With Double-Digit Growth, Prepaid Closes in on Half-Trillion Mark in Load Value

The prepaid card market closed in on half-a-trillion dollars in load volume last year, new data from Mercator Advisory Group Inc. show. Volumes on closed-loop cards grew 14% and loads on the newer open-loop cards increased 24%, according to Mercator’s ninth annual study of U.S. prepaid cards.

In all, Maynard, Mass.-based Mercator estimates that loads on prepaid cards hit $483.2 billion in 2011, up 18% from $410.8 billion in 2010. The closed-loop sector had $299.1 billion in loads compared with 2010’s $262.4 billion. Loads on open-loop cards hit $184.1 billion versus $148.4 billion in 2010.

Most of the action in the past few years has occurred on the open-loop side. With these cards, issuers typically pair up with a program manager such as Green Dot Corp. or NetSpend Holdings Inc. to distribute Visa, MasterCard, American Express, and Discover prepaid products through retailers, employers, or other channels.

But the foundation of the industry remains the closed-loop gift card usable at the locations of a single merchant. The gift card, a mainstay present for birthdays and Christmas, remains the biggest of the 17 market segments Mercator identifies on prepaid’s closed-loop side. Gift cards are a big reason closed-loop cards still account for 62% of all prepaid loads, according to Ben Jackson, a Mercator senior analyst. Mercator wouldn’t release gift card volumes, but says they grew 10% last year.

“Closed-loop is going to stay ahead for a while,” says Jackson. “In part that is a recognition of people’s gifting habits, ‘If I’m going to give a gift it’s going to be for something specific.’ Open-loop gift card providers have kind of a tough row to hoe in overcoming that perception.”

Closed-loop’s second-biggest sector is food-stamp cards distributed by states. Mercator estimates load volume increased 10% last year to $74.3 billion, an increase Jackson attributes to the tepid economy.

The fastest-growing closed-loop segments were campus cards used in cafeterias, laundries, stores, and other locations at colleges and universities, and incentive cards distributed by retailers to induce further spending. Campus cards, whose volume increased 30%, grew rapidly because schools “want to get cash off of campuses…they want to speed people through meal lines,” says Jackson.

Open-loop cards aren’t growing as fast as Mercator had earlier thought, but in 2011 they still captured 38% of the total market, up from only 4% in 2003. By far the fastest-growing open-loop segment last year was the one for cards distributed by states to deliver welfare benefits, formally Temporary Assistance for Needy Families (TANF). Volume grew nearly 100-fold, hitting $1.6 billion from a mere $16 million per year in 2008-10.

The huge jump was mostly the result of states replacing paper checks for TANF benefits.

Load volume for the U.S. Treasury Department’s Social Security card grew 55% last as the federal government continued its migration from paper checks. Mercator estimates the government will save $1 to $1.80 for every check it doesn’t have to process. The Social Security segment ranked No. 2 in growth rate among the 18 open-loop segments Mercator identifies.

A broad category that Mercator calls “cash access,” which includes open-loop gift cards, remittance cards, general-purpose prepaid cards, and related products, grew 33% to $74.1 billion and is the largest of the open-loop segments. But several open-loop segments grew more slowly, under 10%, including employee and other incentive cards, and insurance cards. With the exception of insurance cards, where industry adoption lags, the slow growth reflects the overall economy, according to Mercator.

Mercator’s findings reflect the massive shift in how Americans are using telephones. Loads on closed-loop prepaid cards for long-distance calling on land lines fell 11%, but volume on open-loop cards for mobile phones grew 14%, Jackson says.

Mercator compiled its results from data provided by about 20 retail prepaid card issuers, major prepaid card processors, filings of public companies in the industry, and other sources.