The Green Sheet Online Edition
January 25, 2010 • Issue 10:01:02
Insider's report on payments
Prepaid opportunity: Huge and growing
I come from a large family of folks who enjoy gifting. So it should come as little surprise that gift cards are a big hit with the Murphy clan. But I have to admit even I was taken aback last month as I watched my nephew collect a smorgasbord of gift cards at his birthday party: toy stores, clothing stores, book stores, fast food restaurants - you name it. Any retail chain that might appeal to a nine-year-old boy, or mothers looking to clothe such a boy, had one or more of its gift cards included in this youngster's birthday bounty.
The thinking behind these gifts seems rational enough. Busy moms don't have the time to go out and find cool gifts for their kids' friends, and gift card displays are seemingly ubiquitous. At the grocery store where I shop, for example, a huge display of gift cards (restaurants, movie theaters, hardware chains - even airlines - are represented) is right next to the checkout.
I took the bait and purchased gift cards for the older youths (16 and up) in my family. Of course, it helped that the grocery store's loyalty program features 20-cents-per-gallon discounts at the company's gas pumps for every $50 spent on gift cards.
Inducements or not, consumers were expected to spend more than $26 billion on gift cards during the December 2009 holiday season, according to the National Retail Federation. The NRF expected the biggest winners would be department stores (38.4 percent of consumers said they planned to purchase one department store card), restaurants (33 percent) and book stores (24.4 percent).
Given all this activity, I was surprised to learn from the Federal Reserve Bank of Boston's Survey of Consumer Payment Choice, released in December 2009, that fewer than one in five Americans (17.2 percent) report having a prepaid card.
I have no reason to doubt the Boston Fed's data, although it's unclear to me whether those surveyed considered gift cards to be prepaid cards. Even with that caveat, however, it would seem opportunities for growing the prepaid piece of the payment pie must be enormous.
Here's what Tim Sloane, Vice President and Director of the Prepaid Advisory Service at Mercator Advisory Group, had to say about prepaid cards recently: "[N]o other payment market is riding out the current economic downturn as effectively as prepaid, and I can't think of any better payments market to be in during a recession."
Closed-loop growth slows
Sloane and his colleagues at Mercator released a comprehensive set of reports on the prepaid market during the fourth quarter of 2009. Highlighted findings include the following:
- Growth in spending on closed-loop prepaid cards (such as gift cards) slowed to 4.3 percent between 2007 and 2008.
- Value loaded onto network-branded prepaid cards grew an astounding 48.6 percent, driven in part by payroll and government programs.
- U.S. consumers loaded nearly $250 billion on prepaid cards in 2008; just over $60 billion of that amount was added to network-branded cards.
Sloane blames a "lackadaisical" attitude on the part of program managers for meager growth in closed-loop prepaid card programs. If that's the case, ISOs and merchant level salespeople should take it as a sign that it's time to redouble efforts to sell merchants on prepaid card programs.
Credit cards passé?
"Credit cards are so 2006," began a recent article in The Wall Street Journa. "Today the fast-growing way for consumers to pay is the prepaid card."
With just over 17 percent of consumers carrying the cards, prepaid debit programs have a lot of catching up to do if they are to ever attain the ubiquity of credit cards. But a desire on the part of many consumers to stay clear of debt and the continued tightening of bank credit standards have already laid the groundwork for greater prepaid card adoption.
Capital Access Network, which owns the merchant cash advance business AdvanceMe Inc., reported that same-store credit and debit card sales declined for the eighth-straight quarter in the third quarter of 2009.
Transactions were down 14.84 percent compared to the same period in 2008, according to CAN's Small Business Credit Sales Report.
The biggest dips in credit and debit card transactions were in large metropolitan markets, the report said, while smaller areas (those with fewer than 100,000 residents) showed the smallest declines. Card transactions at restaurants were down 11.06 percent from third-quarter 2008 totals.
The Boston Fed's consumer preference data drive home the fact that more consumers today have debit cards (80.2 percent) than have credit cards (78.3 percent). To put this in perspective, I recall writing headlines in the mid-'80s questioning whether banks would ever succeed in getting debit cards (which at the time were used primarily at ATMs) into the wallets of 30 percent of consumers.
Financially cautious consumers point to a variety of reasons for preferring debit cards generally, and prepaid debit in particular, these days. Budgeting, spending controls, loyalty points and improved security when buying online rank high on that list.
Banks and card companies have good reasons for liking prepaid cards, too. Transaction processing is one of the few profit centers in banking today. Belt-tightening consumers and tightened credit standards have combined to drive out credit transactions. Prepaid card programs create new revenue streams that replace at least some revenues lost to diminished credit card use.
Merchants like prepaid, especially gift cards, for a variety of reasons, too. One is that gift card purchases are tantamount to interest-free loans.
I've interviewed a number of ISOs that have helped build gift card programs for clients that were so successful they obviated the need for those businesses to seek cash advances on their card receivables.
I have nothing against merchant cash advances. I understand there is money to be made selling a product that has been shown to have quantifiable benefits for merchants. In the current economic environment, however, it seems to me that gift cards and other prepaid cards are a better bet for retaining profitable merchant portfolios.
Meanwhile, I just can't help but wonder how long it will take before prepaid debit cards are in the wallets of 30 percent of U.S. consumers.
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at email@example.com.
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