In Prepaid, Issuers And Networks Will See Fastest Revenue Growth

The continuing boom in general-purpose prepaid cards will lift all providers' boats, but some industry players will see revenues grow faster than others, according to new report from Aite Group LLC. The Boston-based research firm estimates that the total revenue pie of the so-called network-branded prepaid card industry will grow from $1.63 billion in 2008 to $5.91 billion by 2014, an increase of 263%. Aite projects that prepaid card issuers will see a compounded annual growth rate in revenues of 28% from 2010 to 2014, while payment card networks will have a CAGR of 27% over the same period. Processors are expected to have a 22% annual growth rate, while program managers will lag at 18%. Aite made its estimates after interviewing more than 35 industry companies in January. Program managers, who typically do the most of the work in deploying prepaid cards by lining up issuers and processors and handling marketing and other details, get the biggest share of the revenues through fees. Aite says managers will get $1.9 billion, or 68%, of the $2.79 billion in estimated total market revenues this year. But managers' income won't grow as quickly as the other market participants' revenues, mostly because of price competition, Aite analyst Adil Moussa tells Digital Transactions News. Moussa notes that No. 1 retailer Wal-Mart Stores Inc. lowered prices in its MoneyCard prepaid card program last year (Digital Transactions News, Feb. 19. 2009). “Everyone had to follow suit,” he says. “That's going to keep happening. We see the program managers have the lowest growth rate, but at the same time they have the lion's share of the pie.” Card issuers will get the second-largest slice of that pie, 17%, or an estimated $470 million in 2010. All of that comes from interchange, which will grow to a projected $1.26 billion by 2014 as transaction volumes grow. Aite came up with its interchange estimates by blending signature-based debit card interchange rates into an average rate of 1.04% per transaction on 65% of the total estimated prepaid volume that goes through the point of sale. Processors will get an estimated 13% of revenues this year, or $360 million. Like program managers, processors' revenue streams are vulnerable to price competition. Also, “We expect the processing prices to decrease with time as issuers and program managers reach scale and therefore a better negotiation seat,” the report says. Aite says the bank card networks will get the smallest amount of prepaid card revenues, 2%, or $60 million this year. But the fees they collect for routing transactions on their systems will grow largely in step with issuers' interchange revenues. In all, Aite projects the total load volume on branded prepaid cards in the U.S. to grow from $41 billion in 2008 to $186 billion in 2014, for a CAGR of 28.8%. Aite estimates that transaction volumes will increase from 1.8 billion to 6 billion over the same period. Of six major network-branded segments, payroll cards captured the largest load volume, 33% last year, or $17.6 billion, followed by general-purpose reloadable cards at 28% and a load volume of $14.9 billion. Aite projects that incentive cards will have the highest CAGR between now and 2014 at 39.3% followed by general-purposed reliable cards at 32.1%. While high, Aite's growth projections for network-branded prepaid cards are significantly below those estimated by another research firm, Mercator Advisory Group Inc. Mercator forecasts the market will hit $292 billion in load volume in 2012 (Digital Transactions News, Dec. 1, 2009). Moussa would not comment about the differences between Aite's and Mercator's estimates. The Aite report notes that new federal regulations on gift card fees arising out of the Credit CARD Act that Congress passed last year “definitely impacted the revenues that players in the ecosystem derived from this product.” Some companies are considering converting their gift cards to general-purpose reloadable cards because of the new rules, Aite says.