Viewpoint: 7 European Markets and Their Shifting Prepaid Opportunities (Spring 2013)
By Manika Singh and Max Shinerock, Edgar, Dunn & Company
When discussing prepaid, we, as an industry, have had a tendency to focus on the consumer proposition, which is understandable. After all, in most markets prepaid growth has been led by consumer products. However, the potential of corporate and government programs remains significant, particularly in Europe, which has experienced important developments over the past few years that have increased the prepaid growth potential in many countries.
In 2010, Edgar, Dunn & Company (EDC) initiated a study of the existing state and prospects for corporate and government prepaid programs in Europe. We assessed seven European countries— France, Italy, Germany, the U.K., Spain, Poland and Turkey—and rated the attractiveness of each market, based on the legal and regulatory environment and prepaid market receptiveness, against the prepaid market opportunity (including estimated size of the opportunity, population and demographic data, and scope for additional services over and above the core product) for corporate and government programs. In 2013 we revisited this study in an attempt to map how the opportunities have evolved.
Not all Markets Are Equal
In our initial study, the U.K., Italy and France stood out as the markets with the greatest opportunity, coupled with relatively open regulatory environments. Since then, Italy and France have begun to deliver on the promise of large corporate and government prepaid segments. Meanwhile, the U.K., perhaps because of its regulatory environment, has become host to a very competitive prepaid industry and often serves as a platform for issuers to expand into other markets. Germany’s regulatory environment has continued to tighten and the potential shown in our original study is unlikely to be fulfilled in the near future. In Spain, enthusiasm for corporate- and government-funded prepaid remains somewhat muted, with growth continuing to be driven by the consumer segment.
Poland and Turkey have experienced the greatest shift. Their respective regulatory and legislative environments have opened up and their payments markets have matured, presenting a significant opportunity for near-term growth.
With a strong foundation in the consumer segment, French prepaid products began gaining traction in the corporate sector with paper vouchers distributed to employees as lunch vouchers, corporate incentives and rewards. While the opportunity was there, at the time of our study the shift from paper to digital had yet to occur, despite some of the largest worldwide prepaid players (Edenred and Sodexo) being headquartered in France. In 2010, France had a relatively conservative prepaid regulatory environment, with government legislation restricting entry by foreign issuers, which compounded the slow migration from paper to plastic.
France continues to represent a significant opportunity for corporate and government prepaid card programs, with several initiatives launched since 2010, including corporate payroll (Natixis – Carte Rémunération) and corporate incentive (CART’ISSIME by Intermedia and Natixis). The market still is dominated by paper and closed-loop cards, however, there has been a marked shift toward open-loop programs. The Second E-Money Directive (2EMD) was transposed relatively late into French law (Jan. 28, 2013), with a particular focus on consumer protection. Unfortunately, the delay in adoption has slowed growth in all areas, with e-money issuers having to seek regulatory authorization in the U.K. or Luxembourg and then passport to France.
At the time of our initial study, Italy was one of Europe’s largest prepaid markets, with a clear focus on the consumer segment. This success was largely driven by cultural factors: the propensity to use cash, familiarity with prepaid products (particularly prepaid mobile) and an aversion to credit. Additionally, Italian consumers are accustomed to paying for even the most basic banking services, which means customers more readily adopted prepaid products that are on a pay-as-you-use basis. But in 2010, Italian programs had begun to shift toward the corporate and government sectors, a notable example being Carta Acquisti, a social benefit payment program from Poste Italiane.
This change has continued over the past two years. The Italian government and local municipalities have committed to using prepaid products to make disbursements, citing accountability and a reduction in tax evasion as the main drivers. Italian legislation is helping this push toward prepaid, with a new government mandate issued in December 2011, requiring that transactions above €1,000 (US$1,301.23) be conducted using electronic payment methods. Additionally, the high number of Italian small and medium enterprises (SMEs) is driving initiatives in corporate payroll and T&E, with several banks—many of which have stayed out of the consumer segment—pushing prepaid cards to SMEs as part of their merchant/ treasury banking services.
Germany is one of the largest European markets in terms of economics and payments. However, in 2010, prepaid products had not found the foothold they had in other markets, even in the consumer sector. The limited prepaid market in Germany at that time was mainly related to two factors: a stringent regulatory/legislative environment and an underlying preference for bank transfers and debit card products. Furthermore, regulations required customers to be physically present for KYC and due diligence checks. Additionally, payroll was required to be paid via a standard bank account, thus making the prepaid proposition superfluous.
Not much has changed in the German prepaid market since 2010, which is still restricted by stringent regulations. Furthermore, domination by the German savings banks, which has driven the prevalence of checking accounts, has restricted entrance by foreign players. Overall, while Germany still represents sizable theoretical potential, it’s unlikely to be realized with current consumer preferences and a rigid regulatory environment.
In the U.K., a solid foundation in gifting presented a promising platform for prepaid to spread into other sectors. A well-defined, relatively open regulatory and legislative environment, combined with proven examples of corporatefunded prepaid programs in the U.K., such as the Barclaycard corporate prepaid card (offering payroll and expense services), as well as local and central government-led initiatives, painted a potentially large opportunity for prepaid.
The regulatory environment in the U.K. continues to present an attractive ecosystem for potential prepaid programs. However, while there has been some progress in corporate and government initiatives since 2010—including the CitizenCard, launched in August 2012, which combines ID, proof of age and a Visa prepaid card—the large potential has not been fully realized. Interest in prepaid programs remains high with the government considering prepaid for welfare disbursements and prepaid issuers beginning to target specific corporate segments (e.g., shipping). An interesting side effect to the open environment in the U.K. has been that it has become a popular market for e-money issuers to acquire their licenses before passporting into other European markets.
In 2010, the Spanish prepaid market was mainly focused on the consumer segment. Spain’s high levels of unemployment, net migration and seasonal workers represented a considerable opportunity for corporate and government prepaid programs. However, Spain’s slow migration to the EMV standard served as a stumbling block for the growth of prepaid, where foreign issuers were hesitant to enter a market that was still in transition. Bank transfers held, and continue to hold, a strong position in the Spanish market and was the de facto standard for social welfare and pension disbursements.
Despite Spain’s relatively open regulatory and legislative environment for prepaid, adoption has remained somewhat slow. The consumer segment has been the main beneficiary of prepaid growth in Spain and this trend is expected to continue for the immediate future.
In 2010 Poland’s payment infrastructure was still very much in development, with POS terminal density far below the European average but expanding and potential for large growth in card penetration. Despite being a fairly young electronic payments market, prepaid already had spread into the corporate and government segments. Since 2005, programs have been in place to pay social benefits via prepaid card (BKO BP prepaid Municipal Card). Payroll cards also had gained some traction, even though bank transfer is the payment method favored by employees. Poland’s reasonably open prepaid regulatory and legislative environment has continued to foster prepaid growth. This, coupled with a still maturing payments market and large opportunities to address niche segments, such as the migrant work force, make Poland an attractive prepaid prospect.
In 2010, the Turkish prepaid market, driven primarily by the large banks, was focused on the consumer and transit segments. However, prepaid was starting to prove popular for corporate use, with reasonably widespread use of employee rewards cards, primarily used as food/luncheon cards. Today Turkey’s prepaid legislative environment is still evolving and at present there are no rules on the supervision of electronic money institutions. However, the central bank is working on an e-money license, which should be closely aligned to 2EMD. Turkey’s relatively high proportion of unbanked consumers, migrant work force and important remittance corridors all present large consumer and corporate prepaid opportunities.
Corporate Programs Key to Growth
While consumer prepaid continues to attract attention in many European markets, companies looking to expand their businesses in Europe should not overlook the growth potential of the corporate and government segments. EDC sees these sectors as key growth areas for prepaid in Europe over the next few years.
As the figure above indicates, EDC considers the prepaid opportunity in corporate and government sectors to be sizeable. This opportunity has attracted, and will continue to attract, numerous players. In Turkey and Poland, it’s primarily the large banks that are driving initiatives, while in France the large corporate entities, such as Edenred and Sodexo, are leading the charge. In Italy the post office has been the major driver behind prepaid.
The U.K. is rather unique in that it remains a very fragmented market, with banks, e-money issuers, program managers and corporations all driving adoption. Despite the variety of players within each market, and across markets, EDC expects growth in the corporate and government-funded prepaid programs to continue over the next three years.
Manika Singh is a manager based in EDC’s London office. She is involved with several projects with prepaid issuers and processors, which have included sizing the prepaid potential in a number of markets and assessing any competitors and their products. Singh also has been working within the mobile space to develop payments strategies for mobile operators. She can be reached at Manika.Singh@edgardunn.com.
Max Shinerock is a consultant based in EDC’s London office involved in projects covering a variety of topics, including prepaid strategy for major international banks, sizing prepaid potential in multiple markets, and competitor and product assessment. Shinerock also has worked on gift and prepaid projects with the U.K.’s largest retailers. He can be reached at Max.Shinerock@edgardunn.com.