Top-up Downturn

Wireless top-ups under attack, while gaming, reloadable-card trends show promise.

By  Angel Abcede, Senior Editor/Content Development Coordinator

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Wireless top-ups under attack, while gaming, reloadable-card trends show promise 

Like kids building sand castles against the tide, retailers staying on top of the prepaid and financial-services business find themselves building a category while fighting its continued erosion.

The subset of prepaid wireless “topup” purchases—or buying more airtime to replace used phone minutes—in particular has taken a big hit, with historic margin figures of 20% plummeting in recent years to half that, according to one buying-group official. Though still about 70% of the overall category, prepaid top-ups have taken blows from multiple angles, including evolving phone-carrier packages, big-box strategies and new government programs targeting the core prepaid demographic.

“Prepaid wireless is undergoing transition,” says Frank Squilla, senior vice president of sales for InComm, Atlanta, a prepaid-product aggregator and service provider. “The industry is still growing at double digits, but it’s not all happening at the retail store.”

New products and carrier packages are making prepaid as attractive to consumers, and in some cases more so, than traditional post-pay plans, Squilla says. Coupled with the recession, prepaid growth is finding favor among the budget- pinched middle class, many of whom avoid c-store retailers by paying online or through carrier-assigned storefronts.

Combating the migration may mean taking numerous approaches, he says, such as finding new products, adopting better marketing strategies for growing subcategories and possibly linking company loyalty programs to prepaid purchases. What has helped stem the tide has been the idea of unlimited prepaid wireless products, he says. At least one provider has seen success with a $50 unlimited wireless card, with another in the testing phase.

According to Squilla, other products building momentum include the following:

General purpose reloadable (GPR) cards. Prepaid credit cards that customers use for their personal bills and purchases vs. as gift cards to family or friends.

Gaming cards. Appealing to a younger demographic, the products buy time to play online games.

International phone minutes. Instead of sending money overseas and paying the associated fees, people can buy minutes to put on relatives’ cell phones.

Top-ups for government-sponsored airtime. These emerging products tie into the estimated 7 to 8 million wireless subscribers currently using government-sponsored communication plans. The customers can now buy top-up minutes when their allotted “free” minutes expire. “You feel like there’s too many choices out there,” says Husmukh Patel, owner of nine-store Kwik Trip, based in Jacksonville, Fla. “It does take some homework to find out what’s going to work for you and what’s not.”

Though his prepaid-wireless volumes have been steady, he agrees that pressures are mounting and sales “will go soft eventually.”

Nurturing an embattled category may seem like the proverbial hamster’s wheel, but retailers may have no choice, according to Mike Zielinski.

“If the middle class gets squeezed, we need to have viable solutions [for them],” says Zielinski, president and CEO of Royal Buying Group, Lisle, Ill. “These are the perfect products; they makes us a destination … Those retailers not in the ball game are losing this segment of the population.”

Multi-headed Monster

Prepaid wireless, though experiencing bumpy times, has seen its share of success, most recently with Irvine, Calif.- based Boost Mobil’s $50 unlimited program, Squilla says. “It will hopefully entice other carriers to get in the game at competitive price points,” he says. New York-based Verizon is currently testing a $50 price point.

The main causes behind the drop in prepaid wireless business stem from strategic plays made in just the past couple of years, according to Squilla. This multiheaded “monster” includes five major developments:

AT&T discontinued its “feature” cards, which were top-ups sold in $5 and $10 denominations. Squilla says, “This was a large part of [retailers’] volume.”

Walmart’s move to proprietary top-up, which made the sale of handsets (or cell phones) at the Bentonville, Ark.- based company’s locations directly tied to Walmart top-up cards. “From that point, you could only buy airtime top-ups at Walmart.”

Growth of MetroPCS. Now hitting 8.9 million customers, the Richardson, Texas-based carrier chose to sell top-up airtime and have customers pay their bills only at corporate or agent-sponsored stores.

Evolution of plans. Traditional plans that had people buying $10 top-up cards every week evolved into “unlimited” programs wherein people purchased a $40 to $50 personal identification number (PIN) that was good all month. Phrasing also changed, and the term “no contract” wireless began to replace “prepaid.” Squilla says the name change started to make prepaid mainstream.

Federal government’s entry into prepaid wireless. Offering a free phone and 68 to 250 free minutes, the Lifeline wireless program is open to many qualified individuals, mostly people receiving some sort of public assistance such as food stamps.

Regarding the Lifeline program, Squilla says the system has the potential for abuse, because no central database controls how many phones recipients are getting. “Until that’s curbed, we’ll see continued growth with free phones and free air time,” he says.

Lots of Players

Though available for land lines since the 1980s, the Fed-backed Lifeline program began moving into the wireless space in a big way a couple of years ago when carriers such as Tracfone and Sprint/Nextel stepped in.

Miami-based Tracfone, with its Safelink program, was the first and currently has double the subscribers, with an estimated 3.7 million over its next competitor. That competitor is Overland Park, Kan.- based Sprint/Nextel’s Virgin Mobile, at 1.8 million with its Assurance offer, according to PRLog.org, a website that says it monitors the Lifeline program.

But the big-name carriers aren’t the only players. Dennis Henderson, CEO of Ready Wireless, Hiawatha, Iowa, says about 1,600 carriers are sanctioned by the federal government to provide service. The potential problem is that these carriers don’t have experience with wireless or with retail. And from the c-store operator’s perspective, making space for 1,600 carriers is impossible.

Henderson says the solution is a single product that ties all the carriers together. That product would sell airtime after a user goes through the free minutes.

Both Ready Wireless and InComm are working to offer such top-up products, with each at different stages of development and testing. It’s a market retailers can’t ignore, Henderson believes. “There’s a minimum of 35 million eligible customers and only 11 million being served today,” he says. “We’re seeing the tip of the iceberg.”

Reloadable Credit

Going back to the mid-2000s, talk has focused on general-purpose reloadable (GPR) cards, or prepaid credit cards with a major logo, such as Visa or MasterCard, that people load up with cash before they pay for goods and services. In recent years, providers have been noticing a pushback from consumers concerned about the complexity of signing up or the hidden costs charged for conducting transactions, according to Tim Richardson, vice president of business development for InComm. While two separate issues, the two concerns tie back to a larger problem of education. Customers who purchase the GPR card want the ease of use they have with gift cards. They don’t want to register, give their addresses or Social Security numbers. “The traditional GPR card is designed as a banking alternative vs. the consumer buying it and then throwing it away,” Richardson says. Going forward, he suggests a “less is more” approach: The sales space gets designated as a “financial services” area with possibly only two products and significantly more educational material surrounding them. Simply put, he says, “most customers don’t realize the card’s full potential, so they never reload.”

To help combat the confusion, InComm is in development with a card called Vanilla One. The solution works like a personal gift card. Customers pay a $4.95 fee and can load the card once with $25 to $500. Future incarnations may increase the ceiling to $1,000 and allow for a limited number of reloads. In addition, inside the packaging is material about GPR cards. “So Vanilla One is truly a training-wheel position next to the other [GPR] products,” Richardson says.

Still, while complications are a valid customer concern, so are hidden fees, says Karen Sobie Hilbert, vice president of retail sales for nFinanSe, Tampa, Fla. Recent government regulations have forced card suppliers to publish fees on product packaging, which Hilbert says does not always occur. Some providers package the information in a booklet that’s inaccessible unless a customer opens the item—which renders it “tampered with,” so it can’t be sold.

She agrees with Richardson of InComm in that education is crucial. “The Card Act of 2009 says you’ve got to separate gift cards from financial services, so a customer can walk in … and know they’re looking at a gift or a financial-services card,” she says. “The product is early in its life cycle, so you can’t just hang it and hope it sells.”

A New Game

Along with GPR, another emerging star for the category is online gaming. Jerry Cutler, vice president of sales for InComm, says virtual goods and digital content will hit $2.1 billion in sales this year. Sales over the next two years are projected to reach $3.5 billion.

C-stores have an edge in that, for the most part, kids don’t have to worry about involving their parents. “Kids can just walk into a c-store and pick up a game card,” Cutler says. “They get instant gratification.” The games vary and attract a wide demographic. Several appeal to kids ages 5 to 10, with more “hardcore” games playing to the 17- to 35-year-old set. Some social-media games even appeal to moms, Cutler says.

Unfortunately for c-store operators, gaming companies have not been quick to take advantage of the channel, opening up access to a select few chains. Growth is occurring, but it’s outside the channel in big-box and specialty stores, he says.

InComm is working to allow more chains access to gaming and make the execution work better for c-stores. Besides active conversations with suppliers, the company recently purchased a payment platform called Zeevex that can pull together any number of gaming products, allowing retailers to display far fewer cards and still have a presence.

And Cutler hopes the effort will bring success to the industry, with gaming volumes expected to double in the next three years. “One [online game] has 90 million active monthly users playing games,” he says. “That doesn’t mean everyone is paying [at c-stores], but just taking a small percentage of that, you can see how big that pie can be.”

Other Options, Services

 Developing emerging subcategories may be a way for retailers to shore up eroding sales and margins from wireless top-up, but another is with new products that hold potential. Roy Gillingham, general manager of North America for eztop Ltd., Miami, says his international top-up product addresses the concern of sending money to overseas relatives.

Developing connections to 150 carriers in foreign countries, Gillingham’s company has the ability to send top-up minutes to 200,000 physical locations worldwide, where customers can walk in and walk out. “Only a fraction of those who can are using the service,” he says. Taking his own success as example, he says his company has experienced 100% growth each year since 2008: “That’s the kind of scale of growth we see [for the product].”

Patel of Kwik Trip is excited about the potential of international top-ups. “Instead of sending money [to another country], they can top up here,” he says. “It will cost them less and they know the money is going on the phone.”

Still, while prepaid cards offer retailers both a destination product and the potential for profit, Zielinski of Royal Buying Group says not to preclude the development of financial services. Though around for decades, money orders, bill payment and other banking or related services can be lucrative for those who know what they’re doing.

A particular retailer he knows has developed the category well with gift cards, wireless and long-distance phone cards. “But he does a lot more money in bill paying, money orders and check cashing than all those other ones combined,” he says. “If this economy continues to struggle and we start seeing more drift down into the lower class, then … being that [financial] logistics coordinator is going to be very important. If you can do that, you’ve got a customer for life.”


Prepaid Tips

For retailers looking to improve prepaid sales, here are a few tips for specific subcategories:

  • General purpose reloadable (GPR) cards: Provide more educational elements in the display area so customers know what they’re buying and how to best use the products.
  • Prepaid wireless: Differentiate the purchase by tying it to a loyalty program.
  • Gaming: Take advantage of promotional links that many gaming providers offer retailers.

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