Mercator Forecast: Potential Regs, Sluggish Economy Puts Brakes on Double-Digit Growth for Prepaid (November 2013)
By Bill Grabarek, Senior Editor
Hampered by regulatory uncertainty and an economy recovering sluggishly, among other factors, the open- and closed-loop prepaid card markets’ growth over the next four years will be slower than in past years, according to the latest forecasting research from Mercator Advisory Group.
In its “10th Annual U.S. Prepaid Cards Market Forecasts,” Mercator predicts that total loads on open-loop cards, which include GPR, payroll, open-loop gift and unemployment benefits, will drop from a previously forecasted 21 percent compound annual growth rate (CAGR) to 6.9 percent through 2016, reaching a total of $254.3 billion.
Total dollars loaded on closed-loop cards, which include retailer gift cards, transit fare cards and government nutritional benefits, will slow from a previously forecasted 5 percent CAGR to 2.6 percent through 2016, reaching a total of $343 billion.
One of the biggest challenges for the prepaid industry continues to be on the legislative/regulatory front, according to Ben Jackson, senior analyst with Mercator and co-author of the market forecast.
|“People across the economic spectrum are finding uses for prepaid cards, so new opportunities still exist for general use prepaid cards.”
For example, the Durbin Amendment remains a thorn in the side of prepaid card providers, particularly the recent decision by U.S. District Judge Richard Leon. This summer, Judge Leon ruled that the Federal Reserve Board of Governors overreached in its interchange and network routing rulemaking.
“While the Federal Reserve has appealed that case, it remains to be seen whether providers will see interchange drop again and whether they will be forced to add unaffiliated networks for each authentication type,” Jackson tells Paybefore. “Adding additional networks would raise costs on prepaid cards, and that could make it hard for new programs to start up and smaller existing programs to survive.”
Segments that will grow the fastest in the next few years, according to the market forecast, are digital media, GPR and flexible spending and health savings accounts (FSA/HSA).
Growth in the GPR segment is being driven by players such as American Express and its Serve and Bluebird prepaid products and Chase’s Liquid—products whose target audience is more than just unbanked/underbanked consumers, Jackson says. “People across the economic spectrum are finding uses for prepaid cards, so new opportunities still exist for general use prepaid cards,” he adds.
|Back on Top Last year’s market forecast by Mercator Advisory Group predicted dollars loaded onto open-loop prepaid cards for the first time would surpass loads on closed-loop cards either this year or in 2014. However, the growth rate of open-loop cards has slowed and the closed-loop market has proved resilient, according to Ben Jackson, senior analyst with Mercator.“The closed-loop retailer gift card market is expected to grow very modestly; but when the base is nearly $100 billion, even a small growth rate translates into large numbers,” Jackson says. “The second largest closed-loop segment after gift cards is the nutrition assistance program segment. If Congress dramatically cuts food stamps over the next few years, then the closed-loop part of the prepaid market could shrink dramatically, but we don’t expect that will happen.”|
The growth of the digital media segment reflects changes in consumers’ method of buying music, books and movies, Jackson says. “There are more digital content cards being purchased either as gifts or for personal use to avoid the need for a credit or debit card.” Many digital content card buyers either don’t have debit or credit cards because they are younger consumers who don’t have bank accounts yet, have been victims of or are afraid of identity theft, use prepaid cards to budget their spending for online entertainment, or are unbanked/underbanked, he adds.
As more companies adopt health care plans with high deductibles and offer FSAs and HSAs to their employees as add-ons to their coverage, this segment of prepaid will continue to see healthy growth. The risk, according to Jackson, is how these plans will be treated under the Affordable Care Act and whether any future changes in the law will affect the segment.
Conversely, the growth rates of prepaid cards in the incentives category have declined, according to the report. While this segment’s performance is a function of the economy, Jackson says there are steps that can be taken to mitigate the economy’s effects.
“Providers need to find ways to add value in such a way that a prepaid incentive card does not look like the plastic version of a paper gift certificate or check,” he says. “Finding ways to connect the cards with loyalty programs, helping incentive program managers make the cards have more trophy value so it seems like a larger reward and positioning the cards favorably against other rewards, such as cash or merchandise, will help.”