New Markets for Stored-Value Cards

  Paper is out, plastic is in. This is the message those involved with the stored-value card market want consumers to believe. The use of gift cards has already exploded, blowing away traditional paper gift certificates, and experts
  foresee nothing but more growth for all types of stored-value cards.
  "There was lots of hoopla before the holiday season for retail (gift) cards," says John Gould director of consumer credit practices at the TowerGroup, a Needham, Mass.-based consulting firm. "Sales went through the roof with 40% to
  50% increases."
  TowerGroup estimates gift card sales went from $30 billion in 2002 to $45 billion in 2003. Average value per
  card also increased from $50 in 2002 to $64 in 2003.
  And that is just the start. Prepaid gift cards have found their niche and will remain. But Gould and others predict that reloadable cards carrying the Visa and MasterCard logos will become increasingly popular in 2004.
  And, with retailers thoroughly converted, newer markets are beginning to look at stored-value cards, including the health-care and insurance industries.
  "This market isn't just about gift cards," says Bill Mathis, senior vice president of member relations at Purchase, N.Y.-based MasterCard International.
  Englewood, Colo.-based ValueLink, a subsidiary of processor First Data Corp., has surveyed the gift card market for the past three years. ValueLink's research indicates that 45% of the adult population in the United
  States, an estimated 97 million people, purchased a gift card in the 12 months leading up to the 2003 holiday season.
  Just 23% of consumers reported doing so in a similar survey conducted in August 2002, according to Karen Larson, ValueLink vice president of product marketing and evolution.
  "Some 92% of people are aware of the cards and they receive nine out of 10 on a satisfaction scale," says Larson.
  ValueLink provides retailers with private-label gift card systems. Larson says the next area of growth for closed-network stored-value cards is the quick-service restaurant sector, including coffee and doughnut shops. She
  also sees companies giving cards to employees for incentives.
  "The closed loop gives the employer a bit more control of where the recipient can use the card and has more trophy value," she says. But she adds that open-networks systems-in which cards have a general-purpose payment card brand-could see some popularity in this area as well.
  Indeed, Gould says the past holiday season was the first that bank-issued gift cards started gaining some traction. Total market numbers are difficult to come by, but the experience of one issuer, Cleveland-based Charter One Bank,
  has lessons for the entire market. Charter One expected to sell 200,000 cards over the holidays, yet ended up selling 600,000, says Gould, whose firm was acquired in February by MasterCard's MasterCard Advisors consulting unit.
  While they do have advantages, closed-loop systems usually are limited to acceptance at only the stores or other locations of the sponsor. Open systems featuring general-purpose payment brands give consumers more options,
  according to George Danforth, vice president of corporate development at the Houston-based Pulse EFT Association, a large electronic funds transfer network. Pulse links an estimated 90 million cardholders with more than 200,000
  automated teller machines and 3.2 million point-of-sale terminals at retail locations nationwide, most in the South and upper Midwest.
  "Single-merchant, closed-system gift cards are a trend that can only go so far," he says.
  Pulse began offering prepaid services to its members in the fourth quarter of 2003, including gift cards. Prepaid cards are one component of Pulse's expansion of member services beyond traditional transaction switching and
  related processing for ATMs and personal identification number-based POS payment terminals. Pulse is providing the back-end systems for stored-value cards, such as real-time cardholder authorizations and settlements.
  A couple of Pulse member financial institutions issued Visa or MasterCard branded gift cards for the past holiday season, Danforth says. "We just put the cards into the banks in mid-December," he says. "We sold more than $3 million
  worth of gift cards in a few weeks."
  Pulse now has seven gift card programs operating and will have payroll and so-called teen/family cards available this spring, according Danforth. Payroll cards allow employers to give cards to employees instead of paychecks so
  they can access their pay from ATMs or at the point of sale.
  Meanwhile, Pulse sees teen/family cards that could be given to children instead of cash and reloaded by parents as a potentially lucrative market. Parents will be able to monitor where the card is used and how much children can
  spend in a single day, all over a real-time Web interface. "If my son used the card five seconds ago I can see it," Danforth says.
  Also through the Web site, parents will be able to reload the card by accessing another payment card account.
  Other firms see the movement to general-purpose stored-value cards as well. "Stored value is moving beyond the early stages," says MasterCard's Mathis. "We're seeing a lot of issuers jumping on this business."
  Thus far, MasterCard has more than 200 stored-value programs with more than 100 different issuers, Mathis says. In 2003, the business was up 50% "in every way we can measure it," he says. "We've seen double-digit increases in
  third-party relationships and the processors with whom we work."
  There are many areas where stored value will grow, according to Mathis. Consumer cards, like the existing gift card programs, will remain popular, but other consumer applications such as travel cards, which can replace
  travelers checks, are beginning to emerge. Corporations also may start looking at stored value for employee-incentive cards or per-diem cards for employee business travel. Businesses may begin using cards to disperse funds, such as
  for health care or related insurance expenses. Finally, the government is looking at stored value for travel vouchers and child-support payments.
  "If you take those segments and those opportunities, it's a $2- to $3-trillion business of potential purchase volume," Mathis says.
  While issuers are interested in the extra interchange revenue a general-purpose prepaid card program could bring in, there is also opportunity to "touch" the consumer in another way, according to Mathis. "It offers a fresh
  opportunity to bring in new customers and offer a new product," he says.
  Columbus, Ga.-based Total System Services Inc. (TSYS), a big transaction processor that provides stored-value programs to retailers, will be watching developments in the health-care industry for prepaid cards. Kathy Heitmueller,
  associate director of North American sales for prepaid products at TSYS, says stored-value cards will be used for employees to access pretax funds from flexible health-care savings accounts. "You'll be able to roll the fund over from year to year and earn interest," which previously was not the case, she says.
  MasterCard has seen some tests using stored-value cards in the health-care market. In one, for example, instead of a doctor giving a free sample of a medication at the office,
  the provider could give the patient a prepaid card to cover the prescription copay at the pharmacy.
  "Doctors like it because they don't have to keep drugs around the office," Mathis says, adding that drug companies also like it because they can find out which consumers are using the drugs.
  Health care, insurance and the further emergence of gift cards all seem to be on the horizon in 2004 for stored-value cards. But the companies involved with stored-value programs also are looking at other developments that may be a bit further away. For instance, TowerGroup's Gould says there
  are opportunities for cobranded gift cards. Such a card would carry a major card brand but also a retailer logo.
  "The card would be good everywhere but you would get something extra for using it at the retailer's location," he says.
  Pulse's Danforth says the market wants a multifunction card that would be bundled with bill payments, money transfer and other capabilities. "You could have multiple loading options and the opportunity to generate some credit
  after some point in time," he says. "There is a big scramble amongst organizations to access technologies to deliver a lot more value and services on the card."
  While much of the stored-value market's potential remains untapped, one thing is clear: no market seems to be so accommodating to so many different possibilities.