Consumers' growing acceptance of automated teller and debit cards is likely to spill over into prepaid cards for telephones and other uses, the American Banker/Gallup consumer survey indicates.


This type of card, new to the United States but well entrenched in parts of Europe and Asia, appeals here mainly to adults under age 35.

Though far from a majority of the population, they make or break numerous product innovations, and more than half of them expressed some interest in prepaid cards.

The interest level rises if the card can be used in many locations -- the multiservice or multiapplication concept that a growing number of banks and other providers are exploring, often in the form of smart cards with computer-chip memories.

The American Banker/Gallup survey is the latest in a series of polls that have independently affirmed consumers' interest in this extension of the debit card. (Other articles reporting on 1994 survey results appeared in the Dec. 12 American Banker.)

Most current prepaid services in the U.S. are sold by telephone companies or by wholesale packagers of long-distance time. Most prepaid phone cards are merely instruction sheets that explain how to dial into a phone network and draw against a paid-in account.

With an eye toward creating a stored-value, or electronic purse, card, some companies have begun experimenting with cards that hold cash value in their magnetic stripes or computer chips.

About 2,000 U.S. colleges and universities have some form of card-based payment program, which may help explain younger people's receptivity to stored value.

A few schools have adopted open payment systems that accommodate prepaid or debit card purchases at off-campus merchants.

U S West recently began testing a chip-based phone card, using technology that has become ubiquitous in France; and Electronic Payment Services Inc., operator of the MAC automated teller machine network, has introduced a prepaid phone card in preparation for a full-blown, chip-based electronic purse trial in Delaware in the fall of 1995.

The two bank card associations, MasterCard International and Visa International, have launched prepaid card projects. They could play a role in creating an infrastructure for broad, multiservice acceptance of the cards, though it will take years to implement fully the chip technology that they see as best suited for the task.

When MasterCard announced in September that a prepaid card would be its first smart card application, senior vice president Diane Wetherington pointed to research showing consumers "like the idea of a prepaid feature, citing its added convenience and security. They also like the versatility it will offer, as the chip will enable multiple currencies to be stored and used on a single card."

MasterCard and Visa, perhaps working with system integrators like Electronic Payment Services or multiindustry groups like the Smart Card Forum, may be banks' best hope to preserve a role in the emerging prepaid payment system.

EPS is one of 19 organizations around the world participating in a Visa-sponsored working group that is developing common technical standards.

The action in other countries is waking U.S. banks up to the opportunity, said Michael Nash, the Visa International senior vice president on the electronic purse program.

"There is little hard data on cash transactions, but by any estimate the market is enormous," Mr. Nash said.

A publication by Financial Times Management Reports estimated that more than a billion prepaid cards are being sold annually around the world for telephone, mass transit, and other applications. Prepaid phone cards alone are expected to top one billion in 1995.

"The U.S. will be led into chip cards by one of these two industries, banking or telecommunications," Dan Cunningham, president of Gemplus Card International Corp., the U.S. subsidiary of France's largest smart card maker, said in a recent interview.

Leadership in the U.S. is "really up for grabs," Mr. Cunningham said. He sees 1995 as "a startup year for both industries" and expects to see "significant quantities" of chip cards in 1996.

A mere 2% of the 1,024 consumers surveyed by Gallup for American Banker in the fall of 1994 had used prepaid telephone cards, but 37% said they were aware of them.

Awareness was considerably higher than average in the Northeast (42%), among males (42%), and among households with more than $75,000 in annual income (48%).

Asked how interested they would be in a prepaid phone card, 4% said "very" and 17% "somewhat." The demographic segment most open to the idea was ages 18 to 34, with 34% very or somewhat interested.

Consumers were much more attracted to the multiservice idea -- permitting the card to be used at vending machines, newspaper outlets, parking meters, supermarkets, fast food stores, and so forth.

Eleven precent were "very interested" and 19% "somewhat interested." In the 18-to-34 age group, 23% were "very interested" and 32% "somewhat interested."

To be sure, 70% of the Gallup sample was not interested in the multiservice card, and 78% rejected the prepaid phone card. But given the newness of the product in the U.S. and the general awareness level, marketers are intrigued.

"There is a great deal of consumer receptivity to prepaid cards," said Allen DeCotiis, president of Payment Systems Inc., Tampa, Fla., citing research by his firm and others.

PSI found in 1993 that 21% of consumers were interested in prepaid cards. The firm pointed out that only half that number were interested in point of sale debit cards in 1984.

Market research encouraged the New York Metropolitan Transportation Authority's rollout this year of a prepaid, replenishable subway fare card.

Six out of 10 city residents responded positively to a transitonly card, and 74% liked the idea of multiple applications, which the MTA is considering.

Bankers need not be squeamish about charging for the service. Electronic Payment Services found in 1993 that 67% of a Delaware sample would pay one cent per prepaid card transaction, 43% would pay five cents, and 39% would pay $15 a year.

In a 1994 survey of 400 consumers by Carmody & Co. of Ridgewood, N.J., 95% said banks would be appropriate prepaid card issuers, compared with 71% saying telephone companies, 62% educational institutions, and 57% transit systems; and 90% were willing to pay a fee for prepaid cards.

In what may be a carryover from their credit card experiences, four-fifths of that 90% favored an annual fee over a transaction fee.

"We just finished qualitative consumer research and we have quantitative research under way in eight countries," said Mr. Nash of Visa. "No research, by us or anybody else, has shown consumers don't want to use [electronic purse! or pay for it -- as long as it's usable and convenient.

"The consumer expectation is that the product will be usable in a number of merchants," Mr. Nash added.

In multinational research conducted by Mondex, the smart-card cash replacement being marketed by National Westminster Bank of London, more than 90% of consumers responded favorably when the concept was explained.

Potential users in the United Kingdom said they would be willing to pay fees higher than those on credit cards.

"The fee-income potential is significant," Mondex consultant James Riddell told a meeting of the Smart Card Forum. "If we didn't think so, we wouldn't be here."

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