The Green Sheet Online Edition
November 09, 2009 • Issue 09:11:01
Reload with prepaid
Business is booming in the prepaid card sphere. In its sixth annual market assessment, Mercator Advisory Group reported that the total amount of funds loaded onto prepaid cards reached $247.7 billion in 2008, surpassing the totals for 2007 by $27.4 billion, or 12.4 percent.
In the closed-loop category, Mercator tracked double-digit growth for gift card incentive programs, cards used for digital media purchases such as online gaming time and music downloads, and gas cards. As for open-loop, network-branded cards, such as payroll, government payments and general-purpose reloadable cards, Mercator estimates its total size to be $60.42 billion, a 48.6 percent increase from the advisory's 2007 estimate.
Given this accelerating bounty, it is a no-brainer that every ISO either sells or resells a prepaid card solution to its merchants, right? Apparently not. Only 50 to 60 percent of ISOs offer gift, loyalty or other types of stored-value card programs, according to Douglas Hardman, founder and Chief Executive Officer at loyalty and stored-value network provider SparkBase.
Hardman believes the reason for this gap is that many ISOs were burned in the past by prepaid card providers' less-than-stellar programs. "It was initially they got a bad taste in their mouth from the way the programs were run," he said. "Those companies had issues with uptime. They'd go down a couple days before Christmas for five or six hours. That's detrimental to your business.
"And when I can't get a hold of somebody in customer service because they're off rock climbing, or you can't get a hold of someone you need to generate numbers, that wears on a person."
A secondary reason is the newness of the prepaid card industry in comparison to the more established, bread-and-butter services of credit and debit card processing. "Most people don't want to be the first one on the block," Hardman said.
A third rationale is that ISOs look at the bottom line and don't see the residuals on prepaid card processing that they enjoy with credit and debit cards.
Steve Eazell, Director, National Sales and Marketing for Secure Payment Systems Inc., said interchange rates are less on prepaid than on either credit or debit cards. Not as many consumers use prepaid cards as much as the other forms, nor do they use the cards as often. "The numbers just aren't there," he said.
But times are changing, and so is the value proposition of prepaid cards for merchants and ISOs. In a troubled economy, prepaid helps keep merchants sticky. In fact, they help with the most vital adhesive factor - keeping merchants in business. And merchants are increasingly hearing from their customers that they want to purchase prepaid cards from their favorite retailers.
The Network Branded Prepaid Card Association is hearing it, too. Kirsten Trusko, Director of the NBPCA, noted that consumer awareness and demand for prepaid cards is growing. The NBPCA's partner banks, processors and program managers are fielding more requests from consumers about how prepaid can help people budget and monitor spending, be used for gifts, and function as an alternative to cash and credit.
"We're getting not only [unbanked] people using the general purpose reloadable, but now we're seeing highly banked people also saying, 'Look, I'm tired of the interest [on credit cards]. I'm tired of the overdraft. And this is just a wiser way for me to spend my money,'" she said.
This rising interest in prepaid is fueling retailers' bottom lines. "If you look at the largest merchants offering these cards and you open up their publically available income statements or reports and take a look at revenue attributed to the cards, there's something driving the enthusiasm and driving the resourcing," Trusko said.
Rise and shine
Fear is another driver. Hardman said ISOs that don't offer prepaid card programs are seeing their merchants jump to competitors that do. To combat merchant attrition, ISOs have been flocking to SparkBase to sell its private-label gift and loyalty card platform. Since October 2008, SparkBase has grown at over a 500 percent clip, Hardman said.
SparkBase is signing medium to large ISOs that don't want the expense of running their own private-label networks but want the benefit of branding SparkBase's network as their own. In addition, the company is receiving business from merchant level salespeople who couldn't convince their ISOs to get into prepaid, so they started their own ISOs and planned to lead with the SparkBase product.
According to Hardman, boarding merchants with prepaid is a new and exciting development. "Merchants are getting bombarded every day with, I can save you such and such points and blah, blah, blah - that stuff. ... Here's a phone call they're not used to getting: Do you have gift cards right now? And the answer is usually no."
Starting the conversation with prepaid, instead of using it as a distant value-add, has proven to be a successful sales strategy. As Hardman puts it, "It's an easy sale. It's inexpensive. It gets them in the door for a later date when they want to start doing credit and debit cards."
Another strategy that ISOs might pursue in the prepaid card industry is becoming program managers (PMs). By running their own programs, such as gift or payroll card programs, PMs can deliver tailored solutions to merchants in their own portfolios and thus reap the benefits of higher margins and stickier customers.
PMs are systems integrators, said Peter Quadagno, Principal and founder of payment consultancy Quadagno & Associates Inc. "These are people - companies - that go out and assemble the different pieces and functions to deliver a program," he said. "And they make these disparate pieces work together."
Processing platforms, inbound call centers and interactive voice response systems are pieces that PMs must combine, which makes the endeavor costly and technologically complex, Quadagno said. But the reward for PMs is control. They set their own pricing and ensure quality service to their customers.
But becoming a PM involves building a complex infrastructure or finding the right partners to perform the various functions on your behalf. Thus, it is not something that a small or even mid-sized ISO could realistically achieve, Quadagno said. For the smaller players, he advises a thorough examination of their portfolios for opportunities in prepaid.
"Who are these merchants?" he said. "How have you segmented them? What couldn't you sell them? What kind of business are they in? Are they all just merchants - mom-and-pop shops? Are they companies? Are they different types of companies? What do they do?"
ISOs can analyze the merchants in their portfolios in a number of ways, including category codes, business practices, transaction volumes, types of POS terminals and store or business locations. Once merchants are evaluated, ISOs can seek appropriate third-party vendors to facilitate programs. Turnkey gift card providers include Valutec Card Solutions, Givex Corp. (now Global Prepaid Exchange) and SparkBase.
But Quadagno is particularly excited about payroll cards, a service by which ISOs can make "serious money," he said.
Paid in full
One such payroll card provider is Payoneer Inc. The Web-based company services other Web-based companies that pay a large number of employees spread out across the globe. Yuval Tal, CEO at Payoneer, offered search engine giant Google Inc. as an example.
"Google pays an enormous amount of self publishers that publish on Web sites: anyone that has a blog, anyone that has some traffic - so hundreds and hundreds and hundreds of thousands of people who each make a bit of money," Tal said.
One Payoneer client is FixYa Ltd. - an online hub of how-to information on everything from car maintenance to computer repair. FixYa employs freelancers around the world to provide their expertise; they get reimbursed on Payoneer's MasterCard Worldwide-branded payroll cards. The cards are especially helpful to freelancers in developing countries. Tal said Payoneer has received numerous testimonials from unbanked workers in India who do not have access to debit cards linked to demand deposit bank accounts. With network-branded, open-loop payroll cards, they can now buy online and take part more fully in the Internet revolution.
The online freelance marketplace is growing exponentially, and workers need an efficient, cost-effective way to get paid, Tal said. Payoneer provides that service at a fraction of the cost of paper check issuance or wire transfers, he added.
With almost 200 clients, Payoneer is experiencing steady growth. Tal noted that Payoneer grew at a pace of 7 percent month over month for the last 30 of 31 months. "You would be surprised at how big the Internet culture is and how much money you can make online," he said.
Eazell said SPS has charted a different direction for payroll cards. The San Diego-based ISO targets factories that employ unbanked workers, often comprised of first generation immigrants from Latin America who do not trust banks. Unlike gift cards, the margins on payroll cards are higher, Eazell said. The only problem is scale.
"Initially it started out where most of the payroll folks, you had to have a pretty big order before you would really be able to rock with these particular companies," he said. "You're talking 5,000, 25,000 cards, and how many ISOs are really talking to those kinds of factories? Not very many."
But if U.S. immigration policy is overhauled and citizenship granted to the 12 to 20 million illegal aliens that live and work in the United States, the ranks of the unbanked workforce will likely swell, according to Eazell. Thus, "ISOs don't go after a lot of the verticals that are using the payroll cards today, but they could," he said.
Additionally, SPS is targeting sales organizations that rely on salespeople who are independent contractors, not employees.
"We had a whole multilevel marketing organization that we sold thousands of these cards to because that's how they paid their downstream representatives," Eazell said. "So we did do very well with those folks because a lot of times they have guys that come and go." Rather than having businesses issue a one-time check, the sales agent gets paid via plastic.
Card of the future
While prepaid cards can facilitate fundamental programs like gift and payroll, they seem equally beneficial for cutting-edge contactless payments. A near field communication (NFC) trial presently underway in Kuwait is testing whether the draw of virtual prepaid cards helps entice consumers to shop in particular stores.
The six-month trial that runs through April 2010 involves Visa Inc., National Bank of Kuwait, Middle Eastern telecommunications carrier Zain and NFC software provider ViVOtech Inc. "Smart posters" embedded with NFC chips encourage shopping mall patrons to tap NFC-enabled Nokia phones against the posters to collect coupons immediately redeemable for purchases at select mall retailers.
As part of the trial, consumers can download Visa prepaid cards onto phones and use the cards to make purchases at mall retailers' contactless POS terminals powered by Visa's payWave technology.
As well as the smart posters and mobile coupon application, ViVOtech provided the NFC technology that resides on Nokia 6212 phones, including the NFC wallet where virtual cards rest and the over-the-air card provisioning software that facilitates contactless transactions.
According to Mohammad Khan, founder and President of ViVOtech, the Santa Clara, Calif.-based company has engaged in upwards of 36 NFC pilots around the world in the last two years. The most well-publicized one teamed ViVOtech with First Data Inc. and Sprint Nextel Corp. for a 2008 trial utilizing smart posters and NFC-enabled phones in the San Francisco Bay Area Rapid Transit District (BART) system.
What ViVOtech learned from the trials may make retailers' eyes pop wide open at the potential benefits of contactless payments. Where the redemption rate for paper-based coupons hovers between 0.5 and 2 percent, that number soars to between 15 and 55 percent for contactless couponing, Khan noted. "It's amazing," he said.
Furthermore, Khan judges prepaid cards as ideal for mobile payments. An issuer - NBK in the case of the Kuwait trial - can instantly create relationships with customers where no relationships existed.
After tapping a phone on a poster to download a Visa prepaid card, "I might not be an NBK customer, but now they just signed me up as a cardholder," he said. "So this is an extremely powerful customer acquisition and solution for gift cards and prepaid."
The micropayment nature of prepaid card purchases via mobile phones does not bother Khan. The profit in low-dollar purchases used to be eaten up by transaction transmission costs, he said.
But that is changing with fast, inexpensive Internet Protocol (IP) environments taking the place of slow, costly dial-up. "There are no transmission costs for [IP]," he said.
"There's only processing costs. So now think of it - if I've got a prepaid instrument on my NFC phone, the prepaid provider knows that the cost of the transaction is very little. ... So I'm doing a dollar, two dollar, three dollar transaction, it's very manageable."
A flattering card
Electronic payments and technology allow us access to the entirety of our financial lives with only a few clicks of the mouse or key punches on mobile handsets, and the prepaid card industry is in some ways leading the way.
In a literal sense, the world remains round. But, as Payoneer's Tal pointed out, the literal barriers that once separated people from their money are nearly gone. "We are the last mile in making the world flat," he said.
Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.