The convenience and budgeting control features that stored valued products offer holds appeal for a wide range of Americans.
By Joe Bush Contributing Editor.
Prepaid’s profit potential is fueled by shifts in the marketplace, wider social acceptance and the nation’s growing population of “unbanked” lower-income consumers. And while store-level merchandising and marketing need to be sharp and employee training enhanced, there are dividends to be reaped.
What some refer to as the pay-as-you-go category—which includes prepaid wireless, long distance, debit cards and more—is becoming an increasingly popular method of budgeting. Furthermore, experts agree, a good portion of these unbanked consumers are already c-store shoppers.
The prepaid category is also expanding in terms of the number of products available. Whether it’s traditional phone cards, prepaid debit cards, gift cards for the holidays or even reloadable gaming cards, customers are buying prepaid in record numbers.
Phone cards, for example, continue to serve as connections to loved ones, emotionally and financially, for scores of new Americans and immigrants with families overseas. Mike Zielinski, CEO of Royal Buying Group, which provides procurement services for independent retailers, said operators should think of prepaid as a traffic driver, not a revenue machine.
“If you can be known as a destination stop for financial services you have another way to get people into your stores, especially the unbanked or underbanked, many of whom would not come to you otherwise,” Zielinski said. “If you’re only handling credit cards and serving people with a lot of money, this growing segment is going to go elsewhere for not only their prepaid products, but their soda and snacks and everything else. It’s an ancillary product to what we’re selling, but a very complementary product.”
Innovation and opportunity is helping the category to grow. Over the past two years prepaid providers have added cards for online gaming, and suppliers and financial institutions are adding standard banking features, such as balance alerts, security features and even online bill-pay capabilities, to reloadable cards.
Research by Mercator Advisory Group, a research and advisory services firm exclusively focused on the payments and banking industries globally, shows that roughly $72.94 billion was loaded onto closed loop gift cards (cards good at a single merchant) in 2010, up 3% from 2009. On open loop gift cards (Visa/Amex/MasterCard/Discover) consumers loaded about $13.36 billion, up 31% from 2010. On general purpose reloadable cards, consumers loaded $42.09 billion, up 47% from 2009.
Meanwhile, pending legislation to regulate transaction fees could set off a domino effect driving people toward prepaid cards and increasing competition from banks for those same cards.
“Retailers that are not in the category definitely need to be. It’s going to be an important category in the future,” Zielinski said. “To start, find a good, strong partner in order to be able to cycle the correct products in and out in a timely manner. It is a changing category; if you don’t have the right mix you won’t have the sales. It’s definitely challenging to manage at times because it changes so fast but, if you manage it correctly, it’s a profitable category.”
Based on March 2011 interviews by Boston-based research and advisory firm Aite Group with 24 senior-level, prepaid-industry stakeholders, regulatory pressures are the industry’s top concern. The Credit Card Act of 2010 affected revenue from gift cards the most, and when the Durbin amendment is enacted debit card fees will decrease, pushing banks to get creative to recover lost interchange revenue.
The most likely way is to compete with retail outlets for prepaid card users, said Madeline Aufseeser, a senior analyst with Aite Group.
“Banks stand to lose a huge amount of money and they will find ways to migrate people into different types of relationships where they can gain that money back,” Aufseeser said. “It actually makes the debit card unprofitable for them in a lot of cases. It’s already more expensive to have a checking account than to carry a reloadable prepaid card. Banks issue reloadable cards now, but because of how banks operate, consumers who don’t have bank accounts aren’t going into banks, so they don’t sell a lot of reloadable cards at bank branches.”
What retailers can expect to see happen is that consumers who go into banks to open a checking account might get sold a prepaid account as opposed to a traditional checking relationship. “There’s not a lot of difference in how they operate,” Aufseeser said.
Aufseeser, at presstime, also questioned whether the lower-transaction-fee portion of the Durbin amendment would survive a review that has delayed implementation from summer 2011 to anyone’s guess.
Doing the Basics
Retailers can choose to skip the drama by not carrying such cards, instead focusing on phone and gift cards. Joe Gibson, directory of category management for 44-store Dari Mart of Junction City, Ore., says his chain does 70% of its prepaid business in wireless phone cards, 10% in long-distance cards and 20% in financial gift cards.
Dari Mart avoids even the extra oversight of high-denomination financial gift cards—due to concerns over the use of them in money laundering—by carrying only $25 and $50 cards. The chain’s sole supplier is InComm, which provides merchandisers, cards and any technology required.
Gibson, who took over the category recently, said he only gets involved if there’s something more pressing than card re-ordering or issues that can’t be resolved between store managers and the InComm rep. The category grossed $250,000 for the chain in 2010, which is still a small portion of the chain’s overall sales.“It’s a fairly hands-off category as long as we supply what the customer needs,” Gibson said. “It’s more of a convenience to our customers.”
While c-stores are destinations for phone card users, gift cards can drive impulse sales. Seasonal spikes are the norm with the gift cards with holidays, graduation and back to school all occasions that spur sales.
Mercator Advisory Group analyst Ben Jackson noted that the prepaid category has grown through the recession. “The cards that grow will vary sector by sector, and what they’re used for varies as well. The overall market continues to grow but the individual pieces in the market go up or down depending on consumer desire and what sort of issues or problems it solves.”
For instance, Zielinski’s company has marketing and merchandising agreements with 6,400 c-stores and he said gift cards—retail and financial—are a bigger business for him now than phone cards—the opposite of Gibson’s stores. In this tough economy, people have been using financial gift cards for staples rather than indulgences.
Jackson predicted a boost in gaming cards for 2011, and more digital-content companies increasing their penetration into prepaid.
“Digital activities continue to grow so these cards continue to grow,” he said. “You’ll probably see these companies get better distribution opportunities and new distribution channels. It wouldn’t surprise me to see more companies target the c-store channel because the demographic is in line with their target customers.”