Prepaid cards' mobile makeover
Mobile and digital technology are expanding use cases for reloadable prepaid cards beyond their heritage as a tool primarily for the unbanked consumers. Furthermore, mobile commerce is driving broader acceptance of digital versions of both prepaid and retail gift cards.

Fintechs increasingly use prepaid cards to access card network rails for new payment products ranging from corporate disbursements to gig-worker payments, and the customizable nature of prepaid cards holds significant promise for connected commerce within the Internet of Things.

What follows is a look at the key trends driving further changes in prepaid and gift cards.
Chart: The prepaid pie
The prepaid card market is in flux, and the market share of various card types will be shuffled in the next few years as use cases evolve, according to the latest research from Aite Group. Government cards, which still account for the largest chunk of market share in the prepaid industry ($148 billion), are one category that will see only incremental changes from the few federal benefit programs and many state governments using prepaid cards to disburse funds.

Gift cards—including closed-loop retail cards and open-loop prepaid gift cards used for rewards and incentives—comprise more than a third of the overall market, and the category is poised for change. While gift cards as a whole are growing, various studies indicate digital versions of these cards will begin to displace physical cards as mobile technology advances.

Payroll cards and health care prepaid cards are both predicted to expand modestly, and reloadable prepaid cards are on track to reach $59 billion in total dollar volume by 2020, as the lines blur between payment mechanisms for corporate payouts, campus purchases and wearables, Aite said. Transit and toll payments account for about 4% of the prepaid card market, and growth will be modest as more transit systems welcome open-loop contactless in the next few years.
Chart: Banking on GPR?
Reloadable prepaid (GPR) cards found their footing in past years as financial tools for unbanked consumers, but the product is now at a crossroads. GPR cards sold at retail outlets like Walmart and online from issuers including Green Dot and TSYS’ Netspend increasingly support direct deposit, bill payment and sometimes even rewards, and many bank account holders use them to control spending and budgets.

Millennials account for about 40% of total spending reloadable prepaid cards, according to FIS’ data. About 25% of young millennials between 18 and 25 years old who had a bank account used a prepaid card to pay a bill within the previous month, according to a survey FIS conducted last year.
Chart: Going virtual
Retail gift cards continue to increase in popularity. On average, consumers buy six or seven retail gift cards per year, up from about 5 in 2015, according to First Data’s latest consumer study. Digital versions of these cards experienced a growth spurt last year.

Mobile gift card apps are a significant category driving more digital gift card sales, First Data suggested. Among all consumers who were aware of mobile gift card apps, 52% had used one and among millennial survey respondents, 65% said they had used an app to purchase a gift card, First Data said.

First Data conducted its survey among more than 2,000 U.S. adults in August 2017.
Chart: Digital divide
Retail gift and prepaid cash cards play a big role in loyalty programs, Blackhawk Networks’ Hawk Incentives found in a recent survey. When redeeming loyalty rewards in the form of a gift card, consumers are generally split on whether they prefer receiving a digital card sent instantly to their mobile phone versus a physical card arriving in the mail. Overall, consumers still prefer retail gift cards to prepaid cash cards.

Digging deeper, Hawk Incentives’ survey data suggests that women, along with consumers under age 35 and those who belong to one or more loyalty program, are significantly more likely than men or older consumers to opt for a digital version of their reward, whether it’s a retail gift card or a prepaid cash card.

Consumers over age 55 who tend to be less tech-savvy prefer physical cards—retail or prepaid cash—when redeeming rewards. Leger conducted its online survey for Hawk Incentives among 1,500 U.S. adults Feb. 5-15, 2018.
Chart: E-commerce tailwinds
Digital and mobile technology — plus the expanding use cases of gift cards — is driving steady volume growth in the broad category of gift cards, according to Aite Group.

Total gift card dollar volume will rise 37%, to $243 billion, by 2020 from $178 billion this year, the research group predicts. This broad definition of the category takes in gift cards in physical and virtual form, employee incentives and retail loyalty program rewards, in a format redeemable at a specific store or for cash with a network-branded cash value gift card.

One driving factor for gift cards is the rise of mobile and online commerce, where merchants—most notably Amazon—offer consumers the option to buy gift cards and pay online from a gift card account balance. Amazon and other large retailers are poised to accelerate this trend by offering incentives for gift card reloads, and pulling funds first from any available gift card before tapping other funding sources, according to Kevin Morrison, a senior analyst at Aite who authored the firm’s latest prepaid card study.