Prepaid Draws More Players

  Growth in the prepaid card market is expected to continue for the foreseeable future as issuers and distributors delve into emerging markets, develop new products, and target unbanked and underbanked segments.
  Overall prepaid card transactions will reach 7 billion by 2010 and have a value of $178 billion, up from an anticipated 4.3 billion transactions valued at $113 billion in 2007, estimates Aite Group LLC, a Boston-based research firm.
  "There are tremendous opportunities to displace cash and checks, and there are many organizations trying to push prepaid," says Gwenn Bézard, research director at Aite Group.
  The prepaid market consists of open- and closed-loop cards, known as branded and private-label cards respectively. Branded cards bear the logo of a card network and can be used at point-of-sale terminals and ATMs bearing the logo, while private-label cards are not associated with any network and can be used only at the business where they were purchased.
  Both segments are expected to keep increasing in sales, though the branded card market will grow more quickly, says Bézard, noting that the private-label prepaid card market is more mature and that the cards have inherent limits as to where they can be used.
  "The network-branded cards as a percentage of the total category are increasing," agrees Ralph Bianco, senior vice president of retail payment solutions at Minneapolis-based U.S. Bancorp, one of the largest issuers of branded prepaid cards, according to Aite Group research. "Three to four years ago, 88% were private-label, and 84% are private-label today," Bianco adds.
  Branded prepaid cards are vehicles to reach unbanked and underbanked populations, says Red Gillen, senior analyst with Boston-based research and consulting firm Celent LLC's banking group. He adds that the unbanked earn roughly $280 billion each year.
  Banks turn down an average of five account applicants each month, but U.S. Bank has the policy that no one should leave a bank without getting some type of account, says Bianco. "Why turn them down?" he says. "Give them [a branded prepaid card] that's safe and secure and mitigates risk but also puts something into the hands of the consumer with our logo on it. It's about building loyalty early on."
  Emerging prepaid markets, such as rebate and loyalty programs, also contribute to growth, says Bianco.
  Tailored products entering the prepaid arena also should spur growth, says Tery Llach, group vice president of marketing for Blackhawk Network, a Pleasanton, Calif.-based third-party distributor of prepaid cards.
  With high margins and low capital investment, distributors stand to gain the most as prepaid sales increase, says Bézard. "The capital investment is almost nothing; anything [distributors] sell is almost pure profit," he says, adding that the margins are high for distributors.
  The third-party prepaid market constitutes a small segment of the prepaid industry, so opportunities for growth still abound there, says Llach. Llach estimates Blackhawk has 86% of the third-party market, though she declines to share sales figures.
  While the long-term outlook for prepaid processors is solid, Bézard expects them to struggle in coming years to gain scale and raise profit margins. "The volumes are growing but are not significant enough to give scale to the different processors in the market," he says.
  Thousands of companies are pushing prepaid, including issuers, processors and distributors, which is helping to drive the market and competition, says Bézard. "The volume of transactions for each company may not be huge," he says. "But a lot of different companies are pushing prepaid and having a few transactions."
  The increased competition means aggregate numbers are going to grow rapidly, but same-store sales are going to slide, says Bianco.
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