Alison Clements on the popularity of prepay cards

The popularity of prepay cards is rocketing among shoppers. Alison Clements reports on the gains to be made for retailers

Prepay cards are turning the buy-now-pay-later consumer spending mantra on its head. While shoppers’ love for the credit card will never die, card schemes where you pay in advance are becoming increasingly popular.

According to PSE Consulting, European prepay card spending has more than doubled every year since 2004. And Giftex values the electronic gift card market at about£2.1 billion. Now that the market is being flooded with new types of prepay products, retailers are wondering how to make the most of them.

Open-loop or mall gift cards, which can be used throughout shopping centres rather than in just one store, are proliferating. Among the regional centres operating such schemes are Buchanan Galleries in Glasgow, Manchester’s Trafford Centre and Cribbs Causeway in Bristol.

Birmingham’s Bullring launched an open-loop scheme in partnership with MasterCard and Newcastle Building Society in 2005. It allows spending wherever Maestro is accepted. Bullring commercial manager Nita Thakore says the system brings significant advantages for consumers. “Customers benefit from greater choice, convenience and security,” she explains. “If a card is lost or stolen, it’s cancelled and replaced.” She adds that buy-in from the majority of retailers in the centre would not have happened with paper vouchers because of the additional administrative complications, whereas this instantly issued card is widely and easily accepted.

One perceived drawback of such cards is that shoppers can’t see what credit they have left once they’ve begun spending. But the Bullring has taken steps to solve the problem. In addition to an online account service, customers can also check their balance at the customer service desk and on touchscreen kiosks around the centre. The scheme also overcomes the traditional problem of retailers having to give their own vouchers for change when the full amount isn’t spent.

Mall cards clearly drive footfall into participating retailers and cater well for the gift market, but how will the plethora of non-retail branded, general-use prepay cards affect retailers? Apart from the tap-and-go contactless cards that promise to replace loose change, there are numerous prepay debit-style cards, many of which incorporate Chip and PIN security, online account management and top-up facilities, but still do not require the card holder to have a bank account or even be credit-checked.

Freedom to spend
Used much like prepay mobile phones, there are now a large number of stored-value products on the market. These include Maestro’s Quidity card, the Cashplus MasterCard, the Virgin Pay As You Go Card, 360Money Splash Plastic, Amex Travellers’ Cheque Card and the Unique Card. The idea behind these cards is that they will give previously untapped groups of consumers the freedom to get spending, at very little cost to the retailer.

Gary Palmer, executive vice-president of business development for US payment processing specialist EFD eFunds, highlights the vast number of people who don’t want or can’t get a bank account. “The teen market has traditionally been kept outside of the financial mainstream,” says Palmer. “Under-16s and the wider unbanked population love these cards because it’s a way for them to spend in a variety of channels even though they don’t have a bank account.” It’s no accident that cards like Splash Plastic and Quidity have a minimum age requirement of just 10 and they could well become the pocket-money management tool of the future.

However, Palmer adds that those who have accounts and debit/credit cards already are still adopting prepay cards in the fast-expanding US market. “These people recognise they need better ways of budgeting, so prepay cards become budgeting tools. They allow people to segment their money and control how they spend,” he says.

Tesco director of treasury Nick Mourant is sceptical about this, however, explaining that because 90 per cent of Tesco customers are credit or debit card holders already, most are unlikely to want any more cards in their wallet. “While I recognise prepay cards have their use for things like paying for iTunes downloads, I can’t see a great benefit above debit cards for paying for grocery shopping and many other high street sales,” he says.

Online shopping is certainly an area in which the benefits of the prepay model are obvious to retailers. Splash Plastic, Virgin’s Pay As You Go and Quidity all allow users to spend on the internet, over the phone or on the high street – anywhere that Maestro or Switch are accepted – and such schemes have opened up new shopping channels to young or financially alienated people who were previously excluded.

Kieron Guilfoyle, chief executive of prepay scheme 3V Vouchers, says that in Ireland it is not only encouraging younger online shoppers, but it is also being used by all ages as the most secure payment option available. He says 15 per cent of Ireland’s online buying community uses the Visa-linked voucher payment system and says take-up in the UK has begun. Following a customer’s online application, a 3V card is posted to them, credit can be loaded onto the card at participating payzone retailers and a security code is sent via SMS or e-mail to the user. Then online payment for goods can be made as for any Visa transaction.

Guilfoyle says: “Actually, 94 per cent of our customers do have a bank account. They are mainstream shoppers, but they are worried about high levels of fraud on the internet and want to limit exposure of their bank details online.” He points out that while half of online business is with the top 20 internet retail brands, the other 50 per cent is made up of 15,000 merchants. “It’s difficult for online shoppers to feel comfortable giving debit card details to niche, specialist sites, yet these are the places where they want to shop,” he says. “Our system makes that possible with the minimum risk and without needing the retailer to change their payment technology.”

Costs to the consumer for prepay services vary. While there’s no charge for registering with 3V, each top-up on amounts of more than£20 costs£3.50. Many prepay cards charge an initial issue fee of between£5 and£10, and most charge ATM fees, as well as money redemption and replacement card fees, so the issuers are certainly making money.

Costs to the retailer, however, are minimal, because merchant fees are in line with those charged for debit card transactions and there’s no need to adapt the IT infrastructure to accept prepay cards. But, so far, retailers have been content to let the likes of Visa and MasterCard launch the products, rather than think about marketing their own.

Comet general manager for business services Mark Towler says retailer-branded general-use prepay cards don’t appeal because of the set-up costs, management complications and additional responsibilities to the consumer. He also has concerns about the risks of children spending online – for instance, using prepay cards to illegally buy alcohol.

Part-payment is also an issue. He notes: “It’s notoriously difficult to authorise transactions partly paid for by a prepay card, with the excess made up in another way. The technology to handle part-payment needs to be developed.”

There is also a risk that the market will be swamped with many cards all vying for the same consumer, adds Towler. Yet he and many others feel that prepay gift cards can be built upon to drive retail sales, with more sophisticated wedding card schemes and online gift card accounts whereby people could create a wish-list for friends and family to contribute to. “Young Johnny could have a web account showing the iPod he wants for Christmas, with aunts and uncles invited to put money on to a particular card,” he suggests. Retailers are also looking at the potential for multiple-user or group gift cards, so that mum, dad, son and daughter can all benefit from, say, an Asda or Debenhams card.

“It’s true that stored-value cards have been slow to take off and the market is embryonic still,” says Chris Harris, head of sales at DataCash, which provides payment processing solutions. “Like all new business models, it takes a while to discover how and where they will work best. For retailers, the gift card model is always going to appeal as it’s an excellent way of locking customers into purchasing with them.”

According to PSE Consulting, it is expected that almost a third of the£50 billion European prepay market will be for gifts. Remarkable opportunities are on the horizon for retailers if they successfully tailor their offer to genuine customer needs.

How the prepay figures add up

  • The UK’s prepay gift-card market is forecast to grow to£2.1 billion in 2007 from£200 million in 2004, according to Giftex.

  • A 2006 study by PSE Consulting forecasts that Europeans are expected to spend 75 billion (£50.5 billion) using prepay cards by 2010, representing 2.3 billion transactions a year – an increase of 110 per cent every year over the coming years. This will represent 5 per cent of total card transaction volumes and 3 per cent of total card spending.

  • Prepay gifting products (card replacement for gift vouchers) will fuel almost 30 per cent of total spend.

  • Travel products, designed to offer an alternative to travellers’ cheques and foreign cash, will account for 15 per cent of spending.

  • Internet payment cards, which provide a secure alternative to credit cards, are expected to generate 13 per cent of spending.

  • Company rewards and incentives programmes are set to account for 12 per cent of spending.