Wednesday, January 25, 2012

Will credit card trends of 2011 apply to general purpose prepaid cards in 2012?

The year 2011 was nothing less than a roller coaster for the payments industry, which saw a lot of changes and new initiatives. Some notable developments were the Durbin Amendment, creation of CFPB, NFC initiatives from the likes of Google, Visa, Verizon, AT&T and others, a slew of mobile apps for payments and digital wallets, Square’s dongle taking off and several others following suit, an increase in credit card spending and a fall in delinquencies. 

From amongst these developments, MyBankTrackerTM identified five key trends in credit cards. 

Let us look at these trends and see if they will spill over into the world of prepaid cards, which had a growth story of its own in 2011 (Eight Annual Prepaid Forecast Report from Mercator):

Credit Card Trend 5: Mobile Rewards Redemption

As mobile banking applications evolve to offer the same capabilities as the online account interfaces, rewards redemption is making its way to smartphones.

Discover upgraded its mobile apps so that customers can redeem their cash back balance through direct deposit, statement credit, or eCertificates. An eCertificate is an electronic gift code that can instantly be used to make purchases at participating brand partners.

Citibank released an app dedicated to its ThankYou Rewards program which lets customers redeem reward points on-the-go. In collaboration with Best Buy, the app allows users to scan merchandise with their phones to see the cost in terms of points. Purchased items can be picked up at the store or shipped to an address.

Will this trend spill over into prepaid cards?

Historically, prepaid cards have not been associated with rewards and loyalty, let alone rewards redemption through mobile phones. This is because prepaid cards were considered to be for the unbanked and less credit worthy customers. Those who needed them bought them despite heavy fees and the card issuing companies did not feel a need to attract customers with rewards. None of the top five prepaid cards advertised at have rewards associated with them; only two of top 10 have some kind of rewards. 

But a lot has changed in the last few years: people are avoiding credit to stay credit worthy, debit fees have risen significantly and revenue from debit (interchange) has been capped at about half of what they had been. Traditional credit card issuers such as American Express, Citi Bank and Discover have jumped into prepaid cards to acquire new customers and revenue streams, intensifying the competition in this field and creating a need for some kind of incentive to retain the customer. Also, now prepaid cards are being issued to the non-needy customer (budget planner, traveler, debit fee avoider) who needs a little more than the immediate tangible benefits of the card to be attracted to a prepaid card offer. 

For the prepaid card issuing companies and retailers, getting customer behavior data from rewards and redemption can be very useful in selling them the right kind of products as well.

Rewards redemption through mobile is more effective because many customers have their phone with them always and the devices are location aware, making rewards more targeted and redemption more feasible.

So, yes, we will see rewards being generally offered with prepaid cards and also see mobile apps for rewards redemption.

Credit Card Trend 4: No preset spending limit

The invention of the “no preset spending limit” feature is being highlighted as a so-called “perk” that may actually pose danger to the consumer.

Many cash back/rewards credit cards will offer this feature to customers who have better credit histories. Examples include Bank of America’s BankAmericard Cash Rewards card and Citi’s ThankYou cards.
It lets customers spend past their assigned credit lines without incurring over-the-limit fees. Consumer advocates warn against the allure of “no preset spending limit” due to the increased possibility of overspending.

Will this trend spill over into prepaid cards?

Prepaid cards by definition can spend only the funds that have been added to them. So this trend does not apply to prepaid cards.

Credit Card Trend 3: No Foreign Transaction Fees

The average credit card will charge a 2-3% fee on purchases made outside of the United States. For the frequent international traveler, this foreign transaction fee can represent a significant expense. But, many card issuers are tossing out this fee on certain cards.

In November, Discover stopped charging foreign transaction fees on all of its cards – like Capital One. Citi, American Express, and Chase have eliminated foreign transaction fees on their more prestigious cards.
It wouldn’t be surprising to see less of this fee, especially on cards for frequent international travelers.

Will this trend spill over into prepaid cards?

A per event fee is the main source of revenue from prepaid cards and a foreign transaction is too attractive an event for the card issuers and processors to not charge the fee. So, no, this trend will not carry over to mainstream prepaid cards.

Credit Card Trend 2: EMV

Throughout the year, the five biggest U.S. banks have begun issuing credit cards that carry EMV chip technology. The cards are currently only available to corporate and more affluent customers but the technology will be making its way to every U.S. credit card.

EMV chips are regarded as a more secure way to process transaction data compared to magnetic strips. It has also become the standard in many foreign nations due to rampant card fraud. The U.S. has been considered a laggard in adopting EMV.

In August, Visa announced plans that give merchants an incentive to accept EMV cards by October 2015.

Will this trend spill over into prepaid cards?

The key driver behind EMV is fraud reduction. Prepaid cards are a more likely candidate for misuse and fraud because they are offered to anonymous customers or to identifiable customers without any credit checks. The target customers for prepaid are more likely to use public, unsecure networks and lose their card information to fraudsters, who can use the information to recreate and misuse the card. Or a financial criminal might buy a prepaid card with the intention of committing a fraud. EMV technology makes duplicating cards difficult and also makes offline and card not present transactions more secure

In addition, EMV based prepaid cards for use in retail or in transit offer a strong business case for issuers as discussed in an Aconite White Paper.    

For these reasons, main stream general purpose reloadable prepaid cards are likely to adopt EMV technology in the very near future.

Credit Card Trend 1: Mobile Payment Functionality

Taking center stage is mobile payments. Consumers who’ve been quickly adapting to financial management on their mobile devices are eagerly awaiting the day they don’t need to carry a credit card to use it.
Google Wallet launched with Citi MasterCard customers using near-field communications technology for contactless payments.

ISIS, a joint venture by the nation’s largest mobile carriers, has locked in major phone manufacturers and major payment processors that will begin promoting NFC technology on mobile devices in early 2012.
Apple is yet to mention NFC for the iPhone but the technology was on the wish list for consumers who waited to purchase the recently released 4S model.

Will this trend spill over into prepaid cards?

The most notable NFC mobile payment initiative in 2011 was Google Wallet and the cards that currently can be provisioned on the phone are Citi® MasterCard®, the Google Prepaid Card or Store gift cards from participating merchants. It’s not hard to notice that the scale is tilted in favor of prepaid cards already as far as Google Wallet is concerned. The biggest problem (not technology related) is that credit card issuers/banks, network operators and mobile wallet providers are all fighting over who owns the mobile wallet customer and who bags the proceeds from the card use. An unintentional fall-out of this situation will be that mobile wallet providers (Google or ISIS) will issue their own prepaid cards to be provisioned on NFC phones.

So, yes, this trend is very likely to carry over to prepaid; in fact, I believe that prepaid cards will lead this trend. 

About the Author

Manish Gupta is a Marketing Product Manager at 

CoreCard Software is a leading provider of card management systems for prepaid, revolving credit, complex accounts receivable, payday loans, fleet cards and more. CoreCard provides a feature-rich and flexible platform for all prepaid programs, either as licensed software or processing services (SaaS or PaaS).  For more information visit or stop by  CoreCard at Prepaid Expo 2012, booth #622. 

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