While the total funds loaded into U.S. open-loop prepaid debit card accounts could reach $186 billion in 2014, uncertainty over future government regulations that may affect the industry could hamper sustained market growth, according to a report from Aite Group LLC.
The Boston-based research and advisory firm expects the value of funds loaded into branded prepaid card accounts this year to reach $69 billion, up 27.8% from $54 billion in 2009. It also expects transactions initiated with the cards this year to rise to 3.3 billion, up 37.5% from 2.4 billion in 2009.
Aite, however, says industry insiders fear that some changes brought on by the Credit Card Accountability, Responsibility and Disclosure Act represent only the start of changes that would decrease margins from prepaid products. The industry, however, could avoid further government interference if it “self-regulates” the market, according to Aite analyst Adil Moussa.
“Self-regulating will help a lot so when more government regulations are discussed, the industry can point to what they’ve already done,” Moussa, the report’s author, tells PaymentsSource. Moussa based his report on conversations with reload networks and prepaid providers.
The Credit CARD Act had an immediate affect on the prepaid industry in a couple of ways, most notably on gift cards. Part of the new law stipulates the cards cannot expire within five years from being issued and that the terms of expiration must be clear and conspicuous.
Most gift and prepaid card providers already were adhering to the new regulations before they took affect in February. Prepaid companies such as Green Dot Corp. and nFinanSe Inc., for example, changed their card packaging to better highlight fees and expiration dates.
Though the report cited any future regulation and legislation as the top challenge for the prepaid industry, it identified changing market dynamics as the top trend.
The open-loop market is still young, but it already has gone through consolidation once through mergers and acquisitions, and that should happen again, Moussa writes.
Several industry observers and executives believe Green Dot’s decision to generate up to $150 million by selling company stock through an initial public offering was a sign it is raising capital for future acquisitions.
“A lot of times when a market leader in an emerging category goes public, it’s to see if they can use the capital they raise in the IPO to grow even faster,” Gil Luria, an analyst with Wedbush Securities in Los Angeles, told PaymentsSource last month (
Green Dot is in the process of acquiring an unnamed bank holding company and its subsidiary commercial bank, but the prepaid card provider did not guarantee when, if ever, it would complete the acquisition, according to its filing with the Securities and Exchange Commission.
Green Dot could jump into an area such as card processing if it seeks to acquire other companies, Moussa says. “NetSpend does its own processing; the more you control, the more beneficial it will be for the company,” he adds.
The report examines six major segments in open-loop prepaid, and Moussa expects incentive and loyalty cards to have the highest compound annual growth rate, 39%, in the next four years. Corporations and retailers increasingly are using these types of cards to increase sales, reward loyalty, shape consumers’ behavior and reward employees, Moussa writes.
Payroll cards will experience 28% growth between through 2014. Prepaid program managers, networks and issuers continue to highlight the benefits of payroll cards to corporations, Moussa writes.
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 Wal-Mart and Sam’s Club U.S. employees. 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, followed by general-purpose reloadable cards and health care cards at 22% each.
Moussa expects open-loop gift cards to have the lowest growth rate at 13%. He believes the economic downturn had a serious effect on the gift card market. Consumers received heavy discounts from merchants and instead bought merchandise instead of gift cards, Moussa writes.
In conversations with industry executives, Moussa says some are considering shifting their open-loop gift cards to general-purpose reloadable cards to avoid issues that segment is likely to face, including thinning margins and shrinking loads. Consumers loaded $6.3 million on gift cards in 2009 compared with $14.9 billion on general-purpose reloadable cards.
