Prepaid gift and loyalty cards remain popular value-added services for ISOs looking to enhance their offerings to merchants, but as the prepaid market matures, success at selling requires embracing a few caveats, experts say.
Closed-loop prepaid gift cards have been around for more than a decade, but a few new factors are emerging that may affect their appeal to merchants and their usefulness as a value-added service for agents and ISOs, observers say.
For starters, some in the merchant-services field perceive prepaid cards as having reached a saturation point in certain U.S. markets, and many ISOs and merchants are likely to have already experimented with them, sometimes getting mixed results.
But it would be a mistake to assume sales opportunities in the closed-loop prepaid card channel are tapped out, experts say.
Indeed, interest in closed-loop prepaid cards may have softened from its peak six or seven years ago, but demand for consumer loyalty programs built on prepaid card systems is still growing, Lori Breitzke, an associate with The Strawhecker Group, tells ISO&Agent.
“There are many interesting loyalty schemes out there today for merchants to participate in ... that can generate income for ISOs if they partner with the right companies,” she says.
In a typical example, an ISO approaches a merchant with the opportunity to sell private-label, closed-loop, prepaid gift or loyalty cards alongside their other merchandise as a standalone service or as part of a package of other value-added merchant-services.
The prepaid cards, provided by a third-party wholesaler, usually are designed to link easily to the card-processing system the ISO is selling, which tends to discourage attrition once a merchant is set up with the prepaid card program.
Though merchants often switch to a new supplier of gift cards when switching processors, they generally are less likely to make such a move when they have an effective gift card or loyalty card program, Drew Freeman, president of the Miami Beach, Fla.-based ISO Merchant Data Systems Inc., tells ISO&Agent.
“Gift and loyalty cards are one of the stickiest tools around for retaining a merchant client,” he says.
Providers can configure and customize closed-loop prepaid cards in diverse ways with simple or elaborate artwork and graphics. Closely related loyalty card programs, which providers also design to tie to existing processing systems, enable merchants to track customer visits and reward them for making certain purchases or for hitting certain purchase milestones. Merchants can give rewards to consumers in the form of cash, coupons, rebates or merchandise, card providers say.
ISOs usually sell prepaid card programs to merchants on a per-transaction basis or for a flat monthly fee. The cost to merchants averages about $30 to $50 per month, plus a one-time setup fee, but costs vary widely, according to a variety of suppliers.
ISOs typically set their own prices for offering prepaid programs to merchants, according to Dan Brames, general manager of Franklin, Tenn.-based prepaid card provider Valutec Card Solutions LLC. ISOs might expect to make 25% to 30% from the total prepaid card deal it cuts with a merchant, but profits tend to be small compared with those of core card-processing services, he warns.
“ISOs should not expect to make a lot of money selling prepaid card programs, but instead they should focus on it as a business-generator and a customer-retention tool,” Brames says. “The key is finding an efficient way to sell and deliver these card programs within the menu of other services you’re selling to a merchant.”
Launched in 1988, Valutec is one of several prepaid-program providers that does a brisk business with ISOs. Valutec, which specializes in providing prepaid cards to small and midsize merchants, works with 2,100 resellers of prepaid cards, many of which are ISOs, and has 45,000 merchant clients, Brames says.
Another angle ISOs may lean on when marketing prepaid programs to merchants is that transactions initiated with closed-loop prepaid cards generate no additional card-network fees.
“If you can get a merchant to look at the big picture, they begin to realize they’re not paying any additional interchange or card fees beyond what they already paid to cover their prepaid card program,” says Thom Aldredge, president of Plano, Texas-based World Gift Card, a subsidiary of Gift Card Systems Inc., which also supplies prepaid cards to ISOs. “They begin to see they are going to come out ahead overall.”
World Gift Card’s ISO business has “soared” within the past two years as certain other suppliers abandoned the market and World Gift Card developed a system requiring fewer steps for ISOs to set up merchants with prepaid card programs for a faster turnaround, Aldredge says.
“There’s a perception that gift cards are complicated to sell, but technology has improved dramatically in the last couple of years so the application process (for an ISO and merchant adopting gift cards) is extremely simple, and cards can be customized in just about any way a merchant chooses,” Aldredge says.
Yet another twist helping certain ISOs drive fresh interest in prepaid cards is pitching them as a mechanism for giving customers refunds on returned merchandise. Instead of cash, the merchant gives the customer a refund using a store’s proprietary prepaid gift card, which likely will drive further sales and loyalty, say ISOs using this approach.
“We’re getting a lot of interest from merchants that always gave refunds back to customers in the form of cash who are now realizing there is a huge benefit in giving a prepaid card instead,” says Ken May, sales and marketing director for Woodland Hills, Calif.-based Executive Merchant Services, where he oversees training for about 100 ISO agents.
The prepaid card “brings the customer back into the store and often results in a certain amount of value left on the card that is never redeemed, which is a plus for the merchant,” he adds.
May also is seeing a lot of success selling prepaid loyalty card programs to merchants that offer commodity-like products. “If a customer is coming back routinely for refills on something they can get anywhere else, a merchant can gain a distinct advantage over competitors with a card-based loyalty program,” he says.
The key to approaching merchants this way is to study their business model first and determine why a prepaid gift card or loyalty card program might benefit them, May says. “I don’t care how long prepaid cards have been around, if you’re willing to do a little more work and explain to a merchant why cards would work in their sector, they are often quite receptive to it,” he says.
But it cannot be overemphasized that ISOs should not expect to see an immediate, significant uptick in revenues when selling prepaid card programs, contends Christian Murray, national director of business development for Ft. Walton Beach, Fla.-based Global eTelecom Inc.
“You’re not going to make a lot of money up front selling prepaid cards, but over the long haul the reduction in attrition you will see will be well worth it,” he says. “The key is educating the ISO sales personnel to understand the prepaid product, helping the merchant get behind the product with proper support and sticking to it.”
For Tod Farnan, a sales representative with the Plover, Wis.-based ISO Hyer Standards LLC, smaller merchants, such as coffee shops, bakeries and those in boutique markets such as spas, are proving to be ripe channels for selling prepaid cards alongside merchant-processing services.
“Merchants with small ticket-sales and more than 1,000 transactions a month seem to do very well with prepaid cards in generating repeat business among customers who like the convenience,” Farnan says.
One of Farnan’s merchant clients, a Chicago-area spa operator, sold $250,000 in prepaid gift cards last year through a system Farnan provided him, he adds.
“Merchants are often skeptical when you first mention prepaid cards, but when I pull out some samples and explain the various benefits, they begin to get it,” Farnan says. “I tell them that every time they sell a customer a prepaid card, it’s one less sale you have to make in the future; it’s money already in the bank, so to speak.”
Challenges to selling gift cards include the additional detail required to explain and deliver a prepaid gift or loyalty program, and the possibility that the additional rates and fees they generate may distract from an ISO’s core mission of selling merchant-processing services, says Jae Haas, president of Rosemont, Ill.-based Transnational Bancard LLC.
“A lot of merchants are well aware of gift and loyalty cards already, so it can be difficult to persuade them that it’s going to be a real improvement for their business,” Haas says. “And when a merchant adds a gift card program, there is no guarantee they will stick around because a competitor may come along and offer to switch them over to a new gift card provider along with a new processing contract,” Haas says.
ISOs also should understand that merchants today are quite savvy about prepaid cards and will demand competitive prices and services, says Michael Hass, president and CEO of Sherwood, Ore.-based PDX Enterprise Solutions. And the demand and interest in prepaid cards can vary widely from one region to another, he says.
“How well you do in selling prepaid cards might depend on how picked over your local area is because there could have been some supplier running around selling a lot of prepaid card programs a couple of years ago and merchants say they’ve already been there and done that,” Hass says. “But there are always merchant categories no one has gone after, and new businesses, such as tanning salons, that no one has approached yet. Sometimes you have to do your homework to find the opportunities.”
At the least, prepaid card programs often serve as an excellent “door-opener” to drive new merchant-processing business, Hass says. “Selling gift cards is a great way to start the conversation, and that may lead to selling the merchant card processing and other value-added services as well,” he says.
And if a merchant did not show interest in prepaid cards when it signed up for merchant-processing services, there is a good chance it may be interested a couple of months later, Hass says.
“Many times if you go back two or three months after selling a merchant processing services to see how things are going, they might be more receptive to considering prepaid cards or other value-added services,” Hass says. “If I have a merchant who’s happy with the first set of things I’ve sold them, I go back and say, ‘Now let’s talk about growing your business,’ and that’s where prepaid cards can enter the discussion.”
Growth in prepaid gift and loyalty card sales may have leveled off, but they are still driving new, long-term business for many ISOs, especially for those creatively matching merchants’ needs with the appropriate programs.
