Industry Views: What Will 2013 Bring for Prepaid and Emerging Payments? (January 2013)
We wanted to start the year off with some perspective from industry thought leaders across the globe to find out what will shape prepaid and emerging payments in the new year. We asked several executives from a variety of companies as well as a few analysts to share their thoughts about what the next 12 months will bring. We also asked about consolidation and competition. Few responded directly to the consolidation question, although it often came up in the discussions of what lies ahead. Not surprisingly, mobile apps and payments features were popular topics, but some experts cautioned that the war on cash has quite a ways to go.
The good news: Growth and innovation are expected to abound as prepaid and emerging payments touch the lives of more consumers every day.
Question: What’s Ahead for Prepaid and Emerging Payments in 2013?
New Customer Segments and Channels
The boundaries of prepaid are expanding, with two distinct trends emerging. First, is the expansion into new consumer markets, comprised of individuals who commonly would be considered atypical users of prepaid. Consumers, such as tail-end baby boomers and transient young adults, are driving the need for unique payment methods to meet their lifestyles. These market groups are more frequently adopting prepaid accounts, and we expect this trend to continue in 2013.
Second, prepaid accounts will expand to offer new functionality not typically provided. Accounts must now deliver relevant, timely and useful offers to consumers when and where they want, and these offers must be delivered via methods consumers can accept and redeem in real-time. Creating multiple form factors tied to a single account—including mobile, Web-enabled and plastic cards—also will continue to grow.
Put simply, as omni-channel commerce intensifies, the need for faster, frictionless transactions integrated seamlessly with consumers becomes even more vital in 2013 and beyond. This will need to be provided in prepaid accounts.
—Beth Horowitz, Senior Vice President, Global Marketing Solutions, Discover
Prepaid cards were once thought of as a product for the unbanked. Well, it turns out that they appeal to more than just the unbanked and have found their way into other segments of the population. This untapped potential and increased awareness will boost prepaid in 2013, not only in usage per card but also in the number of cards in circulation. IQR predicts an exponential increase in prepaid transactions.
In the past, the prepaid life cycle has been short, but with the expanding market we expect longer-tenured customers. The push to market to younger customers will continue, and mobile apps will be developed to appeal to the technologically savvy. In 2013, we also expect prepaid cards to be used more as a replacement to traditional traveler’s checks.
Finally, as financial institutions find ways to make prepaid products more profitable, we’ll see a jump in marketing spend, an increase in partnerships with loyalty programs (similar to the Walmart/American Express Bluebird product) and a focus on data analytics. This analysis will be critical to better understanding the prepaid customer for 2014.
—Karan Bhalla, Director, IQR Consulting
At Galileo, we believe the future of new payment types and the form factors to handle them will continue to explode in the new year and beyond. The confluence of card processing and card issuing will become increasingly focused on “more perfect solutions” for consumers, merchants and issuers. This is inevitable. All of these solutions will begin with the consumer, then move upstream to the service/solution providers. Our customers and our customers’ customers will continue to have higher and higher expectations of these solutions and their delivery.
Five years ago, a solutions provider needed to deliver these services securely and on time, now we also need to deliver them in a way that allows for the consumer to be delighted with their delivery “wrapper,” and, allow for the merchants and card issuers to create amazing offerings that are driven by their business model, not ours. We look forward to the continuance of this trend and are investing heavily in the outcome of delight.
—R. Steven Boyer, Executive Vice President, Business Development, Galileo
We expect to see the continued convergence of diverse payment types and channels in 2013. These changes will be fueled by the development and maturation of the required infrastructure as well as increasing interest from clients, mainly those in the public sector, who are seeking greater efficiency and security in payment distributions.
Emerging channel trends, such as the move toward mobile, will be a main focus and will gain momentum as a vehicle for client servicing activities, such as checking card balances and transaction histories.
As the market continues to mature, we anticipate regulatory analysis across the entire spectrum of prepaid products and expect clarification to be provided around the level of controls required for the various program types and payment flows.
—John Kohari, Global Business Head, Citi Prepaid Services
There are a number of factors that may help nudge prepaid into a more prominent role in 2013. The Durbin Amendment inserted government price controls on interchange paid on debit card transactions. Today, debit interchange has largely been capped (with the exception of small banks, which successfully lobbied for exemptions, and prepaid cards which are exempt from the Durbin rules).
Another factor is a massive demographic wave of Millennials, which are fond of debit, not necessarily checking accounts. Reloadable prepaid cards, priced correctly, could be an alternative for this emerging market. Prepaid cards have traditionally carried many fees, but with several high-profile prepaid card launches in 2012, fee structures may be rationalized. In 2012, the Center for Financial Services Innovation published a paper which proposed voluntary disclosures to preempt regulatory intervention, but the Consumer Financial Protection Bureau is examining this issue and could mandate more consistent prepaid card fee disclosures.
—Scott Strumello, Consultant, Auriemma Consulting Group Inc.
I believe 2013 will bring more growth and more questions about where the next innovation will come from in the prepaid space. The FDIC recently released its 2011 report of banks’ efforts to serve unbanked and underbanked customers, and its findings reinforced why prepaid cards will continue to be an important financial tool to consumers in 2013. The FDIC survey found that the barrier to many Americans accessing a bank account is still minimum deposit requirements. Nearly half of all banks required an initial deposit of $100 or more to open a basic checking account. Prepaid card providers like Insight don’t require minimum deposits.
We’ve seen some major players enter the space this year, but we haven’t seen the next killer app. As the space becomes more competitive, there is more pressure for companies to set themselves apart from the crowd. Mobile check deposit may be the next driver of growth. According to a recent Mercator report, paying bills, depositing checks directly from smartphones to add value to the card, and money transfers will promote the use of GPR cards and stimulate larger loads. That is why Insight offers a mobile check deposit app. By offering this type of innovative technology, Insight believes we will strengthen the long-term relationship with our customers.
—Bill Smith, CEO, Insight Cards
Unlike any other time in recent history, there is an intense interest right now in payments transformation from players both inside and outside of our industry. As a result, I believe 2013 will be an evolving year for emerging payments. The key themes as we look at the year ahead will be centered on:
The ready availability of connected, smart devices and the movement to device-based commerce, which is converging the physical and digital worlds, and
The security and authentication principles that enable this movement.
And, this is the essence of the opportunity and the focus for our organization: to create more secure, easier to use, enhanced shopping experiences, both in-store and online. Consumers will shop and pay in whatever way best fits their needs and lifestyles, from every device they have, either at the register, in the aisle, at home or anywhere else.
—Ken Moy, Group Head, U.S. Emerging Payments Lead, Global Products & Solutions, MasterCard Worldwide
Paying in-store with smartphones will gain significant momentum in 2013, as consumers become more acquainted with emerging payment technologies and more comfortable with the security measures that are in place to protect their assets and personal data. We will see media, such as near field communication (NFC) mobile contactless, visual (e.g. QR codes/barcodes) and plastic tags come to the fore, but it will take time for us to see which mode will take off. The payment industry will continue to innovate but it will be consumers who will ultimately decide the fate of each solution that comes to market.
Due to the lack of sustainable business models for mobile wallets, we will see the market leaders opening up their ecosystems to more partnerships in order to generate momentum and growth. Players, such as merchants, banks and mobile network operators, will work together to offer value added services to their customers.
—Sirpa Nordlund, Executive Director, Mobey Forum
From a closed-loop perspective, portability, increased security and multiple redemption, and purchasing options are key drivers of future growth. Just as consumers have become more comfortable with shopping, banking and paying bills online, the next few years also will provide more security and a level of comfort for consumers to purchase gift cards and other prepaid products via portable devices, such as smartphones and tablets. Retailers are investing in and upgrading POS systems, which will allow consumers to purchase, send and redeem gift cards securely from their portable devices. Social media and group gifting will continue to evolve as will leveraging gift cards as incentives to drive consumer behavior.
Prepaid is a growth industry. Recent proposed and passed legislation threaten to limit this growth due to a lack of understanding. Educating legislative and consumer advocacy groups about the differences in prepaid products is a key priority of the RGCA.
—Rebekka Rea, President and Executive Director, Retail Gift Card Association
Growth in Global Markets
I think the key word to describe what’s ahead in 2013 for prepaid in Europe is growth. Obviously that is counter to everything in the Wall Street Journal and Financial Times about the European economies, but I haven’t seen the prepaid market in Europe held back by the broader negative economic climate. It’s difficult to make general statements that are applicable to the entire prepaid sector (being a much broader product category than credit or debit), but we now operate prepaid programs in eight European countries and are seeing significant growth in all markets. In most European countries, there are various segments of the prepaid market that are just beginning to ramp up—gift cards in some markets, GPR in others, etc. I think it’s fair to say that in Europe there are more under-developed market segments than not. What better scenario for continued growth?
—David Shewmaker, CEO, StoreFinancial Europe
2013 is going to be a very exciting year for prepaid and emerging payments in India. The stage is already set by the current UPA government, which announced that starting Jan. 1, all government benefits would be transferred directly to recipients’ bank accounts or any such alternative to a bank account. [Starting Jan. 1, the program will be implemented in 18 states with the rest of the country to follow later in the year.] I firmly believe this alone is a huge opportunity as government spend is around Rs. 3.5 trillion (US$63.8 billion) on such benefits. All benefits disbursements will be in the form of cash transfer and linked to Aadhar, which is the unique ID being issued to all residents in India by UIDAI.
Such large-scale cash transfers in electronic form would not be possible to bank accounts alone, especially when the banked population is less than 30 percent. This provides a unique opportunity to prepaid and any other emerging payment option, but I expect growth in bank accounts as well. This single event will drive major growth for all players.
On the whole I believe 2013 is going to change the growth trends for prepaid and emerging payments. In the next two to three years, the overall growth in number of consumers using prepaid or emerging payment options will grow multifold and the value and volume processed will also see major growth.
—Naveen Surya, Managing Director, ItzCash Card Ltd.
- In 2013 there will be an increase of prepaid cards tied to e-wallets as more of the online payment processors look to provide a connection between virtual currency and physical currency.
- Look for more Americans to switch from credit cards to prepaid cards as the lingering effects of the recession continue to have an effect on the reduction of credit usage,especially among younger demographics.
- The use of mobile money—whether the ability to shift virtual money to cash through smartphones, through the Internet or SMS (or similar)—will continue to build in the emerging markets of India, Southeast Asia and Latin America, where the pent-up demand of the underbanked and unbanked will drive growth. This demand will be augmented by the central banks of these countries that already see the need to bring foreign cash, access to the global financial markets and rural economic financial engines to their countries.
- An increased examination of the financial upside to providing new services for the unbanked and underbanked in the U.S. and abroad.
- Growth in the share of remittances serviced by online and mobile service providers.
- As services converge, customer service will grow in importance as a differentiator and start to drive movement from one online payment service provider to another—or force change to current providers in the e-commerce space.
- The online and mobile disbursement market will grow as it expands beyond small companies into government and large vertical segments such as insurance and retail.
—Alastair Graham, CEO, Payza (Canada, U.K.)
Corporate prepaid cards will continue to increase as businesses rein in employee and company expenses. Prepaid payment cards are an excellent way to control, manage and monitor business expenses, such as travel, accommodation and entertainment. A prepaid corporate solution offers companies increased control and efficiency in their processes whilst promoting best practices, resulting in a more proactive and effective expense management system. With companies maintaining a tight leash on outgoings, we expect that the number of businesses taking advantage of prepaid cards will continue to grow.
We also will see an increase in retailer-branded payment cards launching with their own loyalty schemes bolted on. In 2013, big retailers will continue to explore new revenues generated from customer data. A retailer-branded payment card (closed- or open-loop) offering cash back and/or rewards on purchases is a shrewd product for brands wanting to track spending habits while encouraging regular spending in-store. This year more retailers will move to get a piece of this action.
—Mike Fromant, Managing Director, Contis Group (U.K.)
We anticipate the development of a direct connection between loyalty programs and gift cards. The consumer is becoming more and more a reachable point of contact through the distribution of coupons and other targeted promotions, which is made possible via advanced data modeling platforms. Prepaid will play the role of provider in terms of rewarding, incenting and introducing new services, such as utilities and various personal services. The Gift Card Corner, a term we use to define the dedicated area for gift cards, will transform into an animated point of interaction for consumers and enhance their shopping experience. This will provide added value to the consumer and will highlight the benefits of each of the promoted products and services. Content partners will add more services aside from the basic face-value gift card to increase purchase intent. We will see the implementation of more concrete applications using mobile and other advanced media outlets.
—Gaetano Giannetto, CEO, Epipoli (Italy)
The explosion of innovative ideas and new technology has shaken the prepaid industry around the globe. As new innovations continue to shape the prepaid world, we can expect that 2013 will be a year of new technology, learning and discovery. The key to success will be to create a balance between innovation and value that does not dilute the program’s intended message.
As the rules and regulations surrounding prepaid cards continue to tighten, we believe that more and more companies will leave the United States, focusing their efforts outside of the country to avoid heavy restrictions and regulations. Better working relationships with banks, program managers and networks will help to alleviate these challenges in the U.S. market.
In 2013, DCR’s focus will be toward helping companies with their existing loyalty and affinity solutions, replacing paper coupons, checks and punch card-type loyalty. Upgrading these solutions with prepaid technology and points-to-cash loyalty will help increase sales and modernize systems to talk directly with customers.
—Diana Fletcher, CEO, DCR Strategies (Canada)
Prepaid will continue to become mainstream as technology evolves to address infrastructure gaps. Mobile solutions, in particular, have the ability to broaden the acceptance footprint. Two challenges remain, especially in Latin America and the Caribbean: regulatory ambiguity and a reluctance from established players to address nascent verticals where the business model is still evolving. Some markets are addressing the regulatory challenge in a way that will favor growth of prepaid in the future. Corporate and government programs that displace paper (e.g., meal or transportation vouchers, social benefits) will continue to grow since they deliver savings and convenience, and can be mandated. Consumer programs will only be successful if they develop a value proposition (discounts, etc.) that is compelling to the consumer beyond the continued use of cash. These programs also need to leverage mobile tools to ensure broader acceptance and foster adoption.
—Miguel Cintron, Vice President of Business Development, i2c Inc. (LAC)
I think we’ll see more activity in the prepaid industry on an international basis. While some countries outside the United States have embraced prepaid opportunities, the number of programs launching internationally has been limited. Many players in the value chain expanding into new markets will face challenges—technology, regulations, market awareness. Despite these challenges, numerous companies will continue to extend their global reach, proving that prepaid solutions are relevant for many customer segments in many countries.
In terms of emerging payments, new solutions such as enabling mobile devices to accept payments will continue to evolve, helping all constituents in the marketplace. New technology is making it easier than ever to adopt new solutions like prepaid programs.
—Michael Hafer, Senior Vice President, Global Stored Value, Western Union
It’s Not All about Mobile
Think outside the phone. While mobile payments—whether funded by a prepaid account or something else—will be a piece of making money work better in 2013, they won’t be the whole pie. As much as consumers like advances in payments technology, they like options more and most certainly don’t like being told which payment type they have to use. Perhaps too many mobile payments and prepaid promotions have centered on their respective versions of paperless transactions being the only one you’ll ever need. Hard currency, cash, still has its place in the payments world and consumers want to know they still have that option. Making it convenient and easy to load cash onto and withdraw it from prepaid and mobile payments accounts will be key to winning the hearts, minds and wallets of consumers who want to know the choice of how to pay is still theirs to make.
—Tom Pierce, Chief Marketing Officer, Cardtronics
We repeatedly delude ourselves that we are about to enter a so-called “cashless” society, and consumers want the ability to transact with a wave of their smartphones or contactless cards. For the prepaid industry, what lies ahead is more likely to be a continuation of a fragmentation of the payments landscape. The introduction of new sales channels, new business models and continuation of the constant churn of innovative and emerging payment methods will represent a significant competitive pressure for the humble prepaid card. From a business standpoint, and despite growing transaction volumes, financial institutions are facing margin pressures in their payments businesses as competition grows.
The biggest challenge to prepaid will be the preoccupation with the mobile wallet. How the mobile wallet will be provisioned, distributed, supported, branded and accepted will be the biggest challenge for 2013 and beyond. New players are expected along every element of the prepaid value chain. Prepaid cards, contactless and mobile payments are expected to shape the future of payments. How these coexist will be the challenge for 2013; overcome this and the opportunities will be huge.
—Mark Beresford, Director, Edgar, Dunn & Company (U.K.)
Question: What’s the Outlook for Consolidation and Competition in the New Year?
The prepaid card industry is expected to see more competition from new market players, which may result in industry consolidation. For example, U.S. Bank recently acquired FSV Payment Systems, a leading prepaid card processor and program manager.
Given the fact that the leading banks already have entered the prepaid card market or will be entering in the very near future, the chance of consolidation is becoming more evident. Motivated by recouping the legislatively induced revenue loss on interchange and overdraft fees, and addressing attractive products for approximately 30 million unbanked/underbanked households in the United States, banks and credit unions have become aggressive in launching low-cost prepaid cards.
There is an additional threat to existing program managers from government organizations that adopt prepaid card programs to disburse federal entitlements (such as monthly Social Security payments or veterans benefits) or state funds (such as unemployment insurance or court-ordered payment). Increasingly there will be no more than four to five large players who will have 90 percent of the transactions, similar to what we see in the custody industry today, and this large group will be able to price more efficiently than anybody using multichannel customer service models that serve every segment (baby boomers to Gen Y) at an attractive service and price point.
—Sankar Krishnan, Global Client Engagement Head, Banking & Financial Services, Sutherland Global Services
Certainly financial-institution issuers of prepaid products will experience more competition, not only from their bank and credit union counterparts, but also from national retailers like Walmart. At the same time, the increased competition will also mean increased awareness among consumers. As national retailers use big marketing budgets to promote the benefits of prepaid, community-based financial institutions—like those that partner with TMG to distribute truly consumer-friendly products—will be in an excellent position to compete.
—Konrad Christensen, Retail Payments Product Manager, The Members Group (TMG)
Payments are no longer reserved for financial institutions, and there are many more players in the ecosystem than there were 10 years ago. In the last couple of years, we have seen large technology companies, mobile carriers and unexpected players enter the space. The market is ripe for innovation and has huge potential in the U.S. as well as in other markets. It may take different forms, but the drivers are the same. People want more of their money and want simplicity, convenience and peace of mind when it comes to managing finances.
The increased competition and industry collaboration is a step in the right direction to comprehensively address the consumer needs we are seeing in the space today and to offer consumers the widest range of benefits, and the most consumer-friendly terms.
—Alpesh Chokshi, President, Global Payment Options, American Express