to the applications being conceived for them. Among the stored-value cards being promoted today are:
* Payroll cards;
* Insurance cards that can be used in conjunction with disability benefits, flexible spending accounts, or property claims;
* College campus cards that often are accepted for payment at nearby stores that cater to a college crowd;
* Pharmacy cards that allow users to pick up samples at a drug store;
* Travel and relocation cards issued to employees;
* Corporate incentive cards issued in lieu of a check or cash bonus;
* Meeting cards that let convention staff pay for conferences;
* Child-support payment cards;
* Phone cards.
Key to the success of nearly all these and other programs is the fact that most don't require any special technology or systems to be in place. Nearly all the cards are accepted on the same point-of-sale terminals used for credit and debit cards, and payments are processed over the same networks. Many don't even require special agreements with merchants to accept the cards-a Visa or MasterCard logo on the card assures that they can be accepted at any store or automated teller machine that accepts those credit or debit cards. Even the private-label gift cards issued by merchants typically are accepted at the same POS terminals that take credit cards and are handled by the same payments processors.
Indeed, many attribute the success of stored-value programs today to two factors: the stunning success of gift card programs by some merchant pioneers and the piggybacking of stored-value acceptance on the existing credit card infrastructure.
'Aversion to Conversion'
"In the past, there was an aversion to conversion when it came to any new payment product," says T. Jack Williams, senior vice president of relationship management for Louisville, Ky.-based National Processing Co. and a stored-value card pioneer who worked on some of the early retail programs. "But then everyone saw the success of the Blockbuster card and the Mobil Speedpass. They could see there were significant benefits to the merchants who issued these cards."
Key to the early successes, however, was the ability to piggyback on the existing Visa and MasterCard infrastructure. "The chip card programs required special terminals and special procedures that made them a hard sell," says Robert H. Baker Jr., senior vice president of stored-value initiatives for First Data Corp. "But the cards today have the look and feel of Visa and MasterCard, even when they're not branded that way. And they don't require much training for acceptance, which is real important to retailers that have heavy employee turnover."
Leading the stored-value trend are gift cards. New York-based Bain & Co. had predicted gift card sales would hit nearly $38 billion in 2002, up nearly three-fold from around $13 billion as recently as 1998 (chart). But that prediction was made in October, and by early December, Robert G. Markey Jr., Bain director of consumer retail financial services, was admitting he might have come in low.
"I made that prediction before I started to see the holiday promotions of the cards and I may have underestimated how aggressive retailers were going to be," he says. "The final number may be quite a bit higher."
Other research supports the growing interest in gift cards. In a survey of about 1,000 consumers, Atlanta-based Synergistics Research Corp. found that about 64% of households said they found a multi-purpose gift card to be valuable, with 48% describing such cards as "very valuable."
And merchants seem to like the cards too. The biggest reason they cite is that gift cards get customers to shop in their stores. Most retailers report that holders of gift cards will make purchases beyond the value held in a card.
And retailers see other benefits to gift cards, especially when they're not used as gifts. Many, for example, use gift cards to deal with such cumbersome issues as returns without receipts. Issuing gift cards in such circumstances generally satisfies the customer while reducing the incentive for persons to steal and then return merchandise to get cash, according to Williams.
Merchants also like using the cards as incentives, Williams adds. Supermarkets can issue gift cards in lieu of giveaway items to promote their stores. And car dealerships can give away cards with free gasoline purchases to those who test drive one of their luxury vehicles, he suggests.
Also, while gift cards were once the private domain of big national retailers such as video rental giant Blockbuster Inc. and coffee king Starbucks Corp. (box, page 44), payment processors now have tailored these offerings for smaller retailers. "Today, small retailers with even two to five locations can issue their own gift cards," says Williams. "They can look and feel just like the big boys."
Retailers aren't the only players that are aggressively pushing gift cards. Visa U.S.A., MasterCard International and American Express Co. all have developed their own gift cards that can be used for purchases at any place that accepts their credit cards.
And it is clear that the bank card associations are taking gift cards very seriously. A few card issuers previously had issued Visa gift cards on a customized basis. But recent surveys of banks, merchants and consumers found that there was a much stronger interest in a gift card that could be used at any Visa location than had been realized, according to Steven Diamond, Visa vice president of consumer debit products.
As a result, Visa "formalized" the gift card offering as a standard Visa product in 2002. About a dozen large Visa banks are already committed to issuing Visa gift cards to their customers, Diamond says. MasterCard executives say they are in the early stages of developing a gift card.
In a couple of cases, Visa card issuers have joined with large shopping malls to create a mall-branded card with the Visa logo. For example, Charlotte, N.C.-based Bank of America Corp. worked with Simon Property Group Inc., the nation's largest owner and manager of shopping malls, to create a Simon-branded Visa gift card. The card is sold at customer-service stations in the 249 malls owned by the group, but can be redeemed at any store that accepts Visa.
Despite this universal utility, it was found in a pilot of the program at four malls that 80% of the cards were still redeemed in stores located in those malls, according to Michele Sullender, vice president of product development for Simon Brand Ventures.
Apart from the mall cards, a number of financial institutions have been selling Visa gift cards directly to their customers. In mid-October, Cleveland-based National City Corp. began selling the cards with the users' names embossed on them from National City Bank's Web site. In late November, the bank began selling so-called non-personalized cards from its branches. The cards are sold with values between $25 and $500.
National City views the gift cards as an extension of the Visa Bucks card, a stored-value card product that the bank has offered for several years to parents of teens.
"The Visa Bucks card is primarily a reloadable card that helps parents teach financial responsibility to their teenage children," says Roger Piskoks, National City senior vice president of electronic banking services. "Some customers were buying the Bucks cards and using them as gift cards, but that product was designed and priced for reloading value. It was not designed nor priced to be used as a disposable card. We needed another option, and the gift card met that need."
National City sells the non-personalized gift cards for $2.95 plus the value of the card. By comparison, the Visa Bucks card has a one-time $15 activation fee and then there is a per-transaction fee to reload value.
American Express also was aggressive in promoting its gift card during the past holiday season. That card debuted in October. It is sold in increments between $25 and $500. A long-time promoter of its gift certificates, American Express' consumer research found a demand for both paper certificates and the plastic gift cards, according to Randall Beard, vice president of worldwide marketing for AmEx's prepaid services. That research found that older consumers tended to want to keep the certificates while younger consumers wanted a prepaid card.
That difference in interest level by age groups was supported by the Synergistics study (chart).
"Many consumers think the card is more convenient to use and it looks more modern and contemporary," Beard says.
With the more recent introduction of the more ubiquitous cards, such as those branded by Visa and AmEx, some observers are wondering if these cards might take away from the popularity of the private-label cards that got the gift card ball rolling, just as general-purpose credit cards cut deeply into the retail credit card market. But others think there is room in the market for both types of cards.
"A private-label gift card is more personal," says Bain's Markey. "It is saying to the recipient, 'I thought about you and I picked a store that I know you like.' The general-purpose card is closer to cash and is better for business gifts or for recipients that you have a less personal relationship with."
Another recent trend is for retailers to sell gift cards other than their own. "Retailers will find new distribution channels," Markey says. "Already (Safeway Inc.'s Chicago-area) Dominick's supermarkets are now selling cards for Sears and Nordstrom's. We'll see more such experimentation."
Among other consumer-driven applications, one of the most popular is the campus card. By some estimates, nearly 2,000 college campuses offer some form of a prepaid card that allows students to pay for products and services on campus. And while campus cards have been around for a while, many banks and other payment programs are looking to add new applications to these cards.
Minneapolis-based U.S. Bancorp, for example, is working on stored-value card projects with 14 different colleges and universities. In some cases, the card is connected both to a stored-value account held by the college as well as to a demand-deposit account at the bank. Students can use such a card around campus to pay for cafeteria food, and use vending machines and laundry machines from the stored-value account. They can use the same card to get cash at an ATM or to pay for groceries, gas and other products with those funds coming out of their checking accounts.
The bank views the hybrid stored-value/debit card as a way to attract first-time customers. "We are looking for the opportunity to get the checking account business with the student," says Jim Marshall, senior vice president for U.S. Bancorp's Campusbanking program. "We want to start a banking relationship that will last into the future."
In some cases, the bank worked with the colleges to start the stored-value program. Other times, the bank added its services to an existing program. With San Diego State University, for example, the college already had a stored-value card that could be used for payment on campus, but it wanted to add value by tying into U.S. Bancorp's debit card network.
Another example of adding utility is a program from Boston-based Student Direct, a company that enables campus cards to be used at businesses off campus.
Student Direct signs up colleges that already have their own stored-value programs; 24 colleges have signed thus far. And then it goes around to businesses near those campuses to get them to accept the card. Most such merchants are located within five miles of the campus. Then, Student Direct processes the payments.
Student Direct requires participating merchants to use its proprietary POS terminal, a Hypercom Corp. model. The same terminal, however, can be used by those merchants to accept credit cards, explains Brian Farley, vice president of campus services.
And while consumer-driven stored-value cards have been the first to gain popularity, many payments experts see even more potential with programs that are sold to corporations and governments.
U.S. Bancorp, for example, is promoting a card that facilitates child-support payments. Rather than have parents who are required to pay child support make their payments to a state agency and then have the state send another check to the custodial parent, this allows the state to give custodial parents a card connected to a central database.
When the state receives the support funds, the amount is put into an account that the custodial parent can access from ATMs and POS terminals that accept Visa cards. Parents can then get cash at the ATMs or use the cards to make purchases. This speeds up the availability of the funds.
Already, Washington and Colorado are participating in the program and the bank is talking to other states, according to John Owens, U.S. Bancorp senior vice president of debit and stored-value services. The states then make the card payment an option to parents as well as traditional checks or direct deposit.
Outside of child support, there appears to be no end to the type of prepaid cards that can be promoted to corporations and governments. Already, MasterCard lists flexible spending, payroll, relocation, meeting, supply and travel cards among those prepaid applications its members offer.
In some cases, prepaid card proponents say they'll be told of a need that one corporation has and then a whole product line can be built around it. Bank of America has been active in promoting payroll cards, incentive cards, insurance cards and travel cards.
"We like to talk to our corporate customers and have them tell us what their needs are as far as payments," says Joseph Lyons, BofA business manager for commercial prepaid products. "Often, we'll customize a prepaid solution to suit the needs of one client, but then find a lot of others have the same need. Then, we'll go around and promote that product to other commercial clients."
Many believe the travel cards will be particularly popular with companies that have employees who travel infrequently. While frequent travelers' needs may be best met with a traditional commercial card, many companies don't want to issue those cards to employees who might only travel a couple times a year. A prepaid travel cards allows a company to load onto a card the value that they expect an employee to spend on a given trip. The employee can then use the card to pay for hotels, restaurants, rental cars and other travel expenses. And the company gets a tracking report similar to that on a commercial card.
"The (federal) government is especially excited about the travel cards for their employees who are traveling on a per-diem basis," says Steve Abrams, senior vice president of MasterCard's global commercial card programs. "It is easy to track how employees are spending the money. Other companies like these cards for employees who are taking short trips or only travel a few times a year."
In a similar application, Abrams says some companies are issuing so-called project cards where employees assigned to work on a specific development project use a card to pay for the supplies, computer services and related items necessary to complete the project. In many cases, managers can view on a Web site the expenses of employees to monitor the progress of the project and assure that funds are being spent appropriately.
Many other corporate prepaid programs relate to insurance and health care. According to MasterCard, some companies are allowing employees to put their flexible spending account (FSA) funds on a prepaid card. This allows employees to use a card to pay for their out-of-pocket medical expenses wherever bank cards are accepted rather than have to pay by cash or check and then send in a receipt.
"The current system is an unyielding process for employees to handle," says Bill Mathias, MasterCard senior vice president of member relations. "With a prepaid card they can use their benefits immediately and they do not have to wait."
Often, employees with traditional flexible spending accounts have to pay a $10 or $20 deductible and they end up mailing in dozens of receipts, each for a small amount, to collect the funds they have paid into their accounts. FSAs allow employees to pay medical expenses with pre-tax dollars deducted from their paychecks.
"Companies who use the prepaid card have seen a significant increase in the number of employees who sign up for a flexible spending account because it is so easy to use," Mathias says.
In another health-care application, MasterCard worked with Fairfield, N.J.-based Marcaluso Group to develop a card used to distribute pharmacy samples. Rather than give actual samples to doctors, participating pharmaceutical companies provide the doctors with stacks of cards that retain the value of a limited quantity of the drug.
Then, if a doctor wants to test whether a particular prescription would benefit a patient, rather than hand over a sample, the doctor gives the patient a card. The patient redeems the card at any pharmacy that accepts MasterCard and is given a sample dosage. This eliminates the potential for theft of drugs from the physician's office, avoids waste due to expiration of the samples and allows the pharmaceutical companies to track who is receiving their samples.
Despite the fact that there are so many different applications for stored-value cards, the fact remains, however, that each application typically remains on a separate card. And just as the prophets once predicted that all-in-one cards would be prominent, many experts still believe that there will be slow migration to multi-application cards.
"Today, these programs reside on mag-stripe cards because that is the infrastructure that is already in place to support them," says MasterCard's Mathias. "But I can easily envision these programs moving to chip cards as the chip migration occurs elsewhere. Then you'll be able to see a lot of different applications on one card."
Then, maybe the once predicted all-in-one prepaid card might come true.
Authoritative analysis and perspective for every segment of the payments industry
Authoritative analysis and perspective for every segment of the industry
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