Consumer shopping behavior is what controls the profitability of the prepaid card industry, according to a webinar presented by Mercator Advisory Group and Fiserv Inc. "Consumers are driving the industry," said Tim Sloane, Vice President of Client Services and Prepaid Advisory Director at Mercator.
Mercator, which has been tracking the prepaid card industry since 2003, breaks down the industry into 33 market segments and categorized the cards as either being closed-loop (such as store-specific gift cards) or open-loop (cards that run over card brand networks). In comparing the closed-loop segments to open-loop, Sloane concludes that open-loop cards are experiencing faster growth.
He said that the compound annual growth rate (CAGR) for closed-loop cards was 10.1 percent between 2004 and 2009. But, in that same timeframe, open-loop cards grew at a CAGR of 63.6 percent, with year-to-year growth of 50 percent. "Clearly, the open loop market is taking off," Sloane said.
Sloane forecasts that, by 2012, the total load amounts on open-loop cards will exceed that of closed-loop cards, "which is pretty astounding given closed-loop market segments have been around for significantly longer than open-loop."
In taking a closer look at the prepaid card industry, Mercator interviewed over 1,000 consumers between May and June 2009. Forty-five percent of the survey participants had recently purchased a prepaid product. Mapped over the entire adult U.S. population, that 45 percent translates to 99.6 million people, Sloane said.
Mercator then identified what types of prepaid cards that 45 percent of respondents had purchased. Seventy-six percent bought closed-loop retailer gift cards. But what amazed Sloane is that 39 percent had purchased open-loop, general-purpose reloadable (GPR) cards, which would account for 38.8 million of that overall 99.6 million population.
In contrast, only 20 percent of that 99.6 million had purchased prepaid phone cards, even though that category had been in existence for a much longer time than GPR cards. "So, in a very short period of time, the open-loop gift card has certainly driven significant market share," Sloane said.
When Mercator asked the survey participants about the reloading of cards, the responses proved interesting to Sloane. Approximately 11 percent (translating into 24 million consumers) had reloaded their cards; 53 percent (117 million) were familiar with the reload concept but hadn't done it; and 6 percent had no awareness that reloading was possible. The latter two categories point to a potential growth area for prepaid cards.
"Clearly there is an opportunity to get out there and educate the market significantly in order to drive additional revenues," Sloane said.
Another conclusion Sloane drew from the research is that consumers are using prepaid cards in many different ways. Fourteen percent said they used the cards for household budgeting. Prepaid cards are therefore replacing "grandma's shoebox with cash in it" for the paying of bills and other expenses, according to Sloane.
Mercator's research found that only 11 percent of prepaid card users said prepaid is a convenient way to pay bills if debit cards are unavailable. Only 11 percent also said prepaid cards are a convenient way to send money to friends and relatives. Both statistics point to another market opportunity – for providers to clarify through messaging the benefits of prepaid cards, Sloane said.
Mercator also tabulated where consumers purchase prepaid cards. Mercator's research finds that:
In analyzing survey participants' answers, at first it seemed as though consumers knew what prepaid cards they were going to purchase before they entered the store or went online, Sloane said. But, in analyzing their secondary answers, Sloane recognized that consumers are "nowhere near set in their ways."
With prominent signage and a variety of cards on display, "it is very likely that those consumers can be driven to make a purchase at that location," Sloane said. "It's just having the right products at the right visibility at the right time to be able to intercept that individual."
Finally, Mercator researched prepaid card distribution channels. In "triangulating" data attained from card issuers, retailers, third-party prepaid card operators and distributors, Mercator realized that the primary distribution channel for prepaid products is the gift card mall.
In the open money and financial services category (open-loop, network-branded cards), which accounted for $8.7 billion in load volume in 2008, almost $2 billion of that load came from cards purchased from prepaid malls. And of the $7.8 billion loaded on open-loop gift cards in 2008, $2.7 billion was loaded via mall-purchased cards.
Sloane concluded, "There is some very solid evidence – I would argue proof – that the merchants should be jumping in on the open-loop gift card and promoting it. It's both a profitability opportunity and it's making sales that they would not normally get."
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