Prepaid Landscape

Prepaid Landscape

The size of the prepaid market is open to debate. The Federal Reserve 2007 Electronic Payments Study estimated that open-loop prepaid transactions totaled $ 13.3 billion in 2006, and prepaid transactions as a whole totaled $ 49.9 billion, compared with $ 1.9 trillion in general purpose credit card payments and $ 986 billion in debit card transactions. The same report pointed out that Aite Group LLC said the market had $ 95.4 billion in transactions for all prepaid cards, open and closed loop, and Mercator4Advisory said $ 197.9 million were loaded onto all prepaid cards, including closed-loop gift cards and open-loop prepaid cards. Network branded cards had a total of $ 26.75 billion loaded on them in 2006,and that number grew to $ 38.66 billion in 2007, according to Mercator. The range of numbers shows that pinning down the size of the prepaid card market is not easy. Companies do not want to reveal what they have accomplished (or not accomplished) in card sales, and some companies count prepaid cards as debit cards. Banks have found a place for prepaid cards in their product lines. Banks have served as issuers that hold the funds, settle transactions, and provide bank identification numbers for transaction routing for prepaid cards. They also have sold cards such as payroll cards, travel cards (to replace traveler’s checks), gift cards, and other types of cards both to consumers and companies. In a survey conducted in the first part of 2007 by the Independent Community Bankers of America, 43% of community banks said they sell network-brande d gift cards. Only 3% said they offered payroll cards. In the first survey in 2005, 2% said they provided payroll cards but nearly “one-fifth of community banks plan to offer payroll cards within two years” the ICBA said in a press release. (The association sent surveys to all but the top 125 banks in the country, and received 1,107 responses in 2007 and 400 in 2005.) Banks are not alone – other companies, including retailers, sell prepaid cards. Wal-Mart Stores Inc. has offered Visa-branded, reloadable prepaid cards since June 2007. The cards are issued byGE Money Bank. The Wall Street Journal reported that Wal-Mar”is on track to register $ 2 billion in deposits on two million cards in 2009.” The American Banker reported that “Wal-Mart, which gained more than 1 million customers with over $ 1 billion worth of transactions from the MoneyCard, is now ‘in the range’ of doubling both figures….” while other reports say Wal-Mart has sold 2 million cards. Since companies like Wal-Mart must work with banks to offer open-loop cards, banks can get into the prepaid card business by acting as issuers that hold funds, authorize payments, and settle payments. Prepaid cards are grouped by where they can be used and whether cardholders can add more money to them. Cards to which consumers can add funds are reloadable cards, as opposed to one time-use, nonreloadable cards. Closed-loop prepaid cards can be used only at one merchant. Most retail gift cards are closed-loop cards. Other examples of closed-loop cards are transit cards and cards sold to players for Internet games. Semi-closed loop cards refer to cards that can be used at a select group of merchants, such as a gift card that could be used at any store in a mall. Open-loop prepaid cards connect to a network and can be used wherever the network is accepted. Branded open-loop cards carry one of the major card brands (American Express, Discover, MasterCard, or Visa). The cards draw on funds held in a pooled account at a bank. Cards that require cardholders to enter a personal identification number (PIN) to make purchases using the NYCE, Pulse, and Star debit networks are also open-loop. Open-loop cards are the ones used most often to provide financial services to people without bank accounts. The ability to use the cards for almost all kinds of payments means that they can substitute for cash, credit cards, and checks. Open-loop prepaid cards can take a wide range of forms. The cards are used as general purpose, reloadable cards where consumers can load money onto the cards and use them for general payments. They can be used as payroll cards, which employers give to employees and load wages onto the cards instead of printing paychecks. Retailers give open-loop cards as incentive cards or rebate cards instead of checks or other merchandise. Parents give reloadable open-loop cards to children and college students as a way of providing them with an allowance and to monitor spending. Consumers use open-loop cards to pay for medical expenses using money from a Health Savings or Flexible Spending Account. Also the federal government uses prepaid cards to distribute social security benefits and state governments use them for unemployment insurance and child support benefits. With the addition of features like bill payment to prepaid cards, consumers may use prepaid cards as substitutes for checking accounts.