Blog: Prepaid Mania Catches On

By Madeline Aufseeser, Aite Group

Just in case there was any doubt among the critics, skeptics and the media, new numbers prove the value of prepaid cards to merchants and consumers. In 2014, retail purchases made with prepaid cards will top US$200 billion, equaling 5 percent of all retail spending in the U.S. (Figure 1).

The purchase volume numbers include prepaid debit, payroll, open- and closed-loop gift, and open- and closed-loop consumer incentive cards, which account for roughly 80 percent of all dollars loaded onto these six card types combined.

Figure 1: Prepaid Card Purchase Spending

It’s no wonder that merchants of all types have begun to promote and sell prepaid card products aggressively. To start, prepaid cards reward merchants with commissions on card sales. Commissions are just the initial benefit merchants derive from selling third-party prepaid products.

First, let’s discuss the benefits of a proprietary closed-loop gift card. Closed-loop gift cards guarantee shoppers will return to spend the funds loaded on the cards and much more, generating an incremental lift in the average ticket size beyond the gift card amount. An added benefit of proprietary closed-loop cards is they offset merchant interchange costs. What’s more, if the cards are reloadable and require consumer registration—typically in exchange for loyalty benefits—the merchant can gather valuable transaction data on its customers. Solving for anonymity at the POS enables merchants to target relevant and more specific rewards to consumers, which ultimately will lure consumers back to shop.

Merchant prepaid card-selling strategies now mirror the cereal or soda pop aisle of a grocery store. Mass merchants and convenience stores typically support large displays positioned at key points in stores housing multiple card brands and card types, presenting a wide array of choice for consumers. Restaurant chains and department stores promote their own branded closed-loop cards on table and countertops; and often give away incentive cards as a bonus to entice consumers back into stores.

Consumers have embraced prepaid cards for many reasons, the most prevalent are:

• Gift card giving is a fast and convenient way to ensure that someone you care about can buy what he wants.
• Prepaid debit cards are a less expensive alternative to checking accounts that are safer than carrying cash and mitigate risk and fraud when shopping online.
• Payroll cards are better than receiving a paper check for employees who do not have checking accounts. Employees have immediate access to the funds, eliminating the high cost of cashing a check and have Regulation E protection under the law guarding against loss and theft.

As prepaid card sales continue to mount, merchants are looking at new strategies to promote the cards they sell. These strategies include selling virtual cards, deploying geolocation based marketing solutions and partnering with major networks and leading brands to sell more cards and bring more value to consumers.

Madeline K. Aufseeser is a senior analyst at Aite Group and author of the recent report “Prepaid Mania: A Merchant Affair,” which she presented, in part, at InComm’s Partner Alliance. Madeline’s consulting and research includes prepaid, credit and debit card issuing, marketing and processing, as well as loyalty marketing and incentives. She can be reached at [email protected].