Prepaid Reaping Financial Rewards

While gift card malls have been getting a lot of attention, prepaid debit, credit, gift and especially gas cards offered by Visa, MasterCard and American Express are quietly booming in popularity.

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. According to the Aite Group, prepaid debit card transactions will surge to $150 billion in 2009, up from almost $13 billion in 2004. 

Plus, prepaid wireless sales are expected to reach over $30 billion by 2010, compared with $8 billion in 2005, according to Atlantic-ACM, a telecommunications industry research consultancy.

These results, experts said, show that the prepaid category is attractive to more than the unbanked or underserved consumer group. Indeed, a good portion of these consumers are already c-store shoppers. The convenience and budgeting-control features in these products make them appealing to a wide range of Americans.

The prepaid debit card category alone is projected to reach $150 billion in 2009, up from $13 billion just a few years ago. Some operators have reportedly seen prepaid programs jump by as much as 2,000% in recent months.

"The prepaid wireless market will nearly quadruple in size over the next five years," according to Wireless Growth Winners, Prepaid & Hybrid: 2006-2010, a recent study conducted by Atlantic-ACM. Specifically, prepaid revenues in 2005 were $8.3 billion and are expected to reach $31.3 billion by 2010. Additionally, prepaid wireless subscribers will increase from 24.2 million to 55.5 million in the same timeframe.

The U.S. Department of the Treasury’s Financial Management Service recently introduced a prepaid debit card for Social Security payments and other federal benefits in 10 states. A nationwide rollout of the Direct Express card is slated for this summer. "People without bank accounts now have a user-friendly, practical alternative to paper checks for their monthly federal benefit payments," said FMS Commissioner Judith Tillman.

About 4 million Social Security and SSI recipients don’t have bank accounts, the government agency said.

Prepaid also has implications for ethnic marketing. Seventy-five percent of the Latin American working population, according to World Bank figures, does not have bank accounts, much less credit cards or debit cards. This unbanked population has no credit record of any kind or any formal financial history.


Varied Buzz

The industry buzz on prepaid "varies by what product you’re talking about," said Michael Zielinski, president and CEO of Royal Buying Group Inc., an organization of convenience store and petroleum marketers based in Hinsdale, Ill. "If you’re talking telecomm you’re talking about how flat the growth is, the continued shrinking of margins, the instability of a lot of the providers and not knowing if the carrier is going to stay in business or not."

Concerning gift cards, Zielinski said, "You have to think about which ones are still showing good growth—obviously gasoline is one of them—and which retail cards are flattening a little bit."

At c-stores, the prepaid business is "all pointed toward gasoline cards now, with $4-a-gallon gasoline," Zielinski said. "For gifting, people want to buy something that they see value in. Obviously, with the price of gasoline today, a gasoline card makes an easy gift to give. Everybody needs it."

The hottest thing in the non-gasoline prepaid cards is what Zielinski calls a "vanilla" non-branded Visa card. "Consumers who are under-banked or fringe-banked can buy the card and load it with more money as they need it, and then use it as a credit card even though it’s really a debit transaction," he said.

"I think the core continues to be exciting," said Mike Skinner, general manager of Coinstar e-Payment Services, "which is the prepaid wireless side of the business. That continues to be a growth business for the telephony companies, and certainly, with the economic conditions we’re faced with today, prepaid is getting even more attention."

Coinstar works with the major national and regional carriers like ALLTEL, Boost Mobile, AT&T, T-Mobile, TracFone, Verizon Wireless, Virgin Mobile and others to provide PIN-based airtime replenishment. Skinner estimates the percentage of the prepaid market that goes to wireless at being "in the 80%-plus range today if we’re talking about convenience stores."

Plus, the margins are very strong when compared to core categories like cigarettes and salty snacks, with some reports showing a margin in the 30 to 35% range, making them an indispensable in-store item.

The recent growth "and the real massive growth in the category has definitely been in the debit category," said Bryan Zingg, vice president of sales for PaySpot Inc. in Leawood, Kan., a provider of prepaid electronic payment processors.

"Prepaid debit loads as well as open- and closed-loop gift cards are such high growth areas primarily because they are new, but also because there is a huge, 30-million unbanked population out there," Zingg said. "They are looking for a way to load cash onto a prepaid debit card so that they can make purchases with the rest of mainstream society on the Internet, or be able to carry less cash and have more of a bank-type product."

PaySpot provides access to the large national wireless carriers such as Alltel, GoPhone from AT&T, Boost, Page Plus, T-Mobile, Tracfone, Verizon & Virgin, as well as regional carriers and MVNOs (mobile virtual network operators), AirVoice, iWireless, Jump, Mojo, Net10, Omni and STi.

The other reason convenience stores are seeing such growth has been, fittingly enough, "convenience," said Zingg. "I think that there has been a huge growth in prepaid debit, but typically they have been sold by check cashers, and now Wal-Mart is getting in the game." The convenience store "obviously has the ability to provide that convenient location for a debit card."

Typically, if c-stores are not doing well with prepaid the problem lies in merchandising, Zingg suggested. "They don’t have any point of sale in the store. When we set up in-store we put in a floor display rack with graphics on it to show the customer that they can buy their debit card and reload their debit card at the store," he said. "We make it very clear that the Joe Wal-Mart cardholder can load that card at that store."


The Business of Prepaid

To make money with prepaid cards, Greg Marlowe, category director for Village Pantry Inc. in Indianapolis, said operators must "first understand the business. Secondly, you’ve got to market it correctly in your store."

What Marlowe sees looking out over the c-store landscape is that "the business has changed drastically over the course of the last six months. I don’t know that we’re even aware yet of how much it has changed." Village Pantry operates 179 convenience stores in Ohio, Michigan and Indiana.

While the prepaid business has not changed at the store or consumer levels "yet," Marlowe noted, it is "a completely different business than it was a year ago." Back then, neither AT&T, Sprint, T-Mobile or others "were interested in occupying any sort of a space that was done with prepaid. They all dabbled in it, but they offered ridiculous programs with expensive phones that nobody cared about. And so you had a lot of room for people like Helio. The turn wasn’t tremendously high, and so was actually an okay deal for everybody.

"Then, Verizon stepped in and said, ‘You know what, it’s probably time we go ahead and do this.’ Suddenly, $99-a-month pricing came in."

The result, from a prepaid card standpoint, is that "the people who in the past were preventing us from doing a lot of prepaid card business all disappeared," Marlowe said. "All of a sudden for me it’s a Yahoo! because I’m not selling a $129 handset to people who are going to pop them up on the Web site. Now I can sell $40 handsets and, by the way, on making the same pennies on these though I was on the $129 and handset … now I am going to sell a PIN to every single one of them assuming—and here’s where the real opportunity is—that I marketed well enough to keep the customer who bought the handset in the first place as a reload customer for every PIN they buy." The business "changed completely from my perspective, and for me it’s all good."

Keeping those customers means communicating with them, Marlowe explained. "You tell people about it. When you walk into the average c-store today you can’t tell whether they sell cell phones there or whether you can recharge them there. It’s the old ‘trying to buy a carton of cigarettes at 8 p.m. in the c-store scenario. They are locked up in the back because the manager left. The same thing can happen with cell phones. Managers have a tendency to think, ‘Lock them up,’ and there are a lot of solutions for avoiding that kind of drastic measure."

For example, Village Pantry merchandises empty clamshells in high-shrink stores and puts cell phones on the sales floor in low-shrink locations. "We merchandise PIN cards with the phones. Making it obvious that you have both available … is the thing to do, and making it a relatively painless process is pretty important, too," Marlowe said.


Grab As Many As You Can

Zielinski thinks there is "still a lot of education needed for c-store operators to get more into the gift card business."

Most gift card providers are "going to want to draft their account maybe 24 hours after the sale, after they activate them. But a lot of retailers are small and don’t trust letting people have access to their bank accounts." They need, Zielinski said, to "get over that. Some of them, unfortunately, aren’t financially solvent enough. When there is a draft that could cause an over-draft, some get very nervous about the relationship between the providers and their own banking accounts."

Village Pantry’s Marlowe urged operators to take advantage of the shifting dynamics within prepaid, and of "the opportunities that just landed in your lap. Because what just happened in the prepaid industry—the compression of the large-scale MVNOs that forced the customers down into these third-tier MVNO’s—just pushed an awful lot of people through your front door. Grab as many as you can."


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