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Bankers and program managers who thought Europe's prepaid card market would follow the rising growth curves of the United States have had to think again. Analysts and observers are sharply cutting their prepaid-market projections and expectations for Europe, although they believe the market eventually will get rolling.
"It just hasn't taken off as quickly as people anticipated, for a myriad of reasons," Chris Jones, senior consultant with United Kingdom-based PSE Consulting, tells Cards&Payments. "This is in contrast to the U.S., where in some sectors prepaid has exceeded original expectations."
Among the reasons for Europe's slow growth compared with the United States are lower costs for maintaining banking accounts in Europe, a lower volume of checks written by European consumers than their U.S. counterparts and a smaller unbanked population in general, says Jones. Moreover, European banks are not used to running the kind of "novel" marketing and distribution schemes that successful prepaid cards often require.
Though estimates on prepaid card spending, let alone profits on those card programs, are hard to come by, few prepaid players are making money, say industry observers.
Perhaps the biggest mistake by those who were pinning their hopes on a fast start for prepaid in Europe was neglecting to take into account the diversity of the market. Each country has its own banking rules and customs, not to mention different consumer attitudes toward cash and prepaid, debit and credit card payments.
"Just transferring the American market to Europe isn't going to work," Chris Reddish, head of prepaid at MasterCard Europe tells Cards&Payments.
PSE Consulting is one of the few analyst firms daring enough even to make projections on a market with such disparate parts–not only in terms of national payment cultures but also prepaid card segments. The firm has "adjusted downwards" its projection made in 2006 that prepaid card spending in Europe would reach 75 billion euros (US$117 billion) by 2010.
In addition, PSE said its forecast of prepaid cards in circulation throughout the continent by 2010 would be "noticeably lower" than the 360 million it once projected, says Jones, who declined to release his new projections for cards or prepaid spending for 2010.
These projections take in both open-loop, network-branded cards and proprietary, closed-loop cards, such as most gift cards. But they exclude most transit cards and all cards used for topping up prepaid mobile airtime.
By comparison, in the U.S., branded and private-label prepaid card transactions will grow to $178 billion (114.1 billion euros) by 2010 from $131 billion this year, according to U.S.-based research firm Aite Group.
The U.S.-based Boston Consulting Group, in research commissioned by MasterCard Europe, last year predicted an even higher spend on prepaid cards in Europe–reaching US$163 billion (109.4 million euros) by 2010. (The firm projected U.S. prepaid spending would approach $300 billion.)
MasterCard, which remains upbeat on prepaid, is conducting another study, however. But as late as May it was still quoting PSE's 360 million card figure.
"You just can't replicate what's in the U.S.," stresses Ken Howes, a director with UK office of consulting firm Edgar Dunn & Co. and a committee chairman with the Prepaid International Forum, a Europe-centric trade association.
Among the biggest differences are so-called unbanked consumers, who are a prime target in the U.S. for prepaid cards. But in such countries as the UK, Germany and France, basic debit card accounts either are free or obligatory for most workers.
"There is too much emphasis on the whole underserved market," says John Goodale, director of business expansion for TSYS Europe, part of U.S.-based processor Total System Services Inc. "In some areas in Europe, that's a very small market: migrant workers or people under the age of 18 who want to purchase online."
The problem with banking on the youth market is they do not have much disposable income. It was a "mistake" to target them, says Philippe Dufour, CEO of PrePay Technologies Ltd., a UK-based prepaid issuer, tells Cards&Payments.
"We believed at the beginning teenagers don't have access to credit or debit cards, so they might be the best customers to use prepaid cards," he says. "The problem is young people are sensitive to price and cost, and they don't have a lot of money to spend on the payments side."
Also, unlike in the United States, European banks are much less active in the prepaid market. They are letting program managers, such as PrePay Technologies and Tuxedo Money Solutions, take the lead in such markets as the UK. UK-based PrePay has its own license to act as a financial institution. Tuxedo, also based in the UK, has a partnership with mortgage lender and financial service company Newcastle Building Society.
European banks do not have very good distribution networks to support prepaid programs, and they also generally are less inclined to take risks than are American financial institutions, observers say.
"They've gotten their fingers burned on stored-value products," says Goodale, referring to the spate of unsuccessful electronic purses banks launched starting in the mid-1990s. "They've got their minds on other things now." This includes the credit crunch that is migrating from the U.S. and expenses associated with complying with mandates of the Single Euro Payments Area.
Growth Prospects
Of course, there are some bright spots on Europe's prepaid landscape and real promise for large-scale growth down the road, say observers.
In Italy, where bank-account fees run high and distrust of banks even higher, prepaid cards are thriving. An estimated 6.5 million open-loop cards were on issue in Italy as of last March, according to the Prepaid International Forum
In the UK, Advanced Payment Solutions Ltd. launched one of the first general-purpose open-loop cards there, cashplus, in 2005. The prepaid issuer announced last February that cardholders had loaded £200 million (US$374 million) into their accounts.
The company claims to be the only prepaid service provider that enables cardholders to get balance alerts and view their last five transactions via mobile text messaging. And in December, Advance Payment announced a deal with the European branch of Philippine National Bank to allow Filipino immigrants to remit funds home using their accounts.
Also in the UK, British bank Lloyd's TSB signed up 100,000 Polish immigrants during a five-month period last year for a prepaid card they could use for remittances.
Experts view such niche markets as remittances, cards issued by governments to disburse benefits and by companies for distributing payroll, insurance payouts and luncheon vouchers as some of the key growth areas for prepaid.
"It's not aimed solely at the underserved. They're looking at replacing inferior products," says Howes of Edgar, Dunn, talking mainly about checks used by governments and companies for their disbursements.
Howes and other experts agree Eastern Europe will be a big market for these and other prepaid products. "The further east you go, the more culturally the societies are used to prepaid," Howes says. "When you go as far as Russia and Ukraine, their business is based on prepaid."
PSE Consulting's Jones is projecting transaction values for prepaid to increase to 131 billion euros (US$194.5 million) by 2015, including transactions from Turkey, Russia and other prepaid-oriented countries of Eastern Europe. Jones also sees a promising market for prepaid cards for online payments, in addition to corporate payroll and expenses, although not everyone agrees online payments will spur growth in prepaid cards.
Closed-loop gift cards also will continue to grow, say some observers.
But while the experts are recalibrating their forecasts and see rosier markets ahead in Europe, they acknowledge this will take years.
Who's To Blame?
Meanwhile, the industry is losing money, and some issuers and other prepaid players are beginning to point fingers for the disappointing results.
Among the culprits, say some prepaid-industry backers, is a lack of awareness of prepaid among consumers.
Mark Simon, Tuxedo Money Solutions CEO, created a bit of a stir at the Prepaid 08 conference in London in June when he laid much of the blame on the doorsteps of Visa and MasterCard.
"I don't think the network brands do 10% of what they could be doing in this area," he said.
Representatives from Visa and MasterCard reject that criticism, saying they do their share to promote prepaid. But they contend it is not their job to get the message out directly to consumers.
"Do we do the big adverts with consumer (media)?" asks Fiona Duncan, vice president of consumer market development at Visa Europe. "(No), not that sort of thing. The ads in the newspaper are really for people selling programs."
She adds that Tuxedo also is "in it for money." "Anyone who is issuing, anyone who is involved in prepaid, has responsibility," Duncan says.
From the tenor of MasterCard statements, one might conclude no awareness problem exists at all. Based on research the card company commissioned for its prepaid conference in May, more than half of consumers in four of five major European countries surveyed are aware of prepaid as a payment method. That includes 87% in Italy, 67% in the UK and 63% in Germany. Only in Poland, at 39%, were fewer than half of consumers surveyed unaware of prepaid.
Though MasterCard says awareness is high, prepaid consultant and researcher David Parker, head of UK-based Pepper Corp., says the lack of education among consumers is the "single biggest reason" for prepaid's slow growth.
"MasterCard says 67% of (British) people know what a prepaid card is. I disagree," he says. "Consumers do not fully understand what a prepaid payment card is. There is a lack of understanding of why to use them and how to use them."
Visa's Duncan sees other reasons for complaints by some issuers of low growth and profitability. A number of small prepaid programs did not start off with a sound business case, she says.
"Some of the programs have very high fees attached to them," says Duncan, implying the value these programs deliver to consumers do not stack up to the costs. "What is it going to (take to) make me, as a consumer, use that program? Some people haven't thought that proposition (through) correctly."
Indeed, observers cite excessive fees and hidden costs by prepaid card issuers as one reason some consumers are staying away, even as the fees attract more interest from regulators.
It also is a reason the Prepaid International Forum in July announced an accreditation service to certify that prepaid programs meet a code of conduct. The accreditation initiative is designed to help the industry avoid bad press and the unwanted attention of regulators from such undesirable practices as hidden fees, aggressive marketing, poor customer service and allegations of money laundering.
Visa Europe, however, is sitting out of the accreditation service and association itself, determined, it says, to police its own issuers. "We have very clear rules under which our members need to operate," says Duncan. "We have found programs with our brand in which we didn't approve, and we have shut them down."
She declines to say why Visa refuses to join the forum, but sources tell Cards&Payments Visa is staying out of the year-old association because rival MasterCard Worldwide was instrumental in the group's founding and a MasterCard representative, Reddish, chairs the board.
Fees Can Add Up
Though some program managers or issuers are transparent with their charges, some observers consider the multitude of fees a drag on prepaid-market growth. In many cases, issuers charge consumers for just about every action they make with their cards.
For example, for its Tuxedo Prepaid Maestro Card, Tuxedo Money Solutions charges £9.95 (US$18.61) to purchase the card, plus 2.95% of the sale or a maximum of £1.50 per retail transaction, 1.5% or up to £1.50 per ATM withdrawal, up to 3% of the amount of account top-ups, £4.99 to replace a lost or stolen card, and £10 to close the account and cash out. Cardholders can avoid some or all of the fees on retail purchases if they pay £4.99 per month.
Dufour, of rival prepaid card issuer PrePay Technologies, has heard the complaints about fees. "Fees are a red herring," he says. "If the value proposition is right, people will pay. We forget we are in a competitive market, and people will choose."
Howes of Edgar, Dunn agrees consumers will pay for value, such as a secure prepaid card they can use for traveling, for budgeting or for remitting funds. But he believes a shakeout in pricing will occur.
Sure, some issuers will resist cutting fees, especially if they are in business solely to run prepaid programs. And with customer counts lower than originally anticipated, some issuers have been raising fees to try to cover their costs.
That is not such a good idea given the cheap debit cards available in much of Europe, say observers. To justify the higher fees and pull prepaid out of the doldrums, it appears prepaid card issuers will have to offer much greater value. CP
