Prepaid card companies are turning to rewards programs as their next weapon to fight churn.

Executives say the rewards could encourage people to reuse a product that many people view as disposable.

"Any opportunity that our cardholders have to enjoy extra value for the use of their card is a good thing for us," said James Jones, the chief executive of AccountNow Inc.

His company, which markets open-loop reloadable cards, plans to offer customers a cash-back rewards program starting next month using a merchant-funded system developed by the Atlanta technology vendor Cardlytics Inc.

AccountNow cardholders will receive offers online based on purchases they have already made with their AccountNow cards. At the company's website they will be able to click on specific offers to activate them, and can redeem them by making a qualified purchase with their prepaid card at a specified retailer.

"Our objective is to provide incremental value to our cardholders that take advantage of targeted purchase activity," said Greg Pacheco, AccountNow's senior vice president of marketing.

Green Dot Corp., NetSpend Corp., AccountNow and other prepaid companies have added a variety of features in recent years to extend the lifetime of their cards, including direct deposit, online bill payment, savings accounts and money-transfer services.

Their efforts have had varying success — NetSpend says the average life of a prepaid card with direct deposit is 20 months, compared to 11 months for those without — but retaining customers remains a challenge.

"That is one of the great opportunities that are out there for prepaid [companies] — to elongate and deepen that relationship," said John Grund, a partner with First Annapolis Consulting in Linthicum, Md.

AccountNow, of San Ramon, Calif., isn't the first prepaid card program manager to dabble in rewards. UniRush LLC, founded by the music mogul Russell Simmons, has offered s merchant-funded rewards program to holders of its Visa Inc.-branded RushCard since 2008.

Wal-Mart Stores Inc. in May announced a 1% cash-back reward on gasoline purchases made with its open-loop, prepaid MoneyCard. The reward is available for purchases made through Dec. 31.

Green Dot, of Monrovia, Calif., helps manage Wal-Mart's MoneyCard program. It "continually evaluates the impact of various reward programs on both acquisition and retention" for its own cardholders, Mark Troughton, Green Dot's president of cards and network, said through a spokeswoman.

NetSpend does not offer a rewards program, a spokesman for the Austin company said.

Offering rewards, especially cash-based rewards, could help increase usage of prepaid cards as long as the offers are relevant to the target audience, said Ben Jackson, a senior analyst who follows the prepaid card market for Mercator Advisory Group in Maynard, Mass.

"The question becomes for these guys what do merchants think that the added volume is worth and whether or not the merchants that they've chosen match up with where their cardholders want to go," Jackson said.

Cardlytics currently has about 70 national and regional retailers in its programs, including McDonald's Corp. and Macy's Inc., according to its chief executive, Scott Grimes.

Other issuers using its system, primarily banks that issue debit and credit cards, can select which merchant categories to have delivered to their customers, though most choose to include all of them, Grimes said.

Customers only receive offers from merchants located nearby, Grimes said.

Aside from AccountNow, which expects to phase in the program next month, one other prepaid card company is already using Cardlytics' system, but Grimes would not name it.

Working with prepaid companies is a logical strategy for Cardlytics because their cardholders — primarily underbanked consumers — tend to be price-conscious and use their cards more frequently, Grimes said.

"Those customers really use their prepaid cards as a substitute for a traditional checking account," he said. "They go online very frequently. They have 20 to 30 purchases a month."

The total amount loaded onto open-loop prepaid cards in the U.S. in 2009 was $124.6 billion, according to Mercator. That figure is expected to reach $421.1 billion in 2013.

Frequent card use is important to Cardlytics because its technology presents offers based on a person's transaction history, allowing merchants to create better-targeted promotions.

For example, a fast-food retailer could offer a $5 discount on purchases of $15 or more to consumers who had used the card to buy food at a competitor's restaurant in the prior month. The custom nature of Cardlytics system was a key reason AccountNow decided to use it, Jones said.

The technology uses "a much more refined process than what we've typically seen in the past where there have been standing offers, but those standing offers may not have been relevant to the large portions of people they've been exposed to," Jones said.

Such standing promotions, typically offered to a company's entire cardholder base, often require consumers to change their behavior to redeem a reward, he said. With Cardlytics' system, offers are tied to merchants and shopping categories in which cardholders already are spending money.

"We may well combine this with other forms of customer rewards in the future," Jones said.

Cardlytics does not charge banks, or in this case, AccountNow, to use its service, Grimes said. Retailers fund and design their promotions, and Cardlytics has revenue-sharing agreements with the banks or prepaid card companies using the system.

Card-issuing banks are becoming more interested in merchant-funded rewards in light of new regulations that threaten their card revenue, according to analysts. The Dodd-Frank financial reform act signed into law in July includes a provision allowing the Federal Reserve to cap debit interchange fees, the main funding source for debit card rewards programs.

The provision excludes prepaid cards, but the economics of prepaid programs are already difficult, making a merchant-funded approach more attractive, Grund at First Annapolis said.

"There's only so much to work with," he said. "Your average load, your average duration of the account, isn't such that it's generating enough revenue to fund rich rewards programs."

Grund said he doubts offering a rewards program will extend the lifetime of a prepaid card incrementally more than some of the other features common with such cards but expects it to increase customer loyalty.

"These rewards programs will certainly increase the customer engagement and improve the likelihood of the customer having loyalty to the card and using that card in the future."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.