Trends & Tactics

 

Visa Gives a Push to Prepaid Cards

 

If Visa Inc. could be personified as an illustrious 19th Century editor, he might be saying, “Go prepaid, young man.”

 

The No. 1 payment card network’s interchange schedule effective Oct. 1, the day new federal debit card interchange price controls also took effect, clearly encourages issuers to pump out more prepaid cards.

 

Visa and MasterCard Inc. typically update their interchange schedules twice a year, in the spring and fall, with major changes usually coming in the spring. But 2011 is no typical year because the first U.S. debit price controls are now in place as a result of the Federal Reserve Board’s interchange and network-affiliation rules implementing the Durbin Amendment in 2010’s Dodd Frank Act.

 

The Fed on June 29 set basic interchange at 21 cents plus 0.05% of the sale for both signature and PIN debit for issuers with more than $10 billion in assets. The Fed is considering adding 1 cent for fraud-control expenses.

 

Big banks’ general-purpose reloadable (GPR) prepaid cards, however, are exempt from price controls provided the cards clear several hurdles set by the Fed. That means large issuers about to lose an estimated 45% of their conventional debit interchange might get some of that back by issuing more GPR prepaid cards.

 

Visa declined to talk about the changes. The new schedule, obtained by this magazine’s sister publication Digital Transactions News, adjusts rates in 19 interchange categories for Visa-branded prepaid cards, with most of them increasing. The basic retail rate, for example, will go from 0.95% plus 20 cents to 1.15% plus 15 cents. On a typical $38 debit card sale, that rate will generate 5% more in interchange: 59 cents versus 56 cents under the April 2011 rates.

 

Visa’s prepaid card supermarket rate also is increasing from and to rates identical to those of retail, but a 35-cent transaction cap remains in place. That cap will result in no increase on a $38 sale.

 

The biggest increase in the Visa-branded prepaid categories is for automated fuel-dispenser transactions, where the rate will go from 0.75% plus 17 cents and a 95-cent cap to 1.15% plus 15 cents, with the cap remaining. On a $50 fill-up, the merchant will pay 73 cents versus 55 cents currently, an increase of 33%.

 

Another rate applicable to service-station prepaid transactions will boost interchange by 29% on a $38 sale. A number of other rates in the e-commerce and travel-and-entertainment categories are going up anywhere from the teens to 30%. But rates for utilities and tax payments, two merchant sectors the card networks are trying hard to develop, will fall for both Visa-branded regular debit cards and prepaid cards.

 

“[Visa] clearly is upping prepaid across the board and giving lip service to some categories,” says consultant Steve Mott, chief executive of Stamford, Conn.-based BetterBuyDesign.

 

Visa’s prepaid push may go only so far, however. Under the Fed’s regulations, GPR cards issued by financial institutions with more than $10 billion in assets are exempt from interchange price controls only if they allow the first ATM transaction each month to be free, do not charge overdraft fees, and do not allow underlying funds to be accessed by any means other than the card itself.

 

Such rules could consign big-bank GPR cards mainly to a niche of customers who don’t qualify for traditional bank products and protect incumbent prepaid specialists such as Green Dot Corp. and NetSpend Holdings Inc.

 

“While banks may still offer prepaid cards as a turn-down product to low-income customers, we believe that the final regulatory language on prepaid card exemption make[s] it very difficult for banks to directly compete with existing prepaid program managers,” says a September research report by The Goldman Sachs Group Inc.

 

 

 

Closed-Loop Prepaid Cards: Alive And Kicking

 

The headlines have gone mostly to fast-growing open-loop prepaid cards in recent years, but closed-loop cards put on a respectable performance in 2010, according to new findings from Mercator Advisory Group Inc. In a study released last month, Mercator estimated that loads on closed-loop prepaid cards grew 13% to $261.2 billion from $230.3 billion in 2009.

 

In fact, the closed-loop market grew faster in 2010 than Maynard, Mass.-based Mercator expected, according to senior analyst Ben Jackson. The many reasons include a strong performance by gift cards and more loads on prepaid card accounts for online gaming and digital content. Mobile-phone calling-minutes cards and certain government programs that distribute more benefits in weak economic times also saw increases.

 

“On the whole, what we’re seeing is even the closed-loop market is showing some resilience in the face of the economy,” Jackson says.

 

The mainstay of the closed-loop prepaid card market, the gift card good only at the sponsoring merchant’s locations, saw some programs decline while others grew. Overall, the growth more than offset the declines. Mercator had forecast 4% growth for in-store gift cards, but total load volume hit $84.6 billion, up 10% from $76.9 billion in 2009.

 

Consumers are simply recognizing the intrinsic value of gift cards and many retailers are doing a better job of integrating their gift cards with loyalty programs and promotions, Jackson says. “They’re realizing that gift cards are not just a plastic version of paper gift certificates,” he says.

 

What Mercator calls its digital-content category grew 29% to $12 billion in loads last year versus $9.3 billion in 2009. The category includes two segments, one measuring digital media, up 19%, and games and ring tones, up 45%. Giant social network Facebook opened the door wider to digital-content sales last year when it launched its Facebook Credits card, a product that enables users to buy content from sites that sell on Facebook.

 

Online games, many offered through social networks, also boosted digital-content sales on closed-loop accounts. Zynga, creator of such popular games as Farmville and Mafia Wars, began selling prepaid cards in March 2010, Mercator notes.

 

Meanwhile, loads on prepaid mobile-phone plans grew 16% in 2010 vs. 13% in 2009 thanks to the increasing popularity of cell phones in general and more smart phones being enabled for prepaid payment plans. More mobile-phone users also are looking for alternatives to costly long-term contracts.

 

“As people struggle with money and the economy, they’ve got to manage their cell-phone contracts,” Jackson says. “I think it’s an obvious case for prepaid.”

 

In contrast, loads on prepaid cards for landline long-distance calls fell 7% in 2010.

 

The struggles many consumers are having with finding or keeping a job helped to boost loads on closed-loop cards for nutrition-assistance programs such as the Supplemental Nutrition Assistance Program (SNAP), formerly called Food Stamps, and the Women, Infants and Children (WIC) program by a combined 21%. Loads in the Temporary Assistance for Needy Families (TANF), the federal government’s main welfare program, however, grew by only 2% as more benefits shifted to open-loop cards.

 

Loads on employee and partner-incentive closed-loop cards increased 10% and loads on consumer-incentive cards also grew 10%.

 

Mercator gathered its data for its eighth annual prepaid card study from a variety of sources, including processors and merchants. The firm revised some previous figures to reflect additional data.

 

 

 

A Gift Card Network  for Online Transactions

 

Anyone with a teenager at home knows the dilemma: all he or she has is cash, along with a burning desire to buy some songs or a game from iTunes or some other cool site.

 

But wait: maybe that kid has a gift card or two. A startup called Openbucks last month introduced a service that may make using those cards online a little easier, though the ultimate verdict from issuing merchants remains to be seen.

 

The Redwood City, Calif.-based company, which has been working in stealth mode for nearly six months with gift cards issued by the Subway sandwich-shop chain, claims its “gift card payment network” extends what have been closed-loop cards to an array of stores beyond those belonging to the issuer. “We connect offline to online,” says Marc Rochman, the founder and chief executive of Openbucks.

 

Rochman says the company, which for now is concentrating on game publishers that sell their wares online, has agreements with 25 such merchants accounting for 300 million active users and about 1,000 games. On the issuing side, in addition to Subway, Openbucks in mid-September was expecting CVS Caremark and the Circle K convenience-store chain to go live in a few days, with gasoline retailers Citgo and Hess Corp. and sporting-goods merchant Sports Authority to become operational on the network within 60 days.

 

Online merchants pay a fee to Openbucks for each gift card transaction. Rochman will not disclose the fee but says it is “competitive” with the 15%-to-30% cost game publishers assume on alternative payments. Issuing merchants collect an undisclosed portion of this fee to compensate for costs involved in opening accounts, printing cards, and processing transactions.

 

“Retailers are going to make a profit on the transaction,” says Rochman, whose background includes prepaid payments and card production. Issuers also benefit from additional foot traffic, he says, resulting from users whose online usage forces them to return more often to the store to re-load value.

 

Studies Openbucks has done with Subway indicate 45% of users are making “frequent” visits to Subway shops to reload their cards, Rochman says. The amount of each load is four to five times higher than the average load for those using the cards only at Subway, according to the research.

 

While gift cards have historically been of the use-‘em-up-and-throw-‘em-away variety, major chains like Subway have issued enough reloadable cards to raise the proportion of this plastic to 28% of all gift cards, according to research by Mercator Advisory Group, Maynard, Mass.

 

Online merchants benefit from the network by getting access to the teen and unbanked market without the costs of issuing their own cards, according to Rochman. “We enable consumers who don’t have access to traditional forms of payment,” he says. “This is purely incremental revenue for [game publishers].” Game merchants that have signed up so far include Bigpoint, Meez, Parallel Kingdom, and World Golf Tour.

 

To use Openbucks, a consumer at checkout selects the gift card option. In a two-step process, the cardholder first redeems credit on his card with the issuing merchant in a shopping cart created by Openbucks, which then immediately transfers that credit to the game publisher. The cardholder’s receipt, displayed onscreen, indicates both phases of the transaction.

 

Ben Jackson, an analyst who follows the prepaid card business at Mercator, says the service could benefit issuing retailers by helping to more rapidly reduce gift card liabilities on their books. It also lets issuers rack up transactions without having to provide benefits or services.

 

But he cautions that merchants will have to take a sharp pencil to their card operations to figure out whether Openbucks makes sense for them. “Closed-loop issuers would have to negotiate very carefully to make this work out,” he says.

 

For example, merchants may have to tie up capital to ensure funds are available to back transactions at unrelated online stores, Jackson says, while the revenue share may not be enough to compensate for costs involved in stocking the cards in gift-card malls and processing transactions. Also, extending what are by definition closed-loop cards to a wider array of merchants could attract attention from regulators, he says.

 

At the same time, the service could generate unprofitable transactions. “If I have to process tons of micro-payments for online games, that could raise my costs,” Jackson warns.

 

But Rochman, who conceived the idea behind Openbucks when he grew wary of letting his teenage children use his credit card to buy songs on Apple Inc.’s iTunes online store, is already laying plans for online markets beyond games and other digital goods. Next, he says, Openbucks is looking to enable gift card transactions for online subscriptions and utility-bill payments.

 

 

 

A Social Security Card Chips Away at Checks

 

More than nine months after introducing a rule requiring recipients of Social Security and certain other benefits to switch from checks to electronic deposit, the U.S. Treasury Department says the number of check recipients has dipped below 9 million for the first time in decades.

 

The agency is now in the midst of interpreting a national survey of benefits recipients and planning new outreach campaigns to convert more recipients to electronic alternatives.

 

At the same time, the popular Direct Express prepaid card, which Treasury introduced in 2008 for recipients without bank accounts, now claims 2.2 million enrollees, up from 1.5 million in December. Indeed, the card program is growing at the rate of 100,000 new enrollments each month, according to Walt Henderson, director of the EFT strategy division at Treasury. “It’s going strong,” he says.

 

A prime reason for the rapid decline in checks and the runup in card enrollees is Treasury’s new rule. The rule requires persons receiving Social Security, Supplemental Security Income, Veterans Affairs, Railroad Retirement Board, and Office of Personnel Management benefits and other non-tax payments to give up checks by March 1, 2013.

 

They can elect direct deposit or the Direct Express card, which is issued by Dallas-based Comerica Bank under a 5-year contract. Persons who have become eligible for benefits since May 1 have not had a check alternative.

 

Henderson says Treasury is interpreting results of a nationwide survey to craft new marketing pitches for direct deposit and the prepaid card alternative. In the Midwest region, for example, almost 1.78 million recipients still take their Social Security payments by check, even though 88% of recipients have converted to direct deposit or the Direct Express program, up from 85% at the start of the year.

 

In a news release issued last month, the agency says it will be “doubling down” on efforts to convert more of these recipients to the electronic methods. Pitches already include inserts sent with checks showing the ease with which recipients can enroll in direct deposit and radio interviews in the region with Treasury officials like Henderson.

 

The goal now is to focus on those who remain resistant to electronic deposit and get them to convert well before the March 1, 2013 deadline, Henderson says. New research Treasury is working on now will include surveys of these persons to find out why they cling to checks.

 

In the current survey, those who have converted cite the security and reliability of electronic payment, compared to checks. “We realize the remaining group is a tougher sell,” Henderson says. “Does a ‘safe, secure, reliable’ [message] work? We’re testing.”

 

Some of these persons will take up the Direct Express card. While Henderson says Treasury “prefers” that recipients with bank accounts sign up for direct deposit, he projects the prepaid card program will grow to between 3 million and 3.5 million enrollees over the next 12 months, given current trends.

 

In December, the agency said some 4 million recipients still receiving checks were unbanked, a figure that has not been updated since. Recipients who use Direct Express may load only federal benefits on the card.

 

Meanwhile, an interim Treasury rule that took effect in January restricts recipients’ ability to load benefits onto prepaid cards other than Direct Express. The rule was prompted by concerns that recipients might load funds onto cards that don’t include the protections of the Direct Express program. Direct Express cards, for example, are protected by Regulation E provisions governing unauthorized transactions, coverage not offered by all reloadable prepaid cards.

 

Under the rule, the card issuer must offer the protections that apply to payroll cards under Reg E, and the account must not allow loan-repayment features that trigger payments when benefits are deposited. The account must also carry deposit insurance.