While the prepaid card market in the US has flourished in a
myriad of forms including gift, remittance and corporate cards
during the past decade, it has only recently begun to establish a
cultural and financial foothold in Europe.
Sensing the opportunity for customer acquisition and branding in
previously untapped markets, a multitude of financial players have
been entering the prepaid space either as issuers or co-branders.
Analysts from financial research and consulting company Tower Group
recently predicted that prepaid spending in Europe will reach €75
billion ($107 billion) by 2010, with 375 million cards in
circulation. This represents a staggering growth rate of 600
percent.
Go deeper with GlobalData
MasterCard launches new cards
Most recently, MasterCard has announced that it is launching three
new prepaid cards for the corporate and government sectors,
allowing companies to control and improve the management of funds.
Chris Reddish, group head of Prepaid Europe for MasterCard,
predicted “fantastic opportunities” for the government and
transport sectors when he spoke to RBI.
Nevertheless, a number of speakers at the Prepaid Cards Summit
2007, held in London in late October by VRL KnowledgeBank,
publisher of RBI, were quick to point out the challenges
that exist within the prepaid cards market, alongside the
opportunities for growth. If there was an overriding theme for the
summit, it was one of a ‘reality check’ for the industry. The exit
of major companies such as Western Union and American Express from
the prepaid space has perhaps had a sobering effect on the sector,
following the hype surrounding the market in recent years.
Potential obstacles
Potential obstacles for the prepaid industry would most notably
come in the form of regulation and profitability. As the sector
grows in volume, it has begun to attract the attention of financial
regulators across the globe. The issue over breakage fees in the
US, as well as compliance concerns regarding the varying purse
limits across European countries, serve as good examples of
this.
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By GlobalDataKen Howes, a director at consultancy Edgar, Dunn & Co,
told conference attendees that substitution economics was in many
instances a key driver for prepaid card growth in the form of cash
or vouchers. However, he noted it is the non-bank institutions that
have proved to be more innovative, targeting a variety of consumer
sectors that have struggled with profitability.
Howes argued that banks, having had their fingers burned with
stored-value initiatives, are proving to be slow to adopt
general-purpose prepaid cards. Consumer fees are also an issue, as
in some markets they remain unsustainable without any significant
added value. The solution to all of this, according to Howes, is
for institutions to team up with third-party organisations to
provide additional customer value through their products.
He stated that by introducing partnerships into the prepaid
proposition, programme managers will be able to share or even
reduce their fixed and variable costs, thereby generating increased
value for the consumer.
Howes cited merchant-driven travel and shopping cards, plus
co-branded prepaid models such as Cetelem Orange, a France-based
initiative that offers bank and credit services managed by Cetelem,
the specialised subsidiary of BNP Paribas, as well as online
services linked to Orange mobile.
He referred to these type of value-added products and partnerships
as “prepaid by default” and stressed the importance of redefining
prepaid as not just for the under-banked but also for
budget-conscious customers.
It was a concern shared by other speakers at the summit:
MasterCard’s Reddish spoke of the need to change ingrained consumer
psychology to combat the prevalence of using cash for
payments.
Increasing regulatory challenges
However, the increasing number of non-financial institutions
entering the prepaid sector also presents regulatory challenges in
some cases, according to John Casanova, a partner with law firm
Sidley Austin, who says that these companies tend to be less aware
of financial regulation. This may potentially impede growth or in
some instances create legal problems for any joint initiatives that
do not take into account compliance and regulation issues.
Kevin Phalen, senior vice-president International Cards &
Public Sector with JPMorgan Chase, suggested that future
opportunities for prepaid, especially within developed markets, lie
with consolidation and these “odd joint ventures”. He stressed the
potential of partnerships between the public and private sector,
citing JPMorgan’s own ventures with the UK Post Office as well as
its NavyCash financial system, which enables sailors and marines to
buy almost anything they need on or off ship without carrying cash
and to access checking and savings accounts at ATMs around the
world.
In the case of JPMorgan Chase, partnership is essential for schemes
of an international scope, as the bank has no global reach in terms
of POS providers.
MasterCard’s Reddish stressed that the opportunities presented by
continued acquisition within the prepaid sector were key to
enabling further development. He predicted a market saturation
level of 10 to 12 percent by 2010, driven by several factors.
The past 12 months have seen the first wave of acquisitions within
the industry. Capital One acquired prepaid marketer NetSpend and
Accor Services purchased PrePay Technologies, a specialist in the
design and development of prepaid cards and management payment
authorisation platforms.
Reddish also highlighted the importance of immigration as a key
driver for prepaid growth in Europe, claiming this “increased
transience”, as well as a desire for financial inclusion, would be
a “key cornerstone” of the market.
Technology growth
Another recent development highlighted at the summit is the growth
of mobile technology within the prepaid space. This is particularly
notable when dealing with emerging markets, where mobile phones are
more common than bank accounts, according to Stuart Butler, head of
business development and sales at prepaid card provider Altair. He
cites mainland China as a prime example: 60 percent of the
population own a mobile phone, while only 20 percent have a bank
account.
