Marketers of open-loop prepaid cards appear to have finally figured out how to promote their products to consumers. But government agencies and corporations also appear to be playing a key role in getting more of the cards to the masses.
A new report released July 9 shows that consumer use of cards carrying the brands of the major card networks is now virtually equal to that of merchant closed-loop cards, driven by growth in benefit and payroll cards.
“We’re now seeing a rise in the business models that are replacing checks for things like benefit payments and payroll, where the costs are incurred by the entity disbursing the funds,” Aaron McPherson, practice director, IDC Financial Insights, said in an interview.
For its research, IDC conducted an online survey in May involving 2,663 U.S. residents. The resulting statistics are accurate to within plus or minus 1.9% at 95% confidence, the company said in its report “Business Strategy: Results from the 2012 Consumer Payments Survey.”
Historically, closed-loop prepaid cards far outpaced their open-loop kin, in part because consumers had to buy network-branded cards while merchants’ cards remained free. And while more retailers now offer open-loop gift cards for sale to consumers at kiosks, it’s the mass-scale initiatives that are driving much of the market growth, the report notes.
Payroll card use dipped considerably last year but this year made a major rebound. And benefit card use has grown even more dramatically the past three years, with more than one-third of the U.S. population now using them, according to IDC.
“This reflects a large-scale shift by the federal and state governments away from checks and toward prepaid cards to deliver benefits,” the report notes. “We do not expect such growth to continue because, as with payroll cards, only a subset of the population is eligible for such benefits.”
Open-loop card use has risen, albeit slowly, since 2005, but the pace appears to be picking up, IDC’s research shows.
Indeed, it appears the actual market is catching up with the potential market, IDC notes in the report.
“We also predicted that caps on the interchange fees that large banks could charge for debit cards imposed by the Dodd-Frank Act should lead banks to shift more resources to prepaid cards, and it appears to be happening,” the report notes. “However, we still believe that most banks have not yet fully leveraged this opportunity and that open-loop prepaid cards will overtake closed-loop cards in 2013.”
Card marketers, such as Green Dot Corp., are getting more sophisticated in their approaches through better branding, rewards programs and other initiatives, McPherson said. Moreover, many mobile funds-transfer initiatives are linked to open-loop cards, he added.
“It’s not primarily a gift card anymore,” McPherson said. “It’s more diverse than that.”
Use of closed-loop cards began to decline in 2005, and that trend continued until 2009, when use began to grow for a couple years before dipping again this year.
“The drop in closed-loop penetration, after a strong rebound in 2011, reinforces a long-term trend away from this product,” the report notes. “It may be that families were using closed-loop prepaid cards in 2011 as a means of spending control as they tried to pay down debt and now have less need of them. It could also be that stores are using alternative means to issue refunds or credits, such as register receipts or direct credits to a card.”
To drive more use of their closed-loop cards, merchants might consider cobranding initiatives that involve a dual purse, with a credit line and a prepaid account, McPherson said.