A prepaid card can be described as a card that cardholders can load up and then only spend the amount that is loaded on the card. A prepaid card issued in the banking sector allows for point-of-sale, internet and mail order purchases and can have extra features added to it, such as access at ATMs.
Prepaid cards offer issuers the potential to grow their card operations. They offer an effective way to replace payments currently made by cash and checks and others that rely on paper-based methods.
Furthermore, prepaid cards provide numerous opportunities for issuers to grow their card operations, particularly given that many payment card markets are moving closer to saturation point.
Expanding card payments into areas currently occupied by other payment tools is essential to generating continued growth in transaction volumes and growth in revenue.
Global phenomenon increasing in all corners
Prepaid cards are very popular in the US, but have spread to all corners of the world and are growing at different paces. According to Datamonitor research, transaction volumes on Visa-branded prepaid cards have doubled in the US during 2005. In Latin America, Visa-branded cards rose to 3.3 million by March 2006, while in Europe, Visa-branded prepaid cards were the fastest growing payment card segment in 2006. In the UK market, Newcastle Building Society, the leading prepaid MasterCard issuer, issued its millionth card during 2006.
There are different types of prepaid cards available in the market but they fall into one of two categories: cards issued directly to consumers and cards issued to beneficiaries.
Prepaid cards offer a card-based solution for the unbanked
There are a number of prepaid card programs aimed particularly at unbanked consumers. A significant number of adults do not hold a bank account. According to Visa, the unbanked segment represents about 80 million consumers in the US alone, and, according to MasterCard, this segment represents 6.5 million consumers in the UK market.
In addition, a lot of consumers have not yet warmed to the idea of having and using a credit card, for various reasons, such as fear of fraud or running into debt.
Although the unbanked segment has been recognized to have great potential, given the size of this market, it is likely that the fees associated with the product may restrict take-up. Issuers should be more aggressive both in their marketing and product strategy and must to willing to innovate and make the product more desirable.
General purpose gift cards give consumers wider choice
The concept of a general purpose card program is similar to gift vouchers issued in the retail sector. However, general purpose gift cards are co-branded with a payment scheme, such as MasterCard, Visa and American Express, and as such give the recipient access to a wide range of retailers and allow for mail order and online purchases, hence a broader choice of 'gifts.'
In the US market, gift cards are available on all major card schemes. While the availability of gift cards in central and eastern Europe, the Middle East and Africa remains limited, in Asia the first prepaid card was introduced in Singapore in January 2004 and they have penetrated western Europe over the last few years.
Similar approach to gift cards taken up by travel industry
Travel cards have made their appearance as an alternative to carrying traveler's checks or cash. Foreign currency is loaded on to the travel card and the traveler can use the card to make purchases as well as access ATMs while abroad.
Travel cards offer a simpler and more secure way to carry money abroad. Although there are usage limitations on travel cards and a number of fees involved, they have the potential to be implemented to form part of a payments solution for consumers traveling abroad, simply because they offer additional functionally to traditional traveler's checks and are more flexible and convenient.
Teen cards introduced to capture teen payment market
Targeting teens holds a particular significance to issuers, particularly as a means of capturing payments onto a card. A teen prepaid card basically allows parents to transfer money from their current account or credit card to an online account, which their offspring can use.
The teen market is generally known to be a difficult one to serve. This is mainly because teens are not always free to make their own decisions when it comes to money and the take-up of teen cards has been mixed. For that reason, the teen market is likely to remain a niche one in the short term.
Local governments see benefits of introducing prepaid cards
The benefits of introducing prepaid cards for the payment of social benefits are vast. On the one hand, it increases efficiency and reduces administrative costs, while, on the other, it provides better service to welfare beneficiaries. At present many governments rely on paper-based methods to deliver social benefits to welfare beneficiaries.
One example is the PKO Bank Polski Maestro Municipal card introduced in 2005, which has now been implemented by municipal offices in 18 cities across Poland.
Private sector also offers numerous opportunities for prepaid card issuers
Other organizations that could benefit form introducing prepaid cards are employers that use time-consuming and costly paper-based systems to pay employees' salaries by means of checks or cash.
Payroll cards were first introduced in the US market in 2001 and have been designed as an alternative to traditional payroll checks. Currently, more than 2,000 employers are implementing the Visa payroll card in the US, including U-Haul, Lowe's, McDonald's and Denny's, and the number of issuers has tripled. The UK has seen development in payroll cards, which has been fuelled by the increase in migrant workers from other countries in the EU, thus creating demand for alternative employee payments.
Prepaid cards also have potential to be implemented in insurance payouts and reimbursements.