Prepaid In Europe – A Force To Be Reckoned With

Recent years have witnessed a plethora of prepaid products enter the market as more payment players realise their potential. Once a sector dominated by alternative financial providers, it is now becoming a less saturated market in the U.S. – with the larger banks now wishing to be in the driver’s seat. For example, J.P. Morgan Chase – the largest U.S. bank by assets – now sells prepaid cards in all of its 5,500 branches. In addition, American Express – a brand previously renowned for targeting the most affluent customers – is increasingly a key player in the U.S.

Both of these developments are supported by research commissioned by the Mercator Research Group which anticipates that $81.8 billion will be loaded onto prepaid cards in the U.S. this year. The Group also predicts that prepaid card use will increase to $116.9 billion in 2013 and $167.2 billion by 2014. This all begs the question – why is “prepaid” the latest pie that payment providers want a slice of? And will we see this space evolve in the European market over the next couple of years, replicating the pace of the U.S. marketplace?

The main drivers we are seeing in creating interest from payment providers in the U.S. prepaid market is that they are seeing the huge increases in prepaid card usage from both consumers and businesses, coupled with the unique benefits that prepaid products bring to both the payment providers involved and the end card user. With the rise in prepaid card usage being based on very solid factors, this also creates a secure market for payment providers to focus their energy on.

There are a number of factors creating this increase including consumer behaviour, which is moving towards prepaid for purposes such as budgeting aids, household expenses, or as a way of distributing pocket money. Businesses are also using prepaid cards in a similar way to manage employee expenses and incentive incentivize schemes. The benefits of prepaid cards are certainly adding to the upward trend as they far outweigh traditional methods on price and usability for tasks such as cash withdrawals and purchases in foreign countries, employee expenses and loyalty schemes.

For retailers the benefits are even greater. Merchants can issue prepaid cards to customers to encourage increased sales through brand awareness and promotions, while also serving as a catalyst for customer retention and loyalty. In addition, data collated on consumer spending habits is able to inform retailer marketing campaigns, enabling opportunities to reach new consumer market segments.

Commenting on the American model, Tim Sloane of Mercator Research said “the most successful prepaid player sells its cards at retail locations to appeal to more consumers.” This can already be seen in the U.S., where the market is dominated by alternative financial provider, Green Dot, which sells its prepaid cards in over 14 high street retail locations. This is likely to be reflected in Europe given Green Dot’s commercial successes.

It is therefore unsurprising that prepaid is predicted to be such an important factor in the future of European payments. In some European markets we are already witnessing an enthusiastic adoption of such products, namely in Turkey and Italy. Italy is leading the charge on the prepaid front, having been an early and eager adopter of the payments channel. As an example, according to the Bank for International Settlements, the rate of prepaid cards being issued increased 41% between 2007 and 2008, from 5.8m to 8.2m in Italy. In fact, recent research by PSE Consulting shows that two-thirds of respondents interviewed believe prepaid will be a success in Europe by 2017 – leading to the prediction that over €160 billion will be spent, generating over 6 billion transactions per annum. These are significant figures which, when combined with evidence of prepaid success in other markets, will certainly attract the attention of financial service providers across Europe.

It is also worth considering the various players involved in the issuing of a prepaid card – and the impact this will have on the market. Prepaid products require unified communications between a number of different parties, including manufacturers and processors. It is likely that the winners in the fight for prepaid voice share will be those issuers who manage the whole card service process – retailers will then choose to outsource prepaid issuing to these providers purely from a resourcing perspective.

Prepaid has the potential to be a significant growth area for the European payments market. For the traditional payment players, prepaid allows the opportunity for institutions to broaden their customer base. Given the various impacts of the financial crisis -including increased regulation and competition – prepaid allows traditional players to restore damaged profits by pursuing alternative revenue sources. What’s more, it is a hugely popular product, as is evident from the revenue-boosting numbers we have witnessed in the U.S., Turkey and Italy with consumers and retailers already benefitting from the service.

It is clear that prepaid services offer many benefits to consumers and retailers, and the growing popularity witnessed at a global level has created more hype around prepaid solutions, encouraging bigger payment players to contribute to the prepaid community as we have witnessed in the U.S. Nevertheless, the jury is still out on how this will translate and develop fully in Europe.

The only question remaining is which players will lead the prepaid charge in Europe. It is certainly possible that Europe will emulate the U.S. model and traction when it comes to prepaid, with alternative providers paving the way for others to follow. This leaves the mainstream institutions to play catch-up and decide how to facilitate this new trend for the benefit of their organisation.

Nick Ogden, CEO and founder, CashFlows

Nick is a serial entrepreneur in the financial services industry, having founded WorldPay in 1997. Nick has since been the Chairman and CEO of The Voice Commerce Group, a financial services company which worked to develop systems which allowed individuals to identify themselves using a voice signature – VoicePay. Nick has been recognised by a number of industry awards including the UK Ernst and Young Entrepreneur of the Year Award, the Computer World Global IT Leaders award, the ID People Awards 2009 and Entrepreneur of the Year at the National Business Awards UK in 2010. CashFlows is the culmination of all Nick’s experiences in business, with the aim to significantly help businesses handle their cash flow in this tough economic climate.