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.
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 prepaid101.com 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 www.corecard.com or stop by
CoreCard at Prepaid Expo 2012, booth #622.
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