Comment- To what extent can merchants be key players in the evolving prepaid business models?
Already they are significantly involved in the issuance and distribution of prepaid vouchers and gift cards and several are considering Visa and MasterCard ‘open loop’ offers.
However, in general the level of UK merchant involvement is probably understated compared with the opportunity that prepaid cards can generate for their store and online business.
The success of prepaid cards in the UK has, frankly, been limited for three main reasons. First, customers do not see compelling value to use the cards compared with alternative payment forms such as cash, credit and debit cards. Second, the pricing model for consumers for using and reloading the cards is generally unattractive if not prohibitive. Finally most issuers have ineffectively marketed the products. As their business model relies on scale, mass-market propositions have emerged rather than tightly segmented and focused ones.
At the root of the problem is the reliance on the typical credit card business model. Without the benefit of interest revenues, revenue streams are mainly limited to consumer fees, interchange and float. This has resulted in the need to impose unacceptable consumer pricing for the target consumer segments to achieve profitability.
The scale and profitability dilemma is leading to the evolution of product segmentation such as travel cards, business cards and insurance payout cards as well as new value-based business models.
For most consumers use of a prepaid card is an alternative to paying by cash. Why would they want to pay to use a card when cash is ‘free’? The short answer is only when the value of the prepaid card is seen as significantly more than cash. The more considered answer is when there is incremental value in the consumer proposition that is built on the core prepaid functionality.
This is where merchants come into the equation as they can play an integral role in prepaid all along the value chain - from card issuance and as a distribution channel for all issued cards, to providing re-load capability, to acceptance.
As a card issuer or co-branded partner a merchant can provide benefits or discounts to loyal customers in the form of special offers, privileges, etcetera, with points allotted for prepaid card usage. As prepaid cards can be given to those who do not have other network branded cards (e.g. youth segment) the programme can extend to a broader customer base than the more traditional network branded cards. This can be especially valuable for those without a readily available payment method for internet purchases. Co-brand arrangements can potentially be made with a bank or e-money licence issuer to share in the interchange to help fund such activity.
Merchants can also generate revenues as a card distribution and top-up channel. Clearly this would only work for merchants such as supermarkets and petrol stations with extensive high street or convenient outlets attracting high customer footfall. As well as provision of cards on racks for customers, attracting space rental revenues, merchants can provide top-up facilities at POS or elsewhere in their retail outlets.
To date top-up networks for prepaid cards have been few and far between in the UK, resulting in significant costs per top-up for many issuers. These have to be passed on to the cardholder or absorbed. Major merchants should consider the provision of top-up facilities for prepaid just as they considered ATMs on their premises years ago. With existing top-up players charging high fees for the facility there is plenty of scope and margin for more competitive pricing by the merchants. Card distribution and top-up facilities can provide good revenue streams for some merchants, as has been seen in the US.
Another evolving model we are likely to see is the multi-application prepaid card. Already mobile operators are partnering with issuers as has been announced with RBS and O2. Merchants in some retail sectors are well positioned to take advantage of other functionalities on a card with direct cost-efficiencies and other benefits for their business. Merchants in the travel and entertainment sector, for example, can provide ticketing, premises access, identification and loyalty applications alongside the core prepaid functionality. This can generate a push-pull consumer demand for the product such as free telephone and internet access in hotel rooms, hotel loyalty points, discounted facilities at local attractions, etcetera as well as a card that can be used wherever Visa or MasterCard is accepted.
Finally, it is worth noting that, despite the recession, many merchants have seen double digit growth in online sales. Consumers continue to be attracted to the internet where they see distinct advantages over the high street. However, prepaid can be positioned as a high street benefit, providing not just a payment facility but other beneficial applications such as access to loyalty and rewards, preference check-out opportunities, VIP personalised shopping and late night access preference. It is an opportunity for the high street to fight back.
Ken Howes is director of Edgar Dunn & Company and co-founder of the Prepaid International Forum (PIF)
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