The Northern Lights Shine On The Prepaid Market

Is Canada truly “prepaid’s best kept secret?”

That’s a question MPD CEO Karen Webster set out to answer when she recently connected with Peter Read, President of Peoples Card Services, for a live digital discussion on the matter.

Off the bat, Webster admitted that the scope of the prepaid market in the United States’ Neighbor to the North — namely, that it is the fastest-growing prepaid market in the world — surprised even her.

Over the course of her hour-long conversation with Read, Webster — along with those viewing the live webinar online — came to understand that there was a lot about Canada that they didn’t know, as Read provided detailed insights that cast a light on the prepaid phenomenon in his home country, exhibiting how it can become a source of advantage and revenues for payments innovators everywhere.

“The Canadian population is open to it simply because there are so many different versions of prepaid showing up in the market, and Canadians are open to technologies and new things.” — Peter Read, President of Peoples Card Services

THE CANADIAN PREPAID MARKET OPPORTUNITY

Acknowledging that the “Canadian prepaid market is not really in its infancy, but it does lag the growth of the U.S. market right now,” Read started things off by dispelling a couple of myths that Americans (and others) may hold about the economic picture in Canada.

Myth #1:  All Canadians are “banked” and don’t use prepaid.

Describing the notion (popularly held in the U.S.) that prepaid is primarily for the underbanked as a “mischaracterization,” Read clarified that Canadians are turning to prepaid “at a surprising rate” (i.e., the aforementioned fastest in the world), with 29 percent of those citizens currently using an open loop (i.e., network branded) prepaid card.

“The Canadian population is open to it simply because there are so many different versions of prepaid showing up in the market, and Canadians are open to technologies and new things,” explained Read, who added that a cultural trend toward being budget-consciousness is also contributing to the uptick in prepaid in the country.

Myth #2:  The Canadian market is the U.S. market, just a little further north.

While there are “definitely similarities” between the Canadian market and the U.S. market, allowed Read — and the former is the most addressable market for U.S. companies to expand into presently — it would be highly inadvisable for any such business to venture into Canada equipped with nothing but assumptions.

On the contrary, Read recommends that U.S. companies exploring the prepaid opportunity in Canada “take advantage of the expertise” that the country has to offer: “Be strategic about resources, but bring in partners that help navigate the regulatory and compliance landscape” and the nuances therein.

DATA POINTS

Moving from myth exploding to hard data, Read and Webster walked the webinar attendees through some facts and figures that underscore the enormous potential that exists in Canada surrounding prepaid.

MasterCard ranks the country as the No. 8 driver of prepaid growth worldwide.

In 2015, the open loop prepaid market in Canada was estimated at just short of $5 billion.

Between 2011 and 2014, prepaid transactions as a whole (including both open and closed loop) in the country rose from approximately $10 billion to $13 billion.

In Canada, open loop prepaid cards are on track for a compound annual growth rate of 18.5 percent — a lift of $9.5 billion between now and 2020.

On top of all of that, added Read, a “vacuum remains” — in that there is “at least twice the growth still available in Canada” for the prepaid market to catch up to the growth rate occurring in the U.S. right now.

WHAT IS DRIVING THE GROWTH

Read and Webster discussed three key factors that are driving prepaid’s surge in Canada.

The first one — which Read admitted “sounds almost too obvious” — is simply the increased awareness of prepaid in the country. Simple but essential, especially given that millennials — who are both more accepting than other demographics of new technologies and experiences and are trendsetters in the same regard — are at the forefront of the “groundswell of movement” toward prepaid adoption that Read describes.

The second factor is that FinTech is prevalent in Canada — particularly in the hubs of Vancouver and Toronto. Here, again, millennials are moving that trend forward, bearing out Read’s observation that “technology is key” in prepaid adoption.

Thirdly, Canada’s regulatory market is now established. With prepaid regulations being implemented at a federal level, explained Read, “there is much less regulatory uncertainty in Canada than there is in the U.S.” Regulatory stability makes businesses more apt to move into prepaid (and the value of the Canadian dollar certainly doesn’t hurt, either).

SOME FOR CONSUMERS, SOME FOR BUSINESSES

In terms of practical use cases, prepaid growth in Canada is illustrated within two general (and equally important) categories: cards for consumers, and cards for businesses.

On the consumer side, Read broke that down further into four specific types of use cases:

There’s the gift use case, which are cards promoted by businesses, that hit the general retail population, and whose usage spikes during major holidays and event seasons (such as graduation). Cards within that group are also non-reloadable.

The shopping use case effectively ticks all those same boxes, with the key difference being that it applies to cards that consumers buy for themselves rather than for others.

There are also consumer prepaid cards designed for the underbanked — people who are looking for transactional services afforded by a “credit card-like product” that inherently allows them, as Read put it, “to be included in society.” Prepaid cards for the underbanked are reloadable.

The fourth and final use case of the consumer prepaid card is aimed at the traveler demographic. Beyond the convenience that cards in this sub-category offer travelers by way of preventing them from having to expose their own credit cards, they also allow consumers abroad to get their money at whatever foreign exchange rate they want and lock it in.

On the business side, explained Read, there are generally two types of use cases for prepaid cards in Canada:

There are those that deal with incentives. Prepaid cards applied toward that end can be either reloadable or one-time use, and they replace couponing and rebate.

Then there is the prepaid card business use case related to travel and expense. In this scenario, businesses are able to control their own expenses, rather than having to manage the credit on company cards.

“In all of those categories” — across both consumer and business use cases — noted Read, “the digitization of cash is what’s key.”

“The way the money gets onto the card may come from cash loading many times,” he explained, “but more and more of prepaid is moving money from bank accounts or via payroll through an incentive — so there actually isn’t a cash component anymore.”

REGULATORY LANDSCAPES

For a U.S. company entering the prepaid market in Canada, there is arguably no more dangerous outcome of making the “it’s just like America but farther north” incorrect assumption than that which pertains to regulation.

While, yes — there are some similarities between the regulatory structures of the U.S. and Canada — Read made it clear that Canada possesses its own set of governing bodies and network rules and payment product regulations that “must be adhered to.”

“[It is] very important that anybody coming north of the border works with a federally regulated financial institution to make sure that [they] come under the federal prepaid regulations.”

To that end, Read believes that it is “very important that anybody coming north of the border works with a federally regulated financial institution to make sure that [they] come under the federal prepaid regulations.”

Working in two languages — English and French — is also a key element for U.S. companies to keep in mind; they will need to understand language laws, specifically as they apply to Quebec.

“With less uncertainty [surrounding regulations] up here,” expressed Read, “what [a company] really has to be careful of is making sure that [they] understand the difference between provincial and federal regulations,” which can be determined by the use of the card.

Leveraging partners is essential in navigating those waters, and Read and Webster walked through a side-by-side comparison of regulatory bodies in both the U.S. in Canada, illuminating their similarities and differences.

“The key difference” across the board, opined Read, “is that the U.S. legal system is more rules-based and the Canadian system is more principles-based.”

In effect, the common practice of U.S. companies working the rules to find a loophole is not likely to fly in Canada.

ENTERING THE MARKET

As the digital discussion began to wind down, Read offered a recap of the primary considerations that program managers from outside Canada need to take into account as they consider the prepaid opportunity in the country.

Get to know the market.  Doing so can allow a program to acclimate to the Canadian consumer and the business nuances, and navigate the regulatory environment.

Use a federal approach.  “Don’t try and come in and do it province by province,” stated Read. “Come in and make sure that you understand you’re going to try and work across the country.”

Look for resources that are technologically agnostic.  “You don’t want to limit yourself to somebody that only works in a specific category,” Read explained. “You want to be able to leverage the major payment networks; you want to be able to work with any of the processors that you may want to work with.”

One final recommendation that Read reiterated was the importance of partnering with an expert resource.

“Try and make sure you go with somebody that sits in a hub or is able to control and provide access to all avenues of the market where there are pieces of business — different processors, different payment networks,” he advised. “You want to make sure you partner with people that are experienced and have a lot of access to the market.”

The good news on that end, as Read concluded?

“There are a few of us up here.”