July 24, 2008
CSD: Prepaid Reaping Financial Rewards
By Howard Riellhu
Through a special arrangement, presented here for discussion is an excerpt of a current article from Convenience Store Decisions magazine.
Payment alternatives for the nation’s “unbanked” and “underbanked” customers are proving to be effective sales drivers. While gift card malls have been getting a lot of attention, prepaid debit, credit, gift and especially gas cards offered by Visa, MasterCard and American Express are quietly booming in popularity.
Prepaid’s profit potential is fueled by wider social acceptance and the nation’s growing population of “unbanked” lower-income consumers. What some refer to as the pay-as-you-go category–which includes prepaid wireless, long distance, debit cards and more–is becoming an increasingly popular method of budgeting. According to the Aite Group, prepaid debit card transactions will surge to $150 billion in 2009 from almost $13 billion in 2004. Prepaid wireless sales are expected to reach over $30 billion by 2010, versus $8 billion in 2005, according to Atlantic-ACM.
The industry buzz on prepaid “varies by what product you’re talking about,” said Michael Zielinski, president and CEO of Royal Buying Group, an organization of convenience store and petroleum marketers. “If you’re talking telecomm you’re talking about how flat the growth is, the continued shrinking of margins, the instability of a lot of the providers and not knowing if the carrier is going to stay in business or not.”
Concerning gift cards, Mr. Zielinski said, “You have to think about which ones are still showing good growth–obviously gasoline is one of them–and which retail cards are flattening a little bit.”
But Mike Skinner, general manager of Coinstar e-Payment Services, which works with the major carriers to provide PIN-based airtime replenishment, insisted prepaid wireless “continues to be a growth business,” particularly given the tough economic conditions. Margins also tend to be significantly higher than core categories like cigarettes and salty snacks.
The “real massive growth” in the category has been in debit, asserted Bryan Zingg, vice president of sales for PaySpot, a provider of prepaid electronic payment processors.
“Prepaid debit loads as well as open- and closed-loop gift cards are such high growth areas primarily because they are new, but also because there is a huge, 30-million unbanked population out there,” Mr. Zingg said. “They are looking for a way to load cash onto a prepaid debit card so that they can make purchases with the rest of mainstream society on the internet, or be able to carry less cash and have more of a bank-type product.”
Typically, if c-stores are not doing well with prepaid the problem lies in merchandising, Mr. Zingg suggested.
“They don’t have any point of sale in the store. When we set up in-store we put in a floor display rack with graphics on it to show the customer that they can buy their debit card and reload their debit card at the store,” he said. “We make it very clear that the Joe Walmart cardholder can load that card at that store.”
Discussion Question: What do you think of the revenue opportunity for prepaid cards? How can c-stores and other channels better exploit this opportunity?
BrainTrust
Recent Discussions
Discussion Questions
Poll
While I agree with the points raised in the article, there is one avenue for backlash from consumers – particularly on prepaid debit cards – that retailers should be aware of. We’ve already gone through something of a backlash on gift cards. Hidden fees, charges against outstanding balances if held for more than a certain time period (like 1-2 years), etc. all came under serious scrutiny by state and federal governments and retailers got caught. They had to scramble to adjust policies on gift cards as consumer advocacy organizations blasted certain policies.
If you think that was bad – whether you think those policies were right or wrong – prepaid cards are much worse. Many have a charge to activate them, a charge to use them, a charge against a balance held for too long, a charge to add more money to them, and on and on, and they don’t fall under the same realm of regulation as gift cards. They’re not in as wide of a circulation as gift cards today, but as their popularity grows, watch out – this may come back to bite retailers in the end.
OK, that was fun but I still don’t feel I understand the opportunities here. Although I have learned about VNOs, VNEs and SIMs, I don’t really understand the technology change that somehow just made prepaid devices more worthwhile. That said, the expansion of government payments by debit card mentioned makes the ability to accept electronic payments critical.
As far as servicing “pre-paid devices,” whether cell phones, debit, or gift cards, it only makes sense that convenience stores would be a natural place to recharge these devices. I guess the threat is that someone would design an ATM that would take cash and recharge the device without needing a bank account.
I am trying to see this whole thing through the eyes of the “under-banked”, which were said to include 30 million people. It sure makes sense to me that I would like to have a card I can use on the Internet, to carry large amounts without the bulk of cash, and I guess it would also provide anonymity, although I don’t know if that would be a major concern. But I don’t see how those things could have changed considerably over the past 6 months, which was mentioned as the time frame for recent demand increases.
I think the major reason for increased use of prepaid devices can be traced directly to the economy. Personally, I recently helped someone move and they rewarded all the folks who helped with a gas-card gift. With everyone stretching their gas budget, gas cards seem an obvious winner. But the other gift cards profit too. Instead of the gift giver needing to go out and find a gift for their friend, they can just pick up a gift card and save their own gas. Maybe the smart thing to do would be to combine the gift card section with a greeting card display.
More undocumented residents = more unbanked population. An opportunity for retailers? Well, poor people are exquisitely price sensitive, which is why some Walmart financial services are priced so low (money orders, etc.) Some retailers use low-fee ATMs to drive traffic and some retailers charge full boat to maximize their ATM profits. Walmart has it both ways: low cost money orders but high credit card interest rates.
More Discussions
As Boomers ‘Age Out of Peak Purchasing,’ How Can National Brands Retain Interest With Gen Z?
According to a recent First Insight study titled “Is Gen Z Still Choosing Your Brand,” while…Is Supply Chain Volatility Here To Stay?
Can we expect an ongoing volatility to remain in terms of retail supply chain?Has Same-Day Delivery Become an Expectation Across Retail?
Are expectations around retail delivery speed in flux?
While I agree with the points raised in the article, there is one avenue for backlash from consumers – particularly on prepaid debit cards – that retailers should be aware of. We’ve already gone through something of a backlash on gift cards. Hidden fees, charges against outstanding balances if held for more than a certain time period (like 1-2 years), etc. all came under serious scrutiny by state and federal governments and retailers got caught. They had to scramble to adjust policies on gift cards as consumer advocacy organizations blasted certain policies.
If you think that was bad – whether you think those policies were right or wrong – prepaid cards are much worse. Many have a charge to activate them, a charge to use them, a charge against a balance held for too long, a charge to add more money to them, and on and on, and they don’t fall under the same realm of regulation as gift cards. They’re not in as wide of a circulation as gift cards today, but as their popularity grows, watch out – this may come back to bite retailers in the end.
OK, that was fun but I still don’t feel I understand the opportunities here. Although I have learned about VNOs, VNEs and SIMs, I don’t really understand the technology change that somehow just made prepaid devices more worthwhile. That said, the expansion of government payments by debit card mentioned makes the ability to accept electronic payments critical.
As far as servicing “pre-paid devices,” whether cell phones, debit, or gift cards, it only makes sense that convenience stores would be a natural place to recharge these devices. I guess the threat is that someone would design an ATM that would take cash and recharge the device without needing a bank account.
I am trying to see this whole thing through the eyes of the “under-banked”, which were said to include 30 million people. It sure makes sense to me that I would like to have a card I can use on the Internet, to carry large amounts without the bulk of cash, and I guess it would also provide anonymity, although I don’t know if that would be a major concern. But I don’t see how those things could have changed considerably over the past 6 months, which was mentioned as the time frame for recent demand increases.
I think the major reason for increased use of prepaid devices can be traced directly to the economy. Personally, I recently helped someone move and they rewarded all the folks who helped with a gas-card gift. With everyone stretching their gas budget, gas cards seem an obvious winner. But the other gift cards profit too. Instead of the gift giver needing to go out and find a gift for their friend, they can just pick up a gift card and save their own gas. Maybe the smart thing to do would be to combine the gift card section with a greeting card display.
More undocumented residents = more unbanked population. An opportunity for retailers? Well, poor people are exquisitely price sensitive, which is why some Walmart financial services are priced so low (money orders, etc.) Some retailers use low-fee ATMs to drive traffic and some retailers charge full boat to maximize their ATM profits. Walmart has it both ways: low cost money orders but high credit card interest rates.