Tuesday, April 17, 2007
The value proposition behind prepaid cards is easy to make: ISOs wanting to differentiate themselves offer the breadth of stored value products retailers are seeking, according to William Biwer, President of Smart Card Solutions LLC.
"They want to be able to provide gift and loyalty applications to provide a full suite of products for the merchant," he said.
The demand for prepaid cards has turned ISO-friendly names like Valutec Card Solutions into hot properties. Metavante Corp. acquired the closed-loop prepaid card provider in January. In this story, we take a look at a few other gift and loyalty card programs available to ISOs.
ISOs also want loyalty from their merchants. "Once you have cardholders out there supported on a program, it's a lot more difficult to switch platforms," Biwer said.
"With open-loop cards, if you switch from one processor to another, those cards are all accepted. In the case of closed-loop, you've got to support [existing cards]. The closed-loop gift and loyalty helps stickiness of merchants for the ISO."
When asked to switch a merchant's closed-loop pre-existing gift card program to Secure Payment Systems' platform, 50% of the time the cardholder database is not transferable, and the previous processor is unwilling to share balance information, said Steve Eazell, SPS Vice President, Sales and Marketing.
Open-loop cards have an inherent advantage for consumers: their ability to be used at virtually any store. But that is the very reason merchants prefer to sell closed-loop cards, he said. The same cards also bring MLSs a higher share of revenue than open-loop.
Industry-wide, gift cards account for only 2% to 4% of retail transactions, Robert Skiba, Executive Vice President for Comdata's Stored Value Solutions, said at the Prepaid Card Expo in February.
Effective marketing, implementing business-to-business channels as loyalty programs, and promoting secondary holiday cards – such as birthdays and Mother's Day – boost that number.
Marketing across the counter is a factor in Starbucks Coffee Company's gift card success, Skiba said.
In January, the coffee chain reported a 30% increase in activations of its gift and loyalty cards during the first quarter over the prior year, to 20 million.
The volume on those cards rose 30% to $287 million, or 12% of Starbucks' revenue. During the same period, the company also took in 3 million reloads, averaging $27 each. With numbers like these, the industry hopes to clone the merchant's model.
Skiba cited Starbucks as one of about 20% to 25% of retailers that "have been able to jump the counter at the point of sale and market directly.
"How did they get a 30% increase this year, with over 20%-plus penetration at the point of sale for [gift cards identified as the] tender type, when the industry is 2% to 4%?"
Following are a number of prepaid card providers that work with ISOs, and information about their respective programs:
The company has traditionally specialized in wireless recharge and calling cards, selling $100 million a year for AT&T Wireless. Its primary nontelecom product is a MasterCard-branded gift card.
Blackstone also processes closed-loop cards for merchants. The company provides back-end processing for gift cards, and promotes its retailers' brands in gift card malls. Approximately 10,000 merchants sell its prepaid products electronically.
ISOs may sell, lease or rent Blackstone's Touch-n-Buy terminal, while also selling its card products. ISOs and MLSs earn from one to 10 basis points on processed volume.
"It ends up being very substantial," said Blackstone's Chief Executive Officer Luis Arias. "We process ourselves, or the ISO can process it, if they are qualified." Registration with Visa U.S.A. or MasterCard Worldwide and having security procedures in place are the primary qualifications for ISO-hosted programs.
Blackstone does not require exclusivity of its resellers. Arias said some of Blackstone's products are reloadable, but features are relatively basic.
The company provides open-loop branded cards from Visa and MasterCard. CardEx performs real-time fraud monitoring, according to Barrett Chamberlain, CardEx Vice President of ISO Sales. "Our fraud capability, as far as scrubbing the transaction, is pretty high," he said.
Key advantages are the company's flexibility and the dependability of its resources, platform and people. "We call people back within 24 hours," he said.
Some reloadable cards can be registered by consumers to enable them to load more than $500.
ISOs adopting CardEx's programs get dedicated account managers. The company performs all processing through Fiserv. Chamberlain said CardEx will have a direct processing connection in the third quarter.
ISOs are charged a residency fee ranging from $500 to $2,500, depending on their size and number of active cards. Standard network pass-through and sponsor bank fees apply. Those fees can be bundled or itemized to enable ISOs to negotiate sponsor bank fees.
ISOs upcharge monthly fees to cardholders to offset residency fees. Cardholder fees include a $3.50 activation fee and a monthly charge ranging from $4.95 to $9.95. ISO upcharges are rebated to them monthly.
CardEx requires an exclusivity contract of at least three years, in which the ISO agrees to market only CardEx's prepaid cards. Chamberlain said penalties for breaking a contract early are negotiable. ISOs retain full rights to their merchants.
The company offers customized cards for businesses wanting to create a brand.
The company offers both gift and loyalty programs on one card. SPS provides all processing, which is closed loop. The company's Web site enables merchants to look at their transaction data in real time. ISOs may brand the Web site with their own identity.
Merchants pay for the cards and either a per-transaction or a flat monthly fee for the service. ISOs get a wholesale buy rate that can be marked up. Eazell said ISOs are not charged fees and "we don't compete with them for credit card processing."
For chains or franchises, SPS offers daily automated clearing house transfers between stores.
The cards are certified on most vendors' terminals, and the programs are certified on a host of restaurant POS programs, Eazell said. SPS also offers ATM and payroll cards. The company plans to offer a MasterCard prepaid card, which has "the unbanked facet to it," he added.
ISOs earn revenue based on transaction fees and the price of the cards. ISOs get a wholesale price for printing the cards and a transaction-fee buy rate, as well, that they can mark up. Free cards are available to ISOs in sample quantities.
The company's primary prepaid product is the SmartTrack closed-loop card, which supports both gift and loyalty programs. Consumers can continue to use the SmartTrack gift card as a loyalty device on which they earn points with purchases, if encouraged by the merchant to do so.
The SmartTrack application coexists on an Internet virtual terminal, alongside debit and credit applications.
"We typically will host the back-end system and provide a Web site for pulling the reports and reviewing the data," Biwer said. "We license the software to ISOs if they are interested in hosting [and processing] it themselves."
For SCS-hosted applications, the Web site and product can be branded for the ISO. At minimum volumes of 1,000 cards, the company will customize cards with the name and logo of the merchant.
SmartTrack merchants are charged either on a monthly subscription basis or on a per-transaction model ranging from $0.05 to $0.20. Biwer said pricing is very volume sensitive.
Loyalty transactions tend toward lower pricing than gift applications. Both pricing structures pay ISOs, which "earn revenue based on the activity on the program, as long as the merchant is running cards and transactions," he added.
Internet protocol-based transactions tend to be less expensive for merchants than dial-up.
The program's processing agreement has an initial two-year term, with annual renewal options. "We don't typically have an exclusive at the end of the term," Biwer said. "I'd rather earn their wanting to be on the program."
Editor's Note: In Part I (see The Green Sheet cover story, March 26, 2007, 07:03:02), we explored the promise prepaid cards hold for ISOs, merchant level salespeople (MLSs) and retailers, especially when merchants are sold on ways to extend the product life cycle.
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