Merchants are more optimistic about the possibilities for prepaid programs delivered through mobile phones than providers of such programs, according to an Aite Group LLC report. It is evidence that merchant perceptions of card programs and their most profitable delivery channels may not always correspond to the perceptions of card providers themselves.
The Aite Impact Note, entitled Selling Prepaid Cards: The Merchant Perspective, is based on a survey of 41 merchants and 21 prepaid providers conducted in February 2012. Aite researchers Madeline K. Aufseeser and Judith Fishman found that merchant perceptions aligned with provider perceptions concerning growth of prepaid usage over the next 24 months in terms of in-store and online delivery channels.
However, when it came to the mobile channel, the viewpoints diverged. Fifty-one percent of merchants surveyed said the mobile distribution channel for prepaid cards was growing; 14 percent said it was "booming." But providers had a different opinion, with only 39 percent saying the mobile prepaid channel was growing and just 6 percent saying it was booming.
Neither group had many respondents who believed the mobile channel would decline. But 50 percent of providers think the channel will remain flat, while only 32 percent of merchants think the same thing.
The report indicated providers are less optimistic than merchants because the infrastructure for the prepaid account-mobile phone payment combination is still limited. "Prepaid providers are still on the fence about digital wallets for prepaid cards because standards have not yet been established, and the POS systems have not yet been upgraded to support the transaction type," the analysts said.
Another perception revealed by the research is that merchants do not recognize that encouraging customers to use prepaid cards would help reduce their overall payment acceptance costs. "Yet, this very strategy could help merchants and prepaid providers alike," the researchers noted.
Merchants' belief that their payment acceptance costs were too high - chiefly due to the interchange they paid to card issuers - culminated in the October 2011 enactment of the Durbin Amendment to the Dodd-Frank Act of 2010, which placed price caps on debit card interchange. Aite said it was predicted that merchants would then try to influence consumers to use debit cards over credit cards, since credit card interchange remains unregulated and more costly for merchants.
But this didn't happen, according to the researchers. "As the implications of the Durbin Amendment have started to emerge at the POS, though, relatively little evidence suggests that large merchants are doing anything to change or influence consumer behavior," the report said.
Aite research seems to reinforce that statement. Sixty percent of merchants surveyed did not see that encouraging customers to use prepaid cards was a way for merchants to reduce payment acceptance costs, even though merchants pay no interchange on closed-loop gift card transactions, for example.
The researchers suggested that a restricted authorization network (RAN) approach, by which a collection of select merchants are pooled onto one semi open-loop, network-branded, general purpose reloadable (GPR) card program, could achieve the same transaction processing cost savings for merchants as closed-loop gift card programs.
In contrast to Aite's mobile prepaid channel statistics, providers are more enthusiastic about RANs than merchants. Twenty-five percent of providers, as opposed to 20 percent of merchants, think implementing RAN strategies over the next 24 months is a priority. Although 66 percent of merchants said RANs are only a "back-burner" issue, Aite believes those respondents may simply be uninformed about their benefits as cost savers.
Aite pointed out that the benefits to providers of particular card programs do not necessarily correspond to the benefits for merchants. For example, fully open, branded GPR cards are more profitable for providers because, in comparison to closed-loop gift cards, GPR card usage is higher and the cards' lifetime is longer, the researchers stated.
But merchants might rank GPR cards below their own closed-loop gift cards, Aite noted. Unlike such gift cards, which are redeemed at the stores where they were purchased, GPR cards can be used at any store where the card brand is accepted, thus potentially depriving GPR card selling merchants of revenues.
"Understanding merchant needs is a critical component for any prepaid provider that utilizes the retail channel as part of its prepaid product distribution and acquisition model," Aite said. By segmenting merchants by their needs, providers can better tailor services to merchants. "This marketing approach will drive a higher level of interest and participation among existing and prospective merchant clients, thereby increasing overall card sales," the researchers said. 
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