Not surprisingly, prepaid card programs continue to grow, as consumers look for safer, more efficient ways to store and spend their money, and companies and governments look to reduce their cash and paper check-handling costs.
But where, specifically, are the best niche and market opportunities for companies wanting to venture into the prepaid space? The answer may depend on the region and the extent to which the organization wants to delve into varying regulations and other factors.
“Market drivers vary across countries, but growth is anticipated to be largely driven by the ability of prepaid solutions to provide a flexible, innovative, cost-effective alternative means of payment for consumers, businesses, and governments,” Amit Sethi, co-chairman of the Prepaid International Forum India and managing director for Asia, Middle East, and Africa at TSYS, said in a recent interview with PYMNTS.com.
“The main drivers supporting global prepaid growth include support of unbanked and underbanked segments, such as youth and general-purpose reloadable (GPR) cards, and functionality to support distribution of stored value in the form of gift, government benefits”, corporate travel and procurement, he said.
In the U.S, one easily can get a picture of where the top areas are for prepaid by looking at card sales. In a report released in December, Mercator Advisory Group reported that Payroll Cards last year topped the list at $20.7 billion, followed by Open Money & Financial Services at $18.3 billion, Open Gift at $11.7 billion, State Unemployment at $11.2 billion and Social Security at $7.9 billion.
That’s lots of money, with the total on U.S. prepaid sales expected to reach $120 billion this year, rising to $132 billion in 2016, according to Convenience Store Decisions, citing Mercator’s data.
Globally, the figure could reach $822 billion by 2017, representing an annual growth rate of 22 percent, according to a July 2012 global prepaid sizing study report commissioned by MasterCard.
“The popularity of prepaid is driven by its unique and practical ability to solve for almost any payment need,” MasterCard said in the report. “It democratizes electronic payments for those outside the traditional banking system and provides a transparent, cost-effective alternative to cash and checks for both governments and businesses.”
In North America, key prepaid segments include closed-loop gift cards issued by retailers, corporate prepaid for managing and controlling expenses and for rewards and incentives, and the government sector. The emerging prepaid opportunities for prepaid in the U.S. are in payroll, and in the unbanked and the underbanked segments.
According to TransCard’s Prepaid Preview 2014 report, GDV loads will see 20 percent compound annual growth rate (CAGR) through 2016 for GPR and payroll cards. This forecasted growth, said Senior Analyst Madeline Aufseeser in the report, “is attributed to three factors: the Durbin Amendment, higher-profile market entrants and companies eschewing paper checks.”
Many nonbanks, including mobile operators, telcos (such as T-Mobile ) and large retailers, including Walgreens, Target and Walmart, also are venturing into the prepaid space, and will therefore need banks to back them.
“There’s great demand for bank sponsors,” Karen L. Garrett, a partner in the banking and financial services division of Stinson Leonard Street, told the Washington Post. “But it’s not something to be done without an enormous investment into the infrastructure to manage the whole thing.”
According to MasterCard, open loop prepaid will represent $427 billion in gross dollar volume by 2017. Of that total, 30 percent ($125 billion) will come from the public sector, 26 percent ($112 billion) from the consumer sector and 44 percent ($180 billion) from commercial players.
The extent to which companies venture into new markets will vary, and many stick with local markets to void the pain of having to deal with multiple regulators and regulations. In the U.S., for example, the Consumer Financial Protection Bureau recently released test-model disclosures for prepaid card packaging it is considering in connection with upcoming proposed rulemaking.
New forms factors, especially mobile devices and virtual cards, is also increasingly a product differentiator, and program managers must consider their options carefully as more options emerge to avoid targeting a fad instead or a trend.
In looking at the Asian and Middle East markets – widely considered to be the emerging markets – the drivers behind prepaid vary, driven by market needs. Government-benefit distribution is one key driver, but so, too, are corporations looking to prepaid as a means to monitor and control expenses for travel, payment to contract workers, especially in Southeast Asian countries like the Philippines . Providing a convenient tool for expatriates to send money home also is a chief driver behind emerging prepaid initiatives.
Other emerging-market countries also are looking at other prepaid technologies, experimenting with biometrics as an authentication method in addition to or as a replacement of just a PIN. For example, according to Payments Cards and Mobile, India’s Aadhar is a national biometric identity system through which banks can issue prepaid cards to anyone with an Aadhar number.
“Government-sponsored programs are poised to become strong drivers of market growth across many markets in Asia and some of the larger Middle East markets,” said Amit Sethi of TSYS. “As a simple form of bank account, prepaid is increasingly seen as a means of improving levels of financial inclusion, as government seeks to drive an option of cashiers on some cases, less cash payments across all segments of society, while at the same time being an effective means of disbursing benefit payments.”
Elsewhere, in some developed nations like Payments Cards and Mobile, prepaid products have not quite “found the foothold.” Germany is restricted by “stringent regulations” that prevent the growth of prepaid. While the country still holds potential to embrace prepaid products in the future, “it’s unlikely to be realized with current consumer preferences and a rigid regulatory environment.”
By Jeffrey Green, Pymnts.com
Jeffrey Green is a Senior Editor at PYMNTS.com, and he has covered the payments industry in various leadership and other capacities for 18 years. Prior to working for Pymnts.com, Mr. Green has held roles as the director of the Emerging Technologies Advisory Service at Mercator Advisory Group and as the Editorial Director of the Payments Group at SourceMedia Inc.