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This story appears in the August 2009 issue of Cards&Payments.
At the same time the recession is leading credit card issuers to raise their underwriting standards and yank or reduce customers' credit lines, many budget-conscious consumers are switching from credit to debit cards to control their discretionary spending.
These trends have created an opportunity for prepaid providers to sign up a different type of customer. But to succeed, the industry first must make those potential customers aware of reloadable prepaid cards as an alternative to traditional debit or even credit cards, executives and observers say.
"Issuers are tightening credit, and where they're tightening credit are the most credit-needy segments. So that certainly opens the door for prepaid products to gain share and penetrate that segment," says John Grund, a partner in the card-issuing practice at First Annapolis Consulting Inc.
Green Dot Corp., a Monrovia, Calif., prepaid distributor, is among the companies benefiting from the prepaid market's growth. The company, whose customers number "in the millions," is "well exceeding" its forecast that the customer total will grow more than 50% this year, says Mark Troughton, Green Dot president of cards and network.
Troughton predicts many banked consumers either will replace their traditional checking accounts or maintain them but switch most of their spending to prepaid cards from regular debit or credit cards. "We're seeing prepaid becoming much more attractive to a broader segment of the population," he says. "The current economy is to prepaid what high gas prices were to hybrids. … This is a transformational event."
Reloadable prepaid cards can carry significant fees for up-front purchase, reloading and monthly maintenance, but those fees can be less onerous for some consumers than the costs associated with traditional checking accounts.
And those fees have started to fall across the industry in the wake of Wal-Mart's February decision to cut the fees of its popular prepaid card to $3 each. In June, Green Dot said it would cut its upfront fees and eliminate monthly fees for "regular users" of its cards this summer. Another prepaid provider, nFinanSe Inc., also said then that it would "match" Wal-Mart by lowering its upfront fee to $3, starting in July.
Product recognition has been problematic. Aite Group LLC says 65% of prepaid executives from 21 companies who responded to a recent survey mentioned "education, awareness or demand cultivation" as being among the biggest challenges facing the prepaid industry. And some blame payments networks such as Visa Inc. and MasterCard Worldwide for not doing enough to promote prepaid.
'Not Doing Enough'
"On the awareness front, a recurring theme is card networks not doing enough to promote prepaid cards, in particular in their TV commercials, which highlight credit and debit but fail to mention prepaid cards," the report notes.
But that is starting to change. In May, MasterCard unveiled a consumer-advertising campaign for the Hispanic market, including a television commercial, to promote reloadable prepaid cards to a larger audience.
MasterCard's new prepaid slogan–"Everyday Prepaid"–is meant to demystify the cards, which often are referred to with such decidedly uncatchy labels as "general-purpose," "network-branded" or "stored-value reloadable," says Laura Kelly, MasterCard senior vice president of global prepaid solutions.
"Obviously, consumers many times don't understand what a GPR is. … 'General-purpose reloadable prepaid' just doesn't roll off my lip, and I'm in the business," Kelly says. "We really did try to say, 'What's the simple answer and the simple way to describe this product?'"
The Spanish-language commercial, part of MasterCard's "Priceless" ad campaign, will run for the rest of this year in 11 U.S. markets where there is a high concentration of Hispanic consumers: Chicago, Dallas, Houston, Los Angeles, Miami, New York, Phoenix, Sacramento, San Antonio, San Francisco and Harlingen, Texas. MasterCard would not discuss its budget for the campaign, which also includes radio and online advertisements and a consumer-education campaign.
"It's incumbent on all of us to make investments in the space," says Kelly. "The majority of the spend on that card is kind of everyday spend. … The purpose is to actually focus on everyday prepaid and for people to connect the prepaid category with things that they use it for every day."
Gwenn Bézard, Aite research director, predicts the benefits of MasterCard's "Everyday Prepaid" push could extend even to its competitors.
"At the end of the day, it's going to help generate higher awareness. From what we have seen, when you have those types of commercials, it's going to lift everyone," Bézard says.
Bézard expects Visa eventually to follow MasterCard by introducing more prepaid-related commercials and says the benefits to MasterCard of being first with such a campaign could be limited. "I'm stopping short of saying it might hurt Visa because prepaid is still small," he says. "You need a lot of transactions to make a difference."
Visa has run television spots for prepaid products in the past, but it is not currently running any such commercial and has no prepaid-specific television campaign planned, according to Hyung Choi, the company's senior business leader for prepaid products.
"What we've done in the past, and we've done this for a couple of years now, is to run a very specific general-purpose reloadable (TV) spot in several key markets across the U.S. to drive awareness and to drive acquisition of the product," he says. "We will continue to evaluate the use of this [TV ad] to drive further awareness and education of the product in the marketplace, but that's going to be just one of the components."
Mick Conlin, senior vice president of agent products at Meta Payment Systems, the unit of Meta Financial Group Inc. that helps other financial institutions market the prepaid cards issued by the Storm Lake, Iowa-based company's MetaBank, welcomed news of MasterCard's planned television campaign.
"Additional exposure for the industry is fantastic, and I think it's a sign that the industry's grown up," he says. (MetaBank issues prepaid cards supported by the Visa, MasterCard and Discover Financial Services brands.)
Conlin does not blame the networks for not doing more sooner on television. "Doing television is extremely expensive, and at this point in the industry's life cycle, [the question is still] whether or not the return is going to justify the expense," he says.
Profile Raised
Jennifer Tescher, director of the Center for Financial Services Innovation, agrees that the networks have the most power to help expand consumer awareness of prepaid cards.
"There are very few prepaid card providers who have the scale or resources to conduct the national campaign that would be needed," she says. "Another silver lining for the prepaid card industry with the current downturn is, with credit card volume down, it raises the profile of prepaid at the networks as a product to focus on to help make up for lost revenue."
But even as observers welcome the industry's efforts to raise prepaid's profile, some predict the reach will be limited. First Annapolis' Grund, for example, doubts that the cards will ever be advertised at the same levels to which the networks pitch credit and regular debit cards to consumers.
The payments industry slowly is bringing prepaid card advertising into the mainstream. The effectiveness of such campaigns could determine for how long or whether such promotions continue. CP
(Maria Aspan is a reporter with American Banker.)
