Marketing Gift Cards Are Just the Start
Rich Mitchell
Pay-ahead plastic surged late last year as Christmas sales of gift cards boomed, but it turns out the prepaid card is taking root in a multitude of markets, including employee wages and remittances overseas. As cardholders become more comfortable with the cards, look for them to turn up in workers’ comp and yet other applications.
The prepaid card has hit the big time. A form of debit card with a twist—consumers electronically access funded accounts linked exclusively to the card—prepaid plastic long has trailed its credit and debit brethren in terms of prevalence and profitability. But 2003 was a breakthrough year. Spurred by cravings for greater income, lower processing costs, and a tighter relationship with customers and employees, a rapidly expanding base of issuers and acquirers—including corporations, merchants, and government agencies—is propelling prepaid activity while moving the application into unconventional markets. Gift cards stole the headlines this past holiday season when a survey sponsored by the National Retail Federation revealed that the plastic may have rung up $17.3 billion in sales, or some 8% of all holidayseason business. At the same time, Wal-Mart Stores Inc., the world’s largest retailer, reported a 20% increase in its gift card business for 2003. Indeed, the cards sold in such volume that some analysts figure they may explain why many merchants recorded flat to disappointing Christmas sales results. As it turns out, retailers can’t book a gift card sale until the cardholder redeems the card. The sudden popularity of gift cards explains—and masks—important developments going on in prepaid applications across a dizzying array of markets. Not only are gift card sales volumes mushrooming in both open- and closed-system environments, but the stored-value card is encroaching on the paper-based travelers check sector. More businesses, meanwhile, are issuing prepaid payroll cards to employees in lieu of checks; foreign-born workers are using cards instead of wire transfers to provide funds to relatives outside the U.S.; and health-care organizations and government departments are positioning cards as vehicles for distributing benefits. Major payment organizations, including Visa USA Inc., MasterCard International Inc., and American Express Co., already support a multitude of prepaid applications and expect to launch additional products over the next few years. Visa has identified more than 35 potential product types, including workers’ compensation, employee relocation, and petty-cash applications. “We’ve seen a 240% growth over the last
year in value loaded onto our prepaid cards, and this triple-digit expansion rate will continue because of the flexible nature of the category,” says Todd Brockman, Visa USA vice president of prepaid products.
Disposable to Reloadable
And with Visa and MasterCard—who have 14,000 U.S. and 3,000 North American member financial institutions, respectively—each reporting that only about 100 of their members are issuing prepaid products, the sector is ripe for expansion. While neither association will reveal annual prepaid volume, they note it has risen from the millions to billions of dollars over the last several years. Analysts estimate the potential market for prepaid card spending to be in excess of $2.1 trillion. “We’re now getting out of the pioneering part of the business and into implementation,” says Bill Mathis, senior vice president for member relations at MasterCard. “In 2004 our focus will move well beyond the traditional disposable gift cards to reloadable solutions.”
The Payoff in Payroll Cards
(current and projected cards in circulation, millions)
Source: Financial Insights
Yet disposable cards, which have magnetic stripes and support purchases at merchants who accept the associations’ credit or debit products, remain the dominant prepaid products. Value is stored in a virtual account and funds are debited electronically during each transaction. Interchange—the percentage of the transaction that is paid by the merchant acquirer to the card issuer—is the same as for a debit card purchase. A major MasterCard issuer, Cleveland-based KeyCorp, is among the institutions pushing to expand its already strong gift card program while also eying new prepaid markets. KeyCorp distributed more than 100,000 of its “Key Possibilities” prepaid cards last year and expects to double that amount in 2004, says Carl Stauffeneger, senior vice president of consumer payment sales. Customers pay a $3.95 fee for the
product, which comes in denominations between $25 and $2,500. There are no charges for signature-based transactions, but cardholders pay $1 for an ATM withdrawal and 25 cents for a PIN-based POS purchase. Stauffeneger says that holders of the “Key Possibilities” card initiate an average of 2.7 monthly transactions with an average purchase amount of $43. That transaction figure is probably higher than the industry average, he adds, because the Key card holds more value than most other prepaid products. KeyCorp expects to eventually issue reloadable cards and to support health-care and government applications, Stauffeneger says. He adds that 80% of the prepaid sales are to consumers, with the remainder going to businesses that often use stored-value cards as sales-incentive tools or to deliver bonuses to employees. Strong prepaid activity also is occurring in closed-loop programs, in which merchants and shopping centers are selling stored-value products that can be redeemed only in specific stores or malls. A 2003 survey by the New York City-based International Council of Shopping Centers found that 54% of retailers and 37% of malls offer gift cards. The survey also reveals ample opportunities for gift card expansion, as 78% of retailers and 71% of mall operators say they still offer paper-based gift certificates. Survey respondents included 30 retail organizations that operate close to 3,000 stores in the U.S., and 104 companies that represent more than 600 malls. Westfield America Corp., which operates 66 shopping centers throughout the U.S., is among the sector’s most aggressive gift card marketers. The company issues American Express-branded cards for use at mall stores that take AmEx charge cards, as well as prepaid products with the Westfield brand that are accepted at all mall retailers. Los Angeles-based Westfield receives an undisclosed transaction fee for each purchase, and promotes the cards with television and radio ads, posters, banners, signage, and local sweepstakes in which gift cards with $500 of value are awarded. More than 80% of sales are to consumers who pay a $1.50 fee for the card, with the remainder going to companies for employee-incentive programs. Sales of the Westfield gift cards, which have been offered for more than three years, increased more than 20% in 2003, says Todd Putnam, Westfield executive vice president. Similar to other issuers, Westfield reports that about 60% of gift card sales occurred during the last two weeks of December, with additional sales spikes occurring around other holidays. Westfield positions gift cards as a customer service rather than a profit generator, and is just starting to consider additional ways to increase distribution after focusing on system-implementation issues. “The idea of selling gift cards for use in more than one shopping center is easily said, but is much more difficult to do from an operations, technology, and logistics standpoint,” Putnam notes. “It took us several years to achieve zero system downtime. But now that all our ducks are in a row with the technology, we can pay more attention to marketing.”
’More Secure’
Indeed, card promotions are becoming increasingly important as competition among gift card issuers heats up. About 90 of the 100 largest U.S. retailers offer prepaid cards, and more small and mid-size merchants also are launching products, says Karen Larsen, vice president of marketing and development for Denverbased First Data ValueLink, a unit of First Data Corp. that installs and supports retail gift card programs. Merchants also are increasingly rolling out loyalty programs with rewards based on prepaid card use, and some retailers are selling other stores’ proprietary cards. “We’re also seeing newer applications taking shape in a variety of markets,” Larsen notes.
While Card-Based Remittances Grow…
(annual value in millions)
…They’ll Claim More of the Overall Market (share of all remittances)
Source: Celent Communications
Such sectors include the travel market, where American Express and Visa-branded prepaid cards are being used in lieu of paper-based travelers checks. AmEx last October launched its TravelFunds Card, which enables consumers to make purchases at any American Express merchant and withdraw funds from ATMs. Users pay a $14.95 one-time fee for the card and $2.50 for each ATM transaction. There is a $5 charge each time cardholders replenish funds via the phone or the Internet.
The TravelFunds Card can hold up to $2,750 of value in U.S. dollars, euros, or British sterling. AmEx promises to refund the balance on lost or stolen cards within 24 hours, and is targeting consumers who are more comfortable carrying plastic instead of paper checks, says Peter Vaughn, AmEx vice president of marketing for travelers checks and prepaid services. Heathrow, Fla.-based travel organization AAA, meanwhile, which provides Visa travelers checks to members, is also offering a Visa-branded prepaid card—called Cash Passport—for no fee when at least $300 is loaded into an account. AAA charges $2.95 for smaller loads and $2 when cards are used to withdraw funds from ATMs. “Travelers checks are a product that might have seen better days,” says Gail Acebes, director of the AAA partnership program. “It is less burdensome to carry a card than to worry about getting a check cashed, and many people see Cash Passport as being more secure than a debit card because it’s not tied into a checking account.” Indeed, the public’s comfort with prepaid is spurring more corporations and government agencies to issue cards for benefits distribution. Prepaid is particularly alluring to administrators of flexible spending accounts who process millions of annual paper-based based medical claims. Employees in FSA programs have pre-taxed funds deducted from their paychecks. The funds are then earmarked for health-related expenses not covered by insurance, including physician and pharmacy co-payments and medical treatments. Workers traditionally pay these out-of-pocket expenses and then submit receipts to their company’s FSA administrator for reimbursement. But prepaid cards enable the funds to be electronically sent from the FSA to the physician or pharmacy. It removes the need for cardholders to pay fees upfront, streamlines claims processing, and eliminates the time and expense of sending checks to employees. “It can cost plan administrators $5 to $10 to process each paper-based transaction,” says Beverly Kennedy, First Data’s senior vice president of health care. “The use of prepaid cards takes that down to cents.” Other employee programs—including dependent-care accounts, in which pre-tax deductions pay for daycare expenses, and qualified transportation benefits that use pre-tax funds for mass-transit and commuterparking expenses—also are ripe for prepaid, analysts say. Indeed, more than 1 million households already access employee benefits with prepaid cards, up from just 300,000 a year ago, says Chris Byrd, executive vice president of Evolution Benefits Inc., an Avon, Conn.-based provider of processing technologies and services for employee-benefit programs. And with more than 20 million workers participating in such programs, and 85 million employees still on the sidelines, the potential market is enormous. “There typically is a 20% to 40% jump in employee participation in FSA programs when prepaid cards are introduced,” Byrd notes. “And third-party administrators can save between 20% and 40% in operating costs by driving paper out of the process.”
The Great Unbanked
More companies also are positioning prepaid cards as a more efficient method of distributing wages to employees without bank accounts. Workers with payroll cards are able to withdraw funds from ATMs and
perform debit transactions with signatures and personal identification numbers at merchant locations. In 2003, 8.5% of the 14.2 million unbanked households received prepaid payroll cards, up from 6% in 2002, reports Celent Communications, a Boston-based research firm. Celent projects 12.4% of 14.4 million unbanked households will receive payroll cards in 2004. Companies using payroll cards avoid the costs associated with printing checks, replacing lost checks, and stopping payment on stolen checks, which analysts say often exceeds $20 per check. And dependence on mail or courier services to ensure that employees receive their pay on time also is eliminated, notes Phoenix-based U-Haul International Inc., which launched a payroll card program in late 2001 and now has 17% of the company’s more than 17,500 employees receiving their pay via the cards. The remaining 83% are paid by direct deposit. Cardholders receive wages through Visa-branded ATMs and can make purchases on the cards at Visa merchants. U-Haul payroll cardholders are charged a monthly fee—which is waived the first year—of $1.50 and are allowed one free ATM withdrawal per week. There is no charge for PIN or signature-based point-of-sale transactions. Another payroll card issuer, Seattle-based Amazon.com, is saving more than $150,000 annually by paying its employees via the cards and direct deposit instead of checks, says Douglas Houser, Amazon.com’s treasury analyst. About 10% of Amazon.com’s 5,200 employees use payroll cards. “The cards also enable unbanked employees to avoid the exorbitant fees charged at check-cashing locations,” Houser notes. “And electronic payments reduce the probability of fraud.” The allure of lower administrative costs and avoidance of check-cashing fees—which can exceed $15, depending on the amount of the check—will result in the distribution of 6.8 million payroll cards by 2006, up from 3.5 million in 2004 and 2.2 million in 2003, projects Aaron F. McPherson, research manager at Financial Insights, a Framingham, Mass.-based research firm. Automated teller machines, meanwhile, also are serving as key funds distribution vehicles for other prepaid applications. More workers in the U.S. who want to transfer money to relatives or acquaintances living abroad, for instance, are sending prepaid cards to enable the withdrawal of local currency from ATMs instead of wiring or mailing cash. Celent Communications projects that the value of such remittances made through card-based money transfers will increase from $300 million in 2002 to $19.5 billion by 2006, with fee revenues to issuers and ATM deployers increasing from $40 million to $2.34 billion. Card-based money transfers are expected to account for 11% of the overall remittance market by 2006, up from 0.2% in 2002. “It will take time for remittance-card providers to decide how to market the product,” says Gwenn Bezard, Celent senior analyst. “But it will eventually take off, especially since the number of ATMs in developing countries has dramatically increased in recent years.” Newer players to the sector include Sunnyvale, Calif.-based Yahoo Finance, which enables holders of its Yahoo PayDirect World Card to access funds from more than 800,000 Cirrus-branded ATMs. Cardholders
are charged a $1.50 withdrawal fee, and persons adding value into accounts pay transaction fees of between $5.95 and $8.95, depending on the country in which funds will be withdrawn. Yahoo is promoting the service by offering five free prepaid phone card minutes each time individuals add funds to their remittance accounts, says Dickson Chu, Yahoo’s PayDirect general manager. “Though PayDirect is targeted at cross-border remittances, it also can be used for other applications within the U.S., such as enabling parents to safely provide money to children who are away at college,” Chu adds.
’Tremendous Growth’
Indeed, the list of current and future prepaid applications continues to lengthen. Visa, for instance, is promoting its “Buxx Card” as a way for parents to distribute allowance and other funds to teenagers. And Vancouver, B.C.-based Cybux Cash Card Co. Ltd. is marketing a prepaid system that allows students to purchase school meals and products from select merchants via a stored-value card, while enabling their parents to view transaction activity via the Internet. Cybux recently tested the system at a high school in North Vancouver and expects to roll out the program to hundreds of schools this fall, says Tom Lennox, president and chief executive officer. “Prepaid is in its early stages and over the next three to four years we will see tremendous growth,” notes John Gould, director of consumer lending and bank cards for TowerGroup, a Needham, Mass.-based financial industry research and consulting firm. “It offers a whole new range of products, and will enable banks to leverage their existing infrastructure to grow their portfolios.” With its emergence as an increasingly important payment vehicle in the retail, government, corporate, and travel sectors, prepaid has become one of the card market’s newest stars. And as more applications are launched, the product’s evolution may soon spur a prepaid revolution.