Recession Is Boosting Some Prepaid Cards, But Profits Are Lagging

Prepaid cards branded by one of the national payment card networks are benefting most from the recession, but prepaid profitability overall is suffering, according to a survey of prepaid card executives whose results were released in a report this week. The survey, conducted by payments-research firm Aite Group LLC at a prepaid card trade show last month, reveals substantial skepticism in the industry about profits, independent of the state of the economy. “There's still a long way to go, regardless of the recession,” Gwenn Bezard, research director at Boston-based Aite and author of the report, tells Digital Transactions News. Asked which category of prepaid product is getting a lift from the economic downturn, some 40% of the 21 executives interviewed named cards branded by a network and used to distribute government benefits, such as unemployment-insurance payments. Network-branded general-purpose cards tied with government cards, though 5% of executives thought they were being hurt the by the economy. Hurt most by the recession are private-label gift cards, with fully three-quarters of executives citing this category. None thought these cards are getting any benefit from the economy. While gift cards were once a fast-growing segment of the prepaid card market, many consumers have grown fearful of buying a card from a merchant that might go out of business, leaving the buyer or the recipient of the gift card with a worthless piece of plastic. Network-branded gift cards aren't faring much better, with 15% of executives citing these products as having been hurt most by the recession. But the study also reveals a vein of pessimism about current profitability in prepaid cards overall, and this impression is not entirely dependent on current economic conditions. The median transaction growth forecast by the executives for both this year and 2010 is 25%, a figure that seems robust on the surface but comes on top of what remains a relatively small niche in electronic payments. “Twenty-five percent is sort of disappointing given the [current] volume,” notes Bezard. “You wish it were growing faster.” At the industry's current volumes, 70% growth might indicate healthy growth, he says. Relatively anemic growth is making it hard for processors and program managers to achieve the economies of scale they need to build profitability, Bezard says. “You have to have volume and scale, and that's what most players don't have today,” he says. “Even the leaders need to grow their volumes significantly to be profitable in a big way.” This result is reflected in the survey results. Just 19% see current profits as “somewhat high” or “high,' while 29% view them as “moderate” and 52% as “very poor” to “somewhat poor.” On a scale of 1 to 5, with 1 as very poor and 5 as very high, current profitability for the prepaid card market as a whole was rated by respondents collectively at 2.7. But there may be a ray of light on the horizon. In two years, 38% of these same executives predict profitability will be high or somewhat high. And the profitability rating two years out jumps to 3.2. The most profitable product, cited by half of respondents, is the general-purpose card, followed by payroll cards (20%) and, despite their hit from the recession, branded gift cards (15%). Least profitable are business-to-business rebate cards and private-label gift cards, both cited as most profitable by just 5% of the executives.