Consumers and businesses are expected to load as much as $186 billion onto prepaid cards in 2014, according to a report released last week, but uncertainty about future government regulations could hamper sustained market growth.
Aite Group LLC expects the value of funds loaded onto branded prepaid card accounts this year to reach $69 billion, up 27.8% from $54 billion in 2009. It also expects transaction volume to reach 3.3 billion this year, up 37.5% from 2009.
However, the Boston research firm said that many payments executives are concerned that the changes imposed by the Credit Card Accountability, Responsibility and Disclosure Act will be only the start of an industry overhaul; they are wary that later steps could cut into the margins on prepaid products.
The prepaid market might be able to avoid further government interference if it "self-regulates," according to Aite analyst Adil Moussa.
"Self-regulating will help a lot," he said, "so when more government regulations are discussed, the industry can point to what they've already done." Moussa, who wrote the report, based his conclusions on conversations with reload networks and prepaid providers.
The CARD Act has already prompted changes in the prepaid industry, most notably on gift cards. Part of the law stipulated that these cards cannot expire earlier than five years from being issued and that the expiration terms must be stated clearly and conspicuously.
Most gift and prepaid card providers began complying with the regulations before they took effect in February. Prepaid companies such as Green Dot Corp. and nFinanSe Inc., for example, changed their packaging to better highlight their fees and expiration dates.
The prepaid market remains young but already has gone through a wave of consolidation, and more mergers and acquisitions are likely, Moussa said.
A key factor was Green Dot's announcement last month that it is planning an initial public offering that could generate up to $150 million; several observers have speculated that the company might use the capital to fund acquisitions.
Green Dot also said in a filing with the Securities and Exchange Commission that it is acquiring an unnamed bank holding company and its subsidiary commercial bank.
Moussa said the company might also consider moving into other business lines, such as card processing. Green Dot's rival, "NetSpend, does its own processing," he said. "The more you control, the more beneficial it will be for the company."
The main beneficiaries of the growing prepaid market are the companies that offer the cards, which are expected to take in $1.9 billion in revenue this year, from selling the cards and from charging various fees to users. That sum will be 68% of the total revenue generated by prepaid cards.
Issuers stand to make $470 million in revenue, or 17% of the total, mainly from interchange fees when the cards are used.
Processors are expected to take in $360 million this year, 13%, from handling the transactions, and the card networks will garner the remaining 2%, $60 million, for various fees.
The report examined six major segments of the open-loop prepaid market. Moussa wrote that he expects incentive and loyalty cards to have the highest compound annual growth rate, 39%, during the next four years. Corporations and retailers are using these types of cards increasingly to stimulate sales, reward loyalty, shape consumers' behavior and reward employees.
Payroll cards will experience 28% growth through 2014, the report said. Prepaid program managers, networks and issuers continue to highlight the benefits of payroll cards to corporations.
Wal-Mart Stores Inc. last year announced it is using an electronic payroll program designed to reduce paper paychecks and pay stubs distributed each year to U.S. employees of Wal-Mart and Sam's Club. Wal-Mart is using First Data Corp.'s Money Network Payroll Distribution Service, which includes a MasterCard-branded payroll debit card.
Government cards for programs such as unemployment benefits will experience 27% growth through 2014, the report said, and general-purpose reloadable cards and health-care cards should grow 22% each.
Moussa said he expects open-loop gift cards to have the lowest growth rate, 13%. He said he believes the economic downturn has had a serious effect on the gift card market. Consumers were offered heavy discounts by merchants and used them to buy merchandise rather than turning to gift cards.
In conversations with industry executives, Moussa said, some were considering shifting their open-loop gift cards to general-purpose reloadable cards to avoid issues the gift segment is likely to face, including thinning margins and shrinking loads.
Consumers loaded $6.3 million on gift cards last year, compared with $14.9 billion on general-purpose reloadable cards.
