Viewpoint: Branding, Customization, and Other Keys to Success in Prepaid Cards

July 08, 2004, 3:47 p.m. EDT 3 Min Read

Last year U.S. consumer spending with plastic cards exceeded spending with all other forms of payment for the first time.

Though this is a significant milestone, the credit card industry has barely scratched the surface in alternative payment methods. Prepaid cards promise to be the next wave in card-based payments. TowerGroup (a subsidiary of MasterCard International) predicts it will be a $347 billion business by 2007.

Though the opportunity is huge, the business is far more complex than it seems and requires considerable investment as well as specialized capabilities. And there are risks.

Many opportunities in prepaid are already being pursued. Gift card sales (retailer cards, closed-loop mall cards, and universal gift cards) have skyrocketed - they went from $22 billion in 1999 to $72 billion last year.

As these and other prepaid cards become more available at retail, they will further fuel consumer awareness and sales. Gift cards are beginning to be sold at UPS stores, malls, and supermarkets, and are due to cross a range of retail categories in time for the holiday season.

Replaceable if lost or stolen, and universally accepted, prepaid travel cards are increasingly being added to consumers' wallets. Reloadable travel cards, such as the American Express TravelFunds Card, are being sold at banks, through the post office, and to AARP members.

Succeeding in prepaid cards means succeeding in these six areas:

Consumer behavior and motivation. People want these cards for a variety of reasons - as a budgeting tool, as a secure payment method, and as an affordable alternative to check-cashing facilities, to name just a few.

Keeping up with the fast-changing needs of consumers is a tall order - a one-size-fits-all approach will not work. A number of customized products are already out there, like the I-Gen MasterCard for the underbanked and unbanked, Visa Buxx for teens, and the American Express TravelFunds Card for people on the go.

Pricing. Prepaid is a relatively new category, and the pricing of these products continues to evolve. The fees include those charged at purchase, flat fees levied when the card is reloaded, and inactivity fees. Several products rely heavily on back-end charges.

Fees are under attack in more than two dozen states, with new legislation being introduced all the time. Companies will have to stay abreast of these bills.

Risk management. Some prepaid cards expose their issuers to fraud and abuse. Since these cards are not necessarily tied to an account, they need sturdy systems backing. As new distribution methods are adopted - including in-person store sales - there will probably be more potential for abuse.

Essentials here include real-time risk assessment capabilities and unique packaging solutions. Do a thorough assessment of any technology partners.

Distribution. Selling prepaid cards is more like selling packaged goods than selling credit cards. The vast majority of cards will be bought and sold in person. You need a diverse mix of distribution partners and multiple selling outlets. Making it easy for consumers to buy prepaid cards right at the point of sale is a must.

Marketing. A brand that consumers know and trust drives purchasing behavior. One way to earn this trust is to guarantee that lost or stolen products will be replaced. A powerful brand can be vital to attracting new customers, but delivering on the brand promise is equally important.

Scale. Developing technology, finding reliable partners, and devising a good marketing plan are costly; several banks have opted out of issuing their own prepaid card because of the expense. Long-term commitment and a sizeable investment are essential.

What began as a relatively simple application, with phone cards laying the groundwork, has evolved into a category with an array of consumer uses. The potential of the prepaid card business is strong and open-ended for those best able to manage the technological, financial, marketing, and distribution elements.