The prepaid card market must undergo significant consolidation in the future because more prepaid card processors exist than are needed to serve the prepaid issuers and program managers in the U.S., new Aite Group research finds.

Unless bigger companies acquire them, some smaller prepaid processors will ultimately shift into other services or "quietly get out of the business altogether," says Madeline K. Aufseeser, senior analyst with Boston-based Aite Group, who authored the July report on the U.S. prepaid processing market.

Aite conducted interviews with processors, issuers and program managers across the payments industry over the first six months of 2013 for the report.

"We have seen this over and over again in new industries," Aufseeser says. "A collection of startups emerge at first, and then the market consolidates and weaker players check out."

Eighteen processors serve the prepaid debit and payroll market space, compared to 17 program managers and 14 major issuers, the report states. Processors survive on scale, serving multiple program managers and issuers. With many "small players" in the market, the number of processors is out of balance with the number of issuers and program managers, the report says.

Because the prepaid market is growing rapidly, market maturity should force consolidation among players, the report states.

The expected consolidation makes it vital for issuers and program managers to fully understand their business needs before jumping into a relationship with a processor, Aufseeser says.

"They need to know the target market and how many distribution channels will be needed," she adds. "It could change how they look at a processing arrangement."

It is common for small issuers and program managers to "go into a product launch blindly and not knowing what the real needs were," Aufseeser says.

Without a good handle on services available, a small issuer may choose a large processor, when a turnkey approach would have been sufficient, Aufseeser says. In that scenario, the issuer may find expenses climbing much higher than expected.

"Mistakes like this can easily be made," she adds.

The report does some matchmaking, saying FIS should purchase TransCard to offer a turnkey processing service and establish user interface to both companies' back-end processing platforms.

It suggests Green Dot should buy i2c to share marketing power and lower operating expenses, while First Data should acquire Blackhawk Networks to "integrate the distribution of the closed-loop gift market with its prepaid solutions."

Finally, Fiserv should buy Ceridian and Galileo to make market inroads into the payroll and prepaid debit space, the report recommends.

"You need scale to stay in this business, and the small guys can't possibly survive," Aufseeser says.

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