The total dollars loaded into the prepaid category will climb to $672 billion over the next three years, according to Mercator Advisory Group, with convenience stores in particular the fastest growing segment.
By Howard Riell, Associate Editor.
The open-loop prepaid card market has been growing, driven by the cash-access and government categories. But as with other products, most notably tobacco, future growth could be hampered by excessive regulation.
But by getting up to speed on the issues involved, and communicating with distributors and customers, convenience store operators can make the best of what may eventually become a trying situation.
Ben Jackson, senior analyst for the Prepaid Advisory Service of Mercator Advisory Group, the independent research and advisory services firm exclusively focused on the payments and banking industries, said the complications began in 2010 with passage of the Durbin Amendment as part of the Dodd-Frank financial reform legislation.
The amendment put a limit on the amount of interchange that could be earned on certain types of cards and it exempted prepaid cards as long as they met certain conditions. One of the aspects involving prepaid and debit cards was that there had to be multiple routing options for transactions available to the merchants.
“What the regulators took that to mean from the beginning was that there had to be two unaffiliated networks,” Jackson said. “It was either the Visa card for the signature and one of the unaffiliated payment networks for PIN-debit, or vice versa. When the retailers filed a lawsuit there was a judge who looked at that provision and said the law required that there be two unaffiliated types of networks for both types of transactions: a signature transaction or a PIN transaction.”
Such an arrangement, Jackson insisted, can be extremely difficult to implement because there is, at present, no workable way to put both a Visa network and a MasterCard network on the same card.
“What that means is that the prepaid companies are kind of out of luck unless that can be worked out,” Jackson said. “And even if it can be worked out, there is no guarantee that it won’t be so expensive to implement that it won’t take a lot of the profitability out of some of these programs.”
Waiting for Clarity
Today, Jackson explained, the parties are waiting for the appeal by the federal government to go through. The gift card industry is facing the most uncertainty. “They don’t have the ongoing income that comes from a reloadable card. But if it comes down to every prepaid card needing to have four payment networks on it, that could be a very difficult requirement to meet,” he said. “That is the big regulation coming down the path that may or may not cause real trouble.”
Beyond that, there is always the risk that the Consumer Financial Protection Bureau might try to limit fees on cards, which could cause further problems. “It hasn’t happened yet,” Jackson said, “but that’s often a concern.” There are also worries about whether or not all prepaid cards will be treated in one manner by the regulators.
“If the regulators turn around and say, ‘We are going to treat all open-loop prepaid cards as though they’re the same thing,’ it will make it very difficult to treat cards equally,” Jackson pointed out. “The requirements in the use case of a general purpose card, and a payroll card, and an incentives card are all very different. They don’t all necessarily need to have the same kinds of protections or regulations because they don’t operate in the same way.”
Prepare for Change
Retailers can try and insulate themselves against potential problems ahead due to over-regulation by getting busy now.
Dick Geiger, director of retail support for Kwik Trip Inc. in La Crosse, Wis., said that increased regulation threatens the growth of the prepaid business primarily because customers don’t like dealing with new rules.
“More regulation is going to make it difficult for us to sell the product,” Geiger said. “The more regulation I see, the more kick-back we get from our customers. The latest regulation was, in fact, the demand for a social security or license number, or some form of identification. People do not want to give up that information, especially for a gift card.”
Explaining to customers that the requirement comes from the government and not the retailer, it goes without saying, accomplishes nothing. “The way they look at it, it’s Kwik Trip’s business, Kwik Trip’s item. We sell it, and if we can’t sell it the way they want it, it’s our fault, not the government’s.”
The percentage of sales that such cards account for in Kwik Trip stores is not among their highest, Geiger confirmed. “It isn’t anything that is going to make or break us. We just got into the category a couple of years ago.” It is, however, a growing percentage, and something that he and his colleagues would like to see continue.
Category growth is happening, incidentally, with little to no marketing effort behind it. The products, for instance, do not appear in advertisements or billboards. “We do have a sign on the front of the store saying that we sell phone cards, cell cards and financial cards, etc. That’s it. I really consider it to be a service,” Geiger said.
At Kwik Trip, the cards are displayed on a spinner rack that stands next to the store’s ATM, creating a de facto financial center. The consumers who purchase the cards are a diverse group, as well, Geiger said.
Ear to the Ground
For c-store and other retailers, the best advice is to remain vigilant, stay plugged in to the issue and begin asking questions.
“If a c-store operator thinks about which cards to offer, he needs to pay close attention to what it is their customers are asking for and buying,” Jackson said. “He needs to figure out what his options are for supplying those cards. Most c-stores are working with an InComm or a Blackhawk Network, so they should be in touch with their distribution partners to find out how they foresee the regulations changing and what options they are going to have, so they can prepare for what their customers are going to need.”
If a retailer is concerned that his General Purpose Reloadable (GPR) or open-looped gift cards are going to go away, he needs to find out if there will be other options available.
Geiger advised convenience store operators to get busy communicating with their local lawmakers about the issue. “Complain to your legislatures and listen to your customers,” he said. Other than that, Kwik Trip doesn’t plan to take any additional steps. “At this point, until we know what’s happening in the government, I don’t think we’ll do anything. We’re going to let it settle itself.”
The category’s potential, however, remains strong. “The item itself has a value,” Geiger concluded. “We see more and more people using them to protect themselves on the Internet and other areas where security is a concern. But at this point we don’t push it. I think it is something that eventually is going to become a very marketable category, and we will probably look at it a little more seriously, but not until the legislative picture clears up a little bit.”