Prepaid, Cellphone Converge
Mobile payments, GPRs, unredeemed gift-card dollars prompt change.
Like the proverbial roads leading to Rome, in the migration of everything prepaid—from gaming to gift and general-purpose reloadable (GPR) cards—all subcategories seem to be converging into the cellphone of tomorrow.
That’s because the growing ubiquity of high-tech smartphones and the movement of payment to “mobile wallets” are acting as magnets, pulling prepaid in.
“I think it is only a matter of time before prepaid mobile-phone payments are as common as using a plastic card for the same type of transaction,” says Scott Hartman, president and CEO of Rutter’s Farm Stores, York, Pa., giving a nod to both mobile wallets and the growing use of prepaid in general.
Several documented prepaid trends back this scenario:
- “Open loop” market to surpass closed loop. The use of prepaid cards in lieu of personal credit and debit cards and even bank accounts (with employees getting their paychecks downloaded onto cards) will exceed volumes for closed loop—or cards tied to specific entities or retailers—by 2014, according to Mercator Advisory Group, Maynard, Mass. The trend indicates the growing use of prepaid as a payment option.
- Prepaid long-distance falls as wireless rises. A 7% drop in prepaid long distance (land lines) from 2009 to 2010 (most recent data available) is projected to continue, falling from $3.7 billion in 2010 to $2.8 billion annually as a subcategory by 2014. Meanwhile, prepaid mobile minutes and plans went in the opposite direction, rising 16% from 2009 to 2010, with projections going from $23.8 billion in 2010 to $32.9 billion by 2014, Mercator says. The trend is the ripple effect of the rising use of mobile phones.
- Retailers believe mobile payment is inevitable. In a joint survey by CSP and Mercator, almost a quarter (23%) of responding retailers said they were considering technology changes to accommodate mobile payments. (See sidebar above.) Retailer buy-in is a must for any new payment trend, especially when change requires a financial investment.
Still, mobile payment faces many obstacles, including data-security concerns, competing mobile-phone technologies and the cost of upgrading pumps and point-of-sale (POS) registers [CSP—May ’12, p. 75]. But retailers such as Woodbridge, N.J.-based Hess Corp. are positioning themselves for the future.
“We’ve been evaluating a lot of different options in the digital [payment] space,” says Ethan Fitzsimmons, director of foodservice, who also covers the prepaid category. “We’re working with [our supplier] to ensure we have the right technology so that we’re ready.”
One of the reasons open-loop cards are projected to surpass closed loop is the growing number of businesses and government entities loading employee payroll onto debit cards, says Ben Jackson, senior analyst for Mercator.
Two indications of prepaid growing as a financial service are the entry of major operators and the positive forecast for GPR. Jackson points to Dallas-based 7-Eleven working with Austin, Texas-based NetSpend Corp. to bring the prepaid NetSpend Visa product to the chain. He says Englewood, Colo.-based Western Union has also entered the game with its prepaid reloadable product.
Frank Squilla, senior vice president of sales for InComm, Atlanta, adds to that the entry of internet payments provider PayPal, San Jose, Calif., and even celebrities such as hip-hop recording artist and producer Russell Simmons.
Mercator numbers show $57.2 billion loaded on GPR cards last year, projecting the number to more than double to $167 billion by 2014.
“This is a function of more and more people using these cards for a variety of reasons,” including budgeting efforts and banking costs, Jackson says. “As you look at [prepaid’s] role in the c-store world, it can become not only another item to sell and potentially on a repeat basis, but [a foundation for] a relationship with that customer, who’s now looking at the c-store for financial services.”
People who don’t have bank accounts or have minimal contact with banks—the “unbanked” and “underbanked”—have always been prime candidates for financial services, Squilla says. GPR is becom ing a more viable way for c-stores to offer those services.
As more players enter the GPR space, the goal is to allow reloads from all of them at the local c-store. “It’s exciting for us,” Squilla says. “[We’re developing] a financial network to top up at all locations … where it’s tied to PayPal, Netspend and Russell Simmons. As more sign on, they’ll have a presence at 150,000 [c-stores nationally].”
The other half of the equation is consumer awareness, says Teri Llach, chief marketing officer for Blackhawk Network, Pleasanton, Calif. As the cards become more visible in other channels, c-store operators are seeing demand rise. “The awareness is growing,” she says. “[Prepaid is] morphing as the use becomes more self-use.”
As a side note, Jackson of Mercator says closed-loop cards are still viable products, with in-store gift cards and “incentive” cards (wherein businesses give employees these cards as rewards to drive behavior) being the fastest-growing segments.
In fact, Mercator had to revise its initial projections about when open-loop would surpass closed because the closed-loop segment was actually larger than it had originally estimated, Jackson says.
Branded gift cards were one of the reasons Hess switched prepaid suppliers at the beginning of the year, Fitzsimmons says. Its new supplier, Blackhawk, offered cards from the branded retailers Hess customers were looking for.
“[Blackhawk] brought a variety of options in prepaid, gaming, fashion, dining, home improvement and digital content and all best in class—Xbox, iTunes, Lowe’s,” Fitzsimmons says. “Brand makes the difference.”
The category has been somewhat flat the past two years, a reflection of the changing telecom arena and the various phone plans flooding the market, Fitzsimmons says. But “we’re starting to see an upside in sales and areas of double-digit increases.”
“With gift cards and creative cards like Groupon and digital content and gaming, we’ve seen an uptick,” Llach of Blackhawk says. “But not just for gifting but [again], self-use. The last thing I want is to tie my credit card to [my daughter’s] iTunes account. A month later, I’d be knee-deep in charges for her music.”
For many consumers, prepaid is the right way to go with digital content, she says. “That’s a big trend with reloadable debit. The consumer says, ‘If I overdraft or do something wrong on my bank account, it’s [a fee]. I’d rather pay $3.95 to buy a reloadable card and pay $2.95 to load it.’ ”
In tandem with GPR developments, Squilla connects the dots back to the cellphone. InComm is working with providers to develop a prepaid mobile-payment platform, where much of the reloadable activity with cards at c-stores can now happen using a cellphone.
The mobile wallet has the potential of aggregating everything from credit and debit cards to loyalty reward points and gift-card totals. Payments and rewards programs, such as the one deployed last year by Seattle-based Starbucks, can reside in apps on people’s phones.
“If people want to have apps, where are they going to load value? They’ve got to go to retail to do this,” Squilla says. “They’re walking around with computers in their pockets now. They need ways to transact their commerce over their phones.”
And it’s not just the unbanked, Squilla says. It’s the teenagers and college students whose parents need ways to budget their children’s spending. “Companies are out there that are trying to build … transactions geared to kids who purchase over the Web, where there’s an online budget, a virtual piggy bank,” he says. “Right now, through the consent of a parent, they’ll buy a cool ringtone. That’ll be $1.99 that happens to be on the phone.”
In the future, Squilla believes that’s the way most transactions will occur. “It’s changing the way people do business.”
Retailers are already marketing to customers online with their websites, such as slurpee.com or speedway.com. It’s the concept of digital delivery. A relevant example today would be the online purchase of a gift card that’s sent via e-mail or through a social network. The recipient ultimately gets a bar code representing a $25 credit sent to his or her cellphone.
One vision of this new process is people paying over the Web vs. when they’re actually at the store. It becomes more of a pickup or even delivery task vs. shopping and paying. “It’s the ‘now’ economy,” Squilla says. “I don’t want to go to the store; I want it now.”
Facing a Digital Future
Retailers still have time to respond to mobile payment, Hartman of Rutter’s believes. Customers still need to feel comfortable with apps with regards to security and the safety of their money. In addition, retailers would have to invest in new equipment.
“Inside the store is the easiest place today to execute a mobile prepaid transaction for c-stores, but even that often requires an upgrade to a scanner and some software,” Hartman says. “Outside, however, is where the majority of our industry transactions take place, and that is going to be a much heavier lift for our industry because it may require the installation of a scanner or [radio frequency] card reader at the pumps, both of which are very expensive.”
In the face of these changing payment options, Squilla says it’s important for retailers to position themselves for the future. POS devices should be geared for mobile payment, either contactless options or scanning, where price-look-up keys allow for multiple denominations. Two more requirements are reloadable capabilities in a price range of $20 to $500, and the ability to settle daily transactions.
“All those things come into play as business continues to morph with mobile payment, services, mobile communications and top-ups,” Squilla says.
From his perspective, Hartman keeps an open mind. He believes the push over the top for this type of transaction will come from “left field.” The easiest way to envision prepaid mobile happening is with the same mechanisms currently used for credit and debit transactions, with the same processors, such as credit-card giants Visa and MasterCard, he says. However, “I expect that in the next two years I’ll wake up and see an announcement of a new, out-of-the-box approach to handling these types of transactions,” Hartman says. “It will make everyone say, ‘Why didn’t I think of that?’ ”
Gift-Card Diversion: A Statewide Pullout
The growth of prepaid has its drawbacks, with the category catching the eye of lawmakers eager to repair budget shortfalls. In a current development, prepaid suppliers have said they will pull all product out of New Jersey in response to a state law attempting to claim unused gift-card dollars.
Based on laws that allow states to take over unclaimed funds from forgotten bank accounts or overpaid cable bills, the New Jersey law passed in 2010 requires retailers to get customers’ ZIP codes in an attempt to usurp gift-card dollars left unused after a couple of years.
“There is an argument to be made for the role of government … but the whole purpose is to reunite [the owners] with their unclaimed property,” says John Holub, president of the New Jersey Retail Merchants Association, Trenton, N.J. “With gift cards, there is no logic, because a gift card is purchased and given to someone as a gift. But it’s potentially regifted 10 times over, so knowing the bearer of product is quite difficult.”
Requiring only a ZIP code further clouds the matter, Holub says, with the plan having logistical problems: “Clearly, there was never any intention of reuniting an individual with the unclaimed balance.”
As a result, Blackhawk, InComm and American Express announced they will pull product at the end of June. “New Jersey has always been a business-friendly state,” says Frank Squilla of InComm. “We hope for a resolution.”
At press time, the pullout plans were still in place.