Growth in Closed-Loop Prepaid Loads Perks up

Facing strong competition from up-and-coming open-loop prepaid cards and maturity in some of its subcategories, closed-loop prepaid cards still managed to grow 7.1% last year, according to a new study from Mercator Advisory Group Inc.

Maynard, Mass.-based Mercator estimates load volume on closed-loop cards, which are issued by or for a single merchant, hit $205.4 billion in 2009 compared with $191.8 billion in 2008. In contrast, loads on open-loop cards grew nearly 61% to $124.6 billion (Digital Transactions News, Sept. 2). While growth in the closed-loop sector fell far short of open-loop’s, it still represented a recovery of sorts following growth of only 4.2% in 2008 and 4.7% in 2007.

Sectors that led closed-loop’s growth included digital content and government payments, according to Tim Sloane, director of Mercator’s prepaid advisory service. Digital media, which takes in music, video, and related content, including Apple Inc.’s huge iTunes marketplace, increased 18% to $9.3 billion. Loads for the online games and ring tones segment grew 13%, but all of the gains came from games, Sloane says.

Government payments increased mainly because of higher aid disbursements thanks to the weak economy, according to Mercator. Prepaid public-transit cards saw load volumes increase about 5% to $7.68 billion. Loads declined in two closed-loop sectors, consumer incentives and benefits cards.

Loads on closed-loop gift cards, the original franchise of the prepaid market, grew 3.1% to $70.5 billion. Gift cards are struggling with maturity, a less-than-robust retailing environment, and more competition from open-loop, or general-purpose, prepaid cards. Last month new federal regulations took effect that require them to be usable for at least five years before they expire, and cuts some fees. The effects of those new rules won’t show up until 2011 or 2012. “The first thing you have to say is at a $70 billion market, maintaining a high growth rate isn’t easy,” says Sloane. “Having said that, we do see an opportunity for merchants to make that growth rate go back up again.”

That opportunity lies in using new technologies, including bar codes that a merchant can send to a customer’s mobile phone for redemption in the store, according to Sloane. “It won’t be about breakage,” he says, referring to the income issuers make on unredeemed balances on closed-loop cards. “It will be about driving consumers to spend more in the store.”

One example of the new mobile trend in gift cards comes from Portland, Ore.-based Giftango Corp., which last week introduced a software developer’s toolkit that mobile developers can use to let users receive gift cards while staying within a mobile application. And software developer Firethorn Holdings LLC reported that 1-800-Flowers.com has adopted its SWAGG application, which lets mobile users buy, receive, and exchange merchant gift cards (Digital Transactions News, Sept. 1).