Boots on the Ground (January 2013)
Experts on five markets—Brazil, France, Italy, Middle East and Russia—discuss how prepaid is developing where they’re doing business, as providers and consultants.
By Loraine DeBonis, Editor-in-Chief
Paybefore: How widely has prepaid been adopted in Brazil beyond the meal voucher market?
Neissan Monadjem: The food voucher programs along with the mobile prepaid “card” vertical represent 80 percent of the US$60 billion prepaid market in Brazil. The first is a US$12 billion-a-year market. As for the latter, 90 percent of the 190 million mobile phones in Brazil are prepaid. The general payment card market grows 20 percent a year, so the potential for growth in other prepaid verticals is immense.
Paybefore: Who’s leading the prepaid charge in Brazil?
NM: Retailers are just starting out. Nonbank players are still more agile and, in some cases, have larger sales channels and geographic coverage than banks, but the financial industry is entering new arenas and banks are ubiquitous, so we see a battle approaching in some interface zones in the next five years. One area of intense growth is in prepaid currency cards, in part, because of a 6 percent tax on credit card expenses overseas (not yet applied to prepaid). Travelers are buying thousands of these cards for much of their US$1.7 billion in monthly travel expenses.
Paybefore: What roles in the value chain need more participants?
NM: We have several solution providers, processors, data centers, IT service companies and card suppliers that can render excellent services in the back-office and management aspects of the prepaid business. New foreign players in the Brazilian market could bring their greater expertise with prepaid business models. For instance, the merchandising strategy in a gift card mall display used in a B2C model. Anyone looking to enter the market should also consider that the Brazilian tax and regulatory environment is very different than those found in the United States and Europe. It’s always advisable to find a trusted local strategic partner to help you avoid mistakes.
Paybefore: What must happen to shift Brazil’s prepaid potential to reality?
NM: Two things: Players should adapt their platforms to the Brazilian infrastructure and highly specific tax system, and—to a lesser degree—to some cultural idiosyncrasies.
Prepaid has been part of the Brazilian culture since the early ’70s. This is a fact, with the exception of gift cards. In the gift vertical, companies still have to fight with the Brazilian lack of acceptance of “cash” as an acceptable gift. It is still a politically incorrect gesture.
On the other hand, ties to old habits are volatile in Brazil, so we expect newcomers in this vertical will be quite successful, but this will happen in the long run.
Paybefore: What are the biggest hurdles?
NM: In 2011, Brazil passed China as the top-ranked emerging country with the largest potential to attract foreign investment for retail, according to an A.T. Kearney survey. But here, the average credit card interest rate is stable at 10.69 percent per month—or more than 238 percent a year. And, this is after a drastic drop in interest rates generated by pressure from the federal government.
Brazilian consumers owe more than US$36.8 billion dollars to banks in overdue monthly payments (more than three months in arrears) alone. A recent survey by the Central Bank points out that 72 percent of Brazilian consumers prefer to pay their expenses in cash. But, this trend is changing. On second thought, maybe these are not hurdles, only invitations for the prepaid industry.
Paybefore: What is and will continue driving prepaid growth in Brazil?
NM: Prepaid growth is part of the US$336.43 billion-dollar payment card market in Brazil, which is growing 20 percent annually. This growth is fed by the rise in the Brazilian GNP, the establishment of a middle class and an increase in e-commerce.
But unlike other card payments, the advance in new products aimed at niche applications is opening previously uncharted markets in the prepaid industry. A good example is the soon-to-come “culture” voucher—a new card program subsidized by a tax deduction offered by the federal government that will open a US$3 billion market, providing millions of employees with an electronic voucher, issued by the private sector and distributed by large and midsize companies. This new benefit card will provide up to US$25 in monthly coverage for books and magazine purchases as well as theater, movies and plays.
Paybefore: How would you describe the prepaid market in France?
Philippe Bertinchamps: The prepaid market in France is old and big. It started 50 years ago and is still mostly a paper-based voucher market. Millions of consumers each day use meal vouchers, which are very popular in France, along with gift vouchers distributed to employees by corporations as incentives and rewards.
Paybefore: What drives the market in France?
PB: The biggest driver, so far, is the tax exemption on meal/gift vouchers. This €7 billion (US$8.56 billion*) B2B market is in the hands of four players: Edenred, Sodexo Pass, Chèque Déjeuner and Natixis.
Eight years ago, banks attempted to launch B2C gift cards and failed. However, there also are roughly 100 significant B2C retail gift cards issued in the market today.
Another popular product is the Navigo pass, which enables 1 million commuters to pay for their transportation in cities like Paris. Navigo is a prepaid contactless card usually co-funded by employers. Wireless top-up prepaid cards are also very popular, as in other countries. Recently, we’ve seen young entrepreneurs launching new open-loop prepaid products, but they’ve encountered some difficulties in the market.
Paybefore: What difficulties?
PB: The main road blocks in France stem more from a poor value proposition than from timid demand. At the same time, the leaders of corporate benefits are not keen to move to digital, which could open the door to new entrants. In addition, banks are afraid of seeing new players capture the business of payments.
Prepaid is still mainly a B2B market. For example, B2B gift vouchers represent 72 percent of the total gift voucher market, with B2C at 28 percent. On top of that, e-money regulation is still unclear.
Paybefore: Tell us more about the regulatory environment. Is it a hindrance to growth?
PB: Eventually Santa Claus and the French parliament made a gift to the e-money business in December 2012 by voting on the adaptation of the Second E-Money Directive (2EMD) in France. The implementation of 2EMD along with the hard push from outsiders to move from paper to e-payment solutions for meal vouchers are two very positive signs that e-money, alternative payment solutions and prepaid products will get a boost this year in France.
Paybefore: What are the greatest prepaid opportunities in France?
PB: The greatest opportunity is certainly in the move from paper to digital for corporate benefits as mentioned earlier with a potential of €10.5 billion (US$12.89 billion), split roughly between €8 billion (US$9.82 billion) for meal cards and €2.5 billion (US$3.07 billion) for gift cards, according to a 2011 Global Prepaid Exchange market assessment. Next are government benefits at €4 billion (US$4.91 billion), consumer gifting with €3.6 billion (US$4.42 billion) and transportation with €2.8 billion (US$3.56 billion).
Paybefore: What are your expectations for the market?
PB: Strong growth in e-commerce in France might drive new creative digital applications in prepaid—more so than positioning prepaid as just a payment solution. The key is to deliver new services for consumers, which is very likely to happen if we consider the potential of social networks and local and mobile payment business to deliver value-added services. For example, marketing services might include promotions, loyalty, CRM and secure payment—all this will create value for issuers, retailers and consumers.
When the big move from paper to digital happens in France, probably within the next 24 months, France will become a hub for prepaid but prepaid will remain a niche compared with debit and credit card volumes. Still, it could be a very profitable niche if innovative services are associated with prepaid.
France might have the highest potential for electronic prepaid products in Europe, with figures running from €24 billion (US$29.48 billion) to €48 billion (US$58.95 billion), according to different research surveys.
Paybefore: What’s one thing people might be surprised to learn about the French prepaid market?
PB: Surprisingly, France is the cradle of three worldwide B2B leaders in prepaid—Edenred, Sodexo Pass and Chèque Déjeuner, which already are issuing card products outside France. Smartbox also was created in France and is a global leader in B2C gift boxes with a full paper-based voucher business in France.
The legacy of paper is still very important in France; bank checks are still popular with more than 500 million issued every year.
Paybefore: Italy has one of the most robust prepaid markets in Europe, but gift cards are a bit newer. How has the market grown since you started in 2006?
Gaetano Giannetto: We launched the retail gift card in Italy six years ago. At the same time, we started the implementation of the gift card mall concept—we call it Gift Card Corner. In 2008, we launched Gift Card Corner in 90 Esselunga stores. Today we have more than 2,000 active stores and more than 25,000 stores ready to start. All major retailers have been involved, including Auchan, Carrefour, Conad Leclerc, Iper, Darty, Expert, Feltrinelli, Mercatone Uno, Metro, Unieuro Dixons, among others.
Major brands also are participating in this business, such as ACMilan, Alitalia, Best Western, Canon, Disney, Groupon, Hello Kitty, iTunes and Mondadori. So the impact on retailers and brands has been fantastic. The consumer response has been very good, particularly in northern Italy where the larger, more innovative stores are located.
Paybefore: What has the consumer response been like to your open-loop gift card?
GG: In Q2 2012, we launched the Epipoli MasterCard gift card and the consumer response has been great. More retail chains are adding this card to their Corners.
To increase sales volume now, we need to improve the awareness of the category, so we conducted an advertising campaign for Q4 along with in-store promotions.
Paybefore: What are the opportunities for growth?
GG: We think the business is huge for B2C and B2B products. Based on the analysis done by Visa, the “cardable opportunity” for open-loop prepaid in Italy in 2015 will be around €63 billion (US$76.75 billion).
To realize that potential, we need to reassure consumers that gift cards are mass-market products meeting all consumer needs, including personal usage and gift. Gift cards are not just for unbanked consumers. GPR and shopping cards will soon be on the shelves of our Gift Card Corners as well.
Paybefore: Even though it’s a large market opportunity, is it difficult for new players to enter?
GG: It’s difficult and requires a large investment. We’ve invested several million euros since 2006, which has helped us build a business with strong partnerships with major retailers, develop a robust platform for gift card activation and redemption, marketing, logistics and merchandising operations. As you know from the U.S. experience, prepaid is a big-volume market. You have to invest money, believe and have patience.
Paybefore: Who are the key players in prepaid in Italy?
GG: We have more than 80 percent market share in the gift card market. The next step is convincing all major retailers to invest in promotions and in-store activities. On the open-loop side, the banks seem uninterested in prepaid. Poste Italiane is the big player there.
Paybefore: Why are banks uninterested?
GG: With the exception of Poste Italiane, banks are quite conservative and not ready to manage a mass-market product, such as the open-loop gift card. Perhaps the typical low-margin model doesn’t excite them. That said, we’re talking with some major banks to implement a dedicated Gift Card Corner in their branches and through online banking.
Paybefore: Are there any roles in the value chain that are lacking or need more participants?
GG: For the gift card market specifically, we’re working to involve the big fashion and luxury brands. However, some of them are reluctant to be sold in a supermarket. Market expansion and coverage are the key activities.
Paybefore: What is the regulatory environment like—conducive to growth or a hindrance?
GG: In continental Europe, the regulation is not very well-defined. Every member state has the freedom to interpret the EU rules and, generally speaking, the U.K. is more liberal than continental Europe. It took almost two years to complete the regulatory approval process to launch the Epipoli MasterCard gift cards.
Anti-money laundering concerns play an important role in the developing market.
Paybefore: What is most important for the growth of gift cards in Italy?
GG: Communication and store executions are vital.
Paybefore: Is payroll still the biggest opportunity for prepaid in the Middle East or are other verticals gaining ground?
David Parker: I believe it would be wrong to say payroll is “the” biggest opportunity; it depends on the specific country you’re looking at. The Middle East is a region like Europe, sometimes viewed as one market but in reality very diverse. There are huge opportunities for prepaid, but they will differ by country.
As far as payroll goes, in the UAE, all salaries must be paid electronically and there’s similar regulation in Bahrain and Saudi Arabia. This has driven the payroll card market forward with operators like C3 now having more than 500,000 payroll cards live today.
But payroll isn’t the whole story. UAE’s RAKBANK, for example, launched a GPR card in 2011, and it already has issued more than 200,000 cards. In Kuwait most of the banks launch prepaid general purpose cards, but Ahli United Bank has launched the region’s first private-label charity disbursement card. In the Levant in Beirut, we have seen Bank Med launch six different programs ranging from gift to companion Internet prepaid cards.
Then you have remittances. These markets include some of the largest employers of Asian expatriate workers, sending millions of dollars home every week/month.
Did You Know?
More than half of all remittances to South Asia come from the Persian Gulf States, which employ more than 11 million expatriate workers, an estimated 8 million or more from South and East Asian coutnries, according to the World Bank.
Paybefore: As you said, the Middle East is not monolithic. Are there specific countries that are easier to enter than others?
DP: Very much so. For instance, in Saudi Arabia new prepaid regulations have just come out, requiring all prepaid card processing to be done “in country.” Program management along with processing needs have to be “in-sourced” by any bank wishing to use these services.
If we compare this to the UAE where changes, which I can’t detail now, are expected that will make it easier to enter the market, there is a major difference. In other markets around the Middle East, a huge education process is needed to help banks understand the opportunities available through prepaid, either as entrants themselves or as BIN sponsors.
Paybefore: What’s driving the market in the Middle East?
DP: The overall driver in several markets has been regulation around electronic payroll, but after that we have seen individual banks realize and identify other opportunities and take these forward. This, in turn, often has caused the market as a whole to sit up and take notice of what’s going on. Certainly the payment schemes have been very active in supporting prepaid.
Paybefore: What are the greatest barriers to adoption in the region?
DP: This differs by market, but in many respects is similar to most emerging regions: regulation. Typically, it’s a lack of regulation or overly restrictive regulation due to lack of understanding of prepaid by the central banks. Infrastructure—POS and ATM but also, importantly, load networks/points—is underdeveloped.
Paybefore: How would you describe the prepaid market in the Middle East?
DP: The Middle East, per se, is a dynamic market with some of the fastest-growing economies in the world, with huge percentages of the population under 30. It’s a very different market; it’s not similar to the United States or Europe. I spent many years living there and even then would only describe my cultural understanding as basic. Culture and the way you do business are very different, which can make it challenging and frustrating for foreign companies. It’s not a market where business is done over the phone. You must have a base if you want to enter the market, often with local partners. It may seem that I’ve been negative, but what I would say overall is that the Middle East is dynamic, has huge potential but is not a quick-win market. It takes commitment and time to enter the market.
It takes real understanding of the cultural issues and it takes careful consideration. But all things considered, it also has the potential to be one of the most profitable with such a young, exciting population.
Paybefore: Is prepaid a big part of your business in Russia or are you more focused on other electronic payments?
Paul Bartholomew-Keen**: If I consider prepaid solutions in their traditional sense, it’s fair to say that prepaid in Russia hasn’t taken off. RBK offers a prepaid program through a domestic BIN sponsor today and—as the first organization to be awarded electronic money licenses under the new regulatory regime—we have the potential to do more in the prepaid space.
The focus for RBK over our 10-year history has been offering alternative ways for consumers to make online purchases. After the Russian banking crisis in 1998, customers didn’t trust the banks to look after their money. With the rise of the Internet in Russia a few years later, people wanted to buy over the Web but most either did not have access to a bankcard, or preferred to withdraw their account balances in cash. This led to the emergence of companies like RBK, which created electronic wallets for consumers who could then shop with specific merchant partners—similar to early Western European models like Splash Plastic, Smart Voucher and paysafecard.
Paybefore: Did any other factors contribute to the rise of the electronic wallet?
PBK: The unique model in Russia that complemented the use of electronic wallets was the availability and growth of self-service terminals or payment kiosks. Today there are more than 350,000 payment kiosks across Russia consumers use to load cash into their electronic wallets or buy services, such as mobile airtime. So, prepaid in a stored value sense is prevalent in Russia, especially as only 13 percent of online payments are made using a bankcard. Compare this with the U.K., where it’s almost a reverse of those statistics.
Paybefore: Who are the key players in the e-wallet space?
PBK: Yandex and WebMoney are closed-loop e-wallets with relatively big coverage, but their consumer bases overlap. To pay with either of them customers need to top-up the e-wallet at a cost of up to 10 percent. Qiwi is the biggest kiosk network and e-wallet. It’s the biggest, but it doesn’t cover the whole of Russia by any means, concentrating on central regions. Customers typically can’t pay directly at kiosks—they need to register and top-up their e-wallets. Direct payments, such as buying airtime or digital content or paying a bill, at a kiosk are possible at an additional cost for the consumer, up to 15 percent.
We offer an e-wallet as well and have more than 2 million users who love digital content.
Paybefore: How do Russian consumers pay for goods in-store?
According to WorldPay and Euromonitor International research, respectively, 87% of Russian e-commerce is conducted via alternative payments and 89% of transactions are made with cash.
PBK: Cash is still dominant. Around 89 percent of all transactions in Russia are made with cash, according to Euromonitor International. There are fewer than 350,000 POS terminals in Russia—about 2,500 per million residents. Half of all Russian shops don’t have a landline, and the communication fail rate of POS terminals on landlines is more than 25 percent.
Paybefore: Since e-wallets are so popular, could there be a way to combine that with mobile to create an in-store shopping solution? Would there be any benefit for consumers to load cash onto the e-wallet to shop in stores rather than just using cash?
PBK: With the communication infrastructure problems on fixed lines, GPRS or other mobile communications would be the route to go, but with cash still dominant this would require significant transformation of the consumer experience. Also there are fewer smartphones in Russia, which limits what you can do with mobile shopping solutions to SMS.
Paybefore: Is there room to grow the e-wallet space?
PBK: Russia and the Commonwealth of Independent States provide a great opportunity for global companies wanting to sell digital or physical goods to cash-based customers using electronic wallets. That’s our focus at RBK with links into more than 125,000 payment kiosks, 40,000 post offices, thousands of retail locations, plus banking gateways.
*Currency conversions in this article correspond to values at the time Paybefore Magazine (Fall 2012) was published.
**Paul Bartholomew-Keen has left RBK Money since this article was first published in Paybefore Magazine. He is now managing consultant for ZipZap, a global cash transaction network that enables consumers to use cash to make online purchases, pay bills and top-up e-wallets, prepaid cards and mobile accounts.