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Issue 07:03:02

Industry Update

The Green Sheet's cruisin' side

New check conversion rules now in effect

Thanks to Michael Nardy for a great year of Street SmartsSM

Processors provide data for study of 'underbanked'

SøGo prepaid card brand seeks users' trust


Industry Leader: Jacques Breton
The man who never stops giving

Way to go, NAAIO


NACHA seeks stronger ACH rules enforcement

By Patti Murphy, The Takoma Group

Merchant retention: Secure it with lists

By Biff Matthews, CardWare International

Let's pull up our socks, and give

By Steve Schwimmer, NAOPP


Street SmartsSM:
An ISO bill of rights

By Michael Nardy, Electronic Payments Inc. (EPI)

What to do when a merchant sues

By Adam Atlas, Attorney at Law

Biometrics 101

By Ross Federgreen, CSRSI

Once upon a sales call

By Jason Felts, Advanced Merchant Services Inc.

Got adware? Beware the FTC's teeth

By David H. Press, Integrity Bankcard Consultants Inc.

Bewitched by Bluetooth

By Joel and Rachael Rydbeck, Nubrek Inc.

Happy fleet

By Dee Karawadra, Impact PaySystem

Company Profiles

New Products

POS terminal brings pay-at-table security

No merchant parameters


Get over it



Resource Guide


Article published in Issue Number: 070302

Prepaid cards make for big stored value

If you're seeking the next big thing, look no further. Prepaid cards it is. So said dozens of speakers at the second annual Prepaid Card Expo. Whether open loop or closed, issuers are eager to partake of the feast they say stored value cards represent.

Having proven their business model, panelists from the closed-loop prepaid world offered numerous tips on expanding merchant programs beyond just gift cards. In this two-part feature, we will share key selling points ISOs and merchant level salespeople (MLSs) can employ.

We will also look at ways MLSs can make the difference between their merchants' cards gathering dust on J-hooks or becoming a bonanza that can yield a 25-fold return on their investment.

The expo kicked off like a tent revival, complete with gospel choir singing "You Raise Me Up" (to more than I can be). Organizers wanted to drive home the point that prepaid cards will bring much-needed banking programs to the underserved. In other words: Prepaid cards aren't just good for the bottom line. They're good for society, too.

That remains to be seen. But metrics are on the industry's side. The major card brands - which now sell dozens of open-loop prepaid cards - may still be newbies to prepaid, but they're already seeing growth.

The ascendant segment

The category is nascent, according to Todd Brockman, Senior Vice President, Prepaid Products for Visa U.S.A. However, the Association's prepaid growth rate from October through September of 2006, on year-over-year sales volume, was in the triple digits. "As it scales a little bit, we see more efforts to increasing loads and ensuring retention to make those products more valuable."

"In 2006, we sold more gift cards than every other year combined," said Alpesh Chokshi of American Express Co. "This is just the beginning of the growth curve."

For MasterCard Worldwide, stored value cards last year "started to go from an emerging payment method to a third segment of the payment card industry," said Ron Hynes, who leads the company's prepaid strategy in the Americas.

The strong gift card sales during the most recent holiday season had a significant effect on retail sales in early 2007, Hynes said. Redemptions began "to push the spending spike into the new year."

Discover Network found a promising new market in the "unbanked" and payroll space for its stored value cards, said Tom Crowder, Discover's General Manager, Prepaid. Whereas a general purpose gift card may carry a face value of $75, a stored value card can be loaded with hundreds of dollars, he added.

Open-loop gift cards are ramped up to overtake retailers' closed-loop cards, Crowder added.

Prepaid cards are big umbrella. The most basic, a gift card, can be turned into a loyalty product with incentives at the POS. Reloadable cards develop a loyalty factor of their own for the issuing brand.

Encouraging consumers to buy, activate, register and extend the product's life through multiple reloads is the high-water mark for issuers. These and other cards can be targeted at a number of sectors: health care, government benefits distribution and the underbanked/underserved demographic.

Payroll products are "really a consumer financial-relationship-based product, with the opportunity to grow out more financial services than what the underserved and underbanked have today," Hynes said. In the public sector, MasterCard is helping replace benefits-check distribution with prepaid cards.

Visa expects to tap into the underserved market, which represents $1 trillion of income, Brockman said.

When a stored value card is reloadable, simple factors will determine its success with underbanked consumers. "This product has to be better than a bank and smarter than cash," said Steve Streit, Chief Executive Officer of Green Dot Corp. "You can't hit a guy with $35 fees every time he overdrafts." And the card will have to enable bill payment "the way these folks pay bills."

Uplifting gifts

The strongest category - and the most relevant to the ISO and MLS - is the gift card, which by one estimate accounted for $17 billion in sales in 2006. Sometimes not captured in these estimates is the sales uplift, or the recipient's own money spent beyond the value on the card.

Comdata's post-holiday survey of 800 consumers in February found that 53% of gift card recipients spent 17% beyond the value of the card, said Robert Skiba, Executive Vice President for Comdata's Stored Value Solutions.

The category is the stand-out merchant product, according to Kevin Grieve, President of Prepaid Services at First Data Corp. "Not many products can drive the ROI we're seeing with the retail gift card." Returns are as high as 25 times the investment, he said.

The positive statistics on retailers' ROI is the sales tool MLSs can use to sell a gift card program.

Grieve said ROI from a successful program comes in three forms:

  1. Float on the revenue taken in before cards are redeemed
  2. Sales uplift
  3. Higher transaction counts, typically three to five per gift card.

The float gives retailers extra working capital or lowers their borrowing costs, Grieve said. The industry's average for sales uplift is 35%, "but you can see 50% or 100% in sales uplift," he added. The three factors together can have enormous benefits: "So $1 spent in a gift card program can drive upward of $50."

The biggest driver of ROI is the merchant's commitment to the program: "If the retailer is rabid about marketing it and integrating it into their business, it tends to be really successful," said Dan Devlin, Chairman of Chockstone Inc. "The almost identical merchant who does not do that won't be that successful."

MLSs and ISOs can sell both open- and closed-loop gift card programs, but the revenue share is greater on closed-loop, according to Steve Eazell, Vice President, Secure Payment Systems.

The company, which markets gift card programs to merchants, plans to add a MasterCard-branded stored value card because it gives the underbanked more flexibility to spend the cards where they choose.

"To those gifting occasions, the open-loop card has a very steep hill to climb in order to overtake closed-loop cards," said Jeremy L. Sacker, Vice President, Archway Marketing Services.

Spice it up

When selling a gift card plan to merchants, forget plain vanilla. The market is saturated with retail-branded gift cards. And the major credit card brands have added dozens of open-loop cards to the mix. A gift card is just another gift card, unless it's more than that.

The number of retailer-branded products in the market raises concerns that a bubble exists. "The explosion in the number of cards is going to make it harder to manage," Sacker said. Visa, alone, has 15 versions of prepaid cards, and the sheer variety of card versions leads to consumer confusion, he added.

"It's going to be up to retailers and processors supporting the industry to find innovative ways to make sure that bubble doesn't burst," said Carman Wenkoff, President of Value Pay Services LLC, which manages the prepaid card program for Subway restaurants. "You can't have a plain vanilla gift card."

Differentiating a gift card program requires customizing it, marketing it and attaching incentives to it. When retailers integrate the program with their brands and marketing, they "can see a 30% lift in year-over-year sales or activations of that gift card," Grieve said.

Driving the success of gift card programs begins with the design of the card, its carrier package and in-store displays, the location and square-footage devoted to displays, and something as basic as whether store employees keep it well stocked, he added.

In-store treatment can result in a 20% differential in card activations from store to store within the same retailer, First Data found recently when it sent mystery shoppers to 500 merchant locations. "You've got to be very cognizant of the creativity in the card, of what will differentiate it and make it more personalized," Skiba said. "If you don't innovate," the bubble could burst.

"Ways of customizing future gift card programs may include photo or video cards, envelope design or personalization, and ties to greeting cards. ... Things that have content will carry the day and make it more personalized."

Make it sticky

Launching a successful gift card program doesn't end with hanging the cards on J-hooks. That's when the merchant's job begins. MLSs can help make those programs a success by educating retailers on the steps that will turn card recipients into loyal customers, spending beyond the face value of the card each time they return.

"Yes, gift cards have a good value proposition for most retailers," but it can be more successful by adding a loyalty component to it, Devlin said. Doing so "completely changes the ROI," he added.

"The gift card itself is a loyalty program," Grieve said. Getting the most out of a card program involves layering. Getting the recipient to register the anonymous card and adding auto-reloading capabilities and POS promotions are additional layers that add value, driving sales and building ROI for the merchant.

Reloading features move the card toward a financial product. "It's very important to distinguish your strategy," Grieve cautioned.

When trying to build customer loyalty to the product, providing a deposit mechanism is critical, Hynes said.

Alliances build strong gift card programs. Business-to-business (B2B) sales are the dominant channel for gift cards and vouchers in the U.K., said Tony Craddock, CEO of Giftex Ltd., who moderated the gift card discussion. To make it easy for businesses to buy the cards, they should be available in bulk packs and online.

B2B potential is strong when a card is marketed to reach buyers at the right businesses. In 2006, human resources managers identified gift cards as their preferred incentive for sales associates, Skiba said. Auto dealerships and other sales-driven businesses may be good targets for certain retailers.

Alliances may pair merchants with similar specialties for gift-card promotions, for example between a movie theater and a nearby restaurant. This concept of the shared wallet "is the next thing that will make it much more enticing for that consumer [and] that HR department," Skiba added.

Value-added layering to a gift card program can yield greater ROI when, for example, a retailer adds incentives to its B2B-channel gift cards, so the recipients get real-time promotions delivered at the POS and targeted exclusively for them, said Devlin. "That's a way to incent."

Another point in implementing a card program is the operational challenge: "You've got to make it more convenient than cash," Wenkoff said. A good interaction starts with the store's connectivity: Is it fast?

The chosen program should make split-tender and multiple-card transactions easy. That involves thoroughly training in-store personnel, to ensure the consumer experience is painless. "People are not going to reload or buy it for friends if they have a bad operations experience," he added.

For open-loop reloadable products, Visa's Brockman said it is "critical for the consumer to have a consistent experience with that card." Features crucial to the process include the instant availability of loaded funds; real-time authorizations/declines by the issuer; ubiquitous reloading locations; and clerk training.

The industry is asking underserved consumers to switch from cash to plastic "with trust - to hand $300 over. So, the training that goes on at the merchant location is really important," Brockman added.

Looking ahead

"I don't think 2007 is a destination year," said Green Dot's Streit. Instead, the industry will enjoy incremental growth as it adds feature sets to prepaid product categories, "to set us up for the monstrous growth that's coming."

The years 2008 and 2009, Streit added, "are going to be the nuts years."

In part II, we will look at gift card programs available to the ISO and MLS.

Article published in issue number 070302

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