Gone are the days when prepaid open loop cards were considered glorified gift cards.
These days, consumers are learning that open loop cards can be linked to a multitude of banking-type features. On the flip side, retailers are learning how to turn these accounts into ongoing relationships with customers that allow them to flex their marketing muscle.
This combined awareness will make 2013 a year of healthy growth in the prepaid reloadable space. We talked to eight executives in the prepaid market, who predict that over the next few years in reloadable we’ll see a plethora of new features added to open loop cards that make them closely resemble bank accounts. This will inspire a more diverse user demographic, and bring banks and traditional credit card companies into the loop as prepaid providers.
We’ll also see open loop accounts go digital and mobile with reloadable virtual gift cards picking up speed and mobile applications playing a key role in gift card provisioning and payments. Both of these factors will contribute to a deeper integration between open loop cards and loyalty, incentive and other marketing programs. Finally, open loop cards will pick up speed in emerging markets abroad.
As these changes take shape, many in the industry believe 2013 will be a year of trial and initial adoption, while 2014 and 2015 lead to a tipping point and much greater uptake.
Open Loop Prepaid Accounts: A Moveable Bank Account?
For many years, open loop cards were marketed to the underbanked, and they offered the bare bones – stored value that could be reliably debited for online shopping and other card-drive purchases. In the past couple of years, some providers have begun to offer a few banking-type features, such as direct deposit. But in 2013, in response to direct consumer demand, expect those banking-type features to blossom in prepaid open loop.
“Open loop will continue to be driven by the underbanked, but we are seeing new segments of interested consumers, who are getting closed out of the credit world or are finding that banks are not meeting their needs in the way that they were before,” said Mike Hafer, senior vice president of global prepaid at Western Union.
Because these users have had experience with banks, they are demanding a wider set of features, including automated bill pay, online account management and even linked savings accounts that can accrue interest.
This phenomenon is driving traditional banking and credit card institutions, such as Chase and Amex, to get into the space. When they do, they tend to bring a wider set of features.
“Consumers today are not only more tech savvy and better informed about the products, services, deals and discounts available, but the current economic environment has forced people to do more with less. Because of this, many consumers need alternative ways to live within their means yet they also want the convenience and benefits that traditionally have been associated with checking accounts or debit cards,” said Laura Kelly, SVP of the Americas, Global Payment Options, American Express.
“Families want to have the planning tools, and everyone wants the ability to easily manage finances, as well as to conduct immediate person-to-person money transfers. We see our customers asking for this type of convenience every day. They not only want payment options to improve their lives, they want them to be more convenient and to simplify finances. This is where the need for prepaid arises.” said Kelly.
While open loop cards have historically been sold at convenience stores, box stores and online, 2013 will see more banking institutions enter the field, diversifying the distribution chain. With that, we could see the rise of the ATM as a tool to sell and reload open loop cards.
Todd Nuttall, CEO of Better ATM Services, explains that consumers have been buying what is essentially a moving bank account through convenience stores because… well, they’re convenient. And that won’t change. But banks as a storefront are not so convenient. Meanwhile their ATM machines are the perfect bridge – they’re as commonly found as convenience stores (even more so) and they are perceived as an arm of the bank with the same kind of security.
The challenge will be in training prepaid consumers, who haven’t previously worked with ATMs. Yet Nuttall doesn’t expect that to be a deal breaker.
“Underbanked customers are already kiosk users – they make utility payments with kiosks, for example. The behavior is not foreign to them,” said Nuttall.
If all goes according to plan for Better ATM, ATMs that sell prepaid cards will turn prepaid customers into “psuedo banking customers,” Nuttall says. And, as consumers become dependent on related banking-type features, they may be willing to pay more fees as long as they are clear.
“They may say, ‘I am happy to pay $1 for email notifications of balance,’” he explained.
Open Loop Gone Digital
The gift card world has been turned upside down with the rise of digital gifting or egifting. In a digital world, gift cards can be bought on ecommerce sites or even at storefronts and then sent to friends using SMS or email. Accounts can be redeemed using PIN codes, QR codes and could eventually be linked to NFC chips. Until now that has been driven by closed-loop gift cards that don’t require the kind technology scalability at the POS terminal as reloadable cards. But that’s set to change in the coming years.
“As soon as you have a card that is similar to the plastic card, but in a digital format, you’ll see the same activity you’ve seen with closed loop,” said Michael Fletcher, senior vice president of sales and marketing at virtual gift card provider Giftango, which was acquired by mega prepaid provider InComm in January. “There are a lot of solutions working to solve that point of sale [challenge] to allow cards to work at the POS in a scalable manner.”
One thing for sure, Giftango is seeing demand in its channels for digital open loop. But demand has to be larger than that.
“We have channels asking us for open loop cards,” he says, explaining that they see it can be much less expensive on the fulfillment side to provide virtual cards. “But the demand is not as high yet from the consumer. And there has to be more incentive [to accept these cards] for the merchant.”
Much larger retailers, such as Starbucks and Williams Sonoma, are leading the way with open loop digital gift cards, working with CashStar as a provider. Starbucks has seen enormous uptake of its digital open loop accounts – and lots of media attention to go along with it.
“At a high level we are seeing growth in our business in general, and more consumer demand for digital gift card delivery. It won’t take the place of plastic, but many more retailers are adopting digital gifting programs and making consumers more aware of it. That’s good for the whole industry,” said CashStar vice president of marketing Gene Cornfield.
Open Loop and the Mobile Experience
As reloadable gift cards are going digital, they’re also going mobile, but that doesn’t necessarily equate to the mobile wallet.
CashStar’s Cornfield says providers and retailers should be aiming for “the mobile optimized experience,” meaning that digital cards should be made available through mobile applications that are as easy to use as full online applications or in-store purchases.
“We found among our 300 brands, those that have a mobile optimized experience sold 37 times more than our clients that didn’t have mobile optimized [applications],” said Cornfield. “Our research has shown that retailers who serve the customer where they are, on the device that they choose, have the highest conversion rates.”
But the mobile experience doesn’t stop there – and Starbucks is perfect proof of that. The obvious goal is to make it so that open loop accounts can be linked to mobile wallet applications. Starbucks already has an application that allows users to load prepaid accounts and then debit them directly from their phones. However, there is not yet a universal mobile wallet or even set of standards and POS acceptance technologies. Until that happens, growth in open loop mobile wallet won’t be rapid.
The good news, however, is that consumers are already showing excitement around the mobile wallet and virtual gifting. Passbook, an Apple iOS application, is not actually meant to be a digital wallet, but it allows users to congregate a bunch of account numbers in one file on their mobile device, and then pay with a QR code. These accounts could be prepaid or bank account linked.
“One of the things we are most excited about is Apple’s release of Passbook with iOS 5 and 6,” said Cornfield. “Passbook is on so many iPhones and iTouches and it becomes a facilitator for gift cards to be more accessible and for consumers to get used to mobile as a payment mechanism.”
Even though Passbook is impacting only a tiny segment of mobile devices, initial use is a good sign. For customers that have Passbook, between 10 and 20 percent of all CashStar cards sent among customers are added to Pasbook,” Cornfield said.
Open Loop Cards Inspire Innovative Loyalty and Marketing Plans
Meanwhile, plenty of third-party vendors are working on an aggregated mobile wallet or platform. The more obvious ones are Google Wallet and ISIS, but companies like Clutch are creating platforms that integrate multiple reloadable prepaid accounts for payment with marketing. The Clutch application can pull accounts from gift cards, credit cards, PayPal and even peer-to-peer (person-to-person) payments.
While Clutch will enable a wide variety of payment methods from barcode reading to NFC chips, actual payments is not the most exciting part of the application, says Andy Odell, cofounder of Clutch. After all, the 12 seconds it takes to swipe a card is not a process that needs fixing.
But more exciting, the Clutch platform can integrate data from users and all of the accounts they’ve linked to the aggregated platform. This leads to a host of new mobile marketing and loyalty possibilities.
The Clutch platform can offer up coupons and other incentives based on past buying trends. Users can set up their Clutch dashboard to filter retail offers based on their location and a number of other factors. And they do all of this through their mobile app.
Open Loop and the Brave New World of Incentives and Loyalty
Many companies see 2013 as the year that open loop plays a larger role in loyalty – where closed loop once dominated.
“Closed loop will still be more prevalent, but there are two large credit card companies that are both running independent programs that allow members to redeem points and convert them to gift cards,” said Cornfield. These gift cards are then completely separate from the credit account. Cornfield is seeing a similar trend in retailers that experience more periodic sales – such as clothing stores. They offer points over time, and are converted into open loop prepaid accounts.
Open Loop Goes Global
If any company could take open loop international, it would be Western Union, which already serves retail customers with money remittance all over the world. However, consumer awareness has been a challenge. The coming few years will see that change.
“Globally we are seeing a greater awareness of these types of tools,” said Hafer. “The world is becoming a much more connected place. Consumers have more access to information than before through internet, smartphones and word of mouth. We can speak easily over the internet using Skype.”
In addition to consumers learning more, banks and other providers are beginning to address the necessary technical infrastructure to support these programs.
“Technical infrastructure in some of these countries is still maturing,” said Hafer. That means that there are not organizations in place that enable providers to run a Know-Your-Customer check, for example. Finding user identities in other countries can be a challenge. Payment technology is often not in place. This will change in the coming years, opening the path for prepaid payments growth abroad.
Consumer Awareness, the Never Ending Challenge
Educating consumers on open loop, digital cards and mobile accounts will be the biggest obstacle in open loop growth both domestically and abroad.
“The US market is a perfect case study on this topic. Look how many years it has been now and you still have consumers buying reloadable cards and thinking they are [closed loop] gift cards,” said Hafer.
Prepaid providers will have to carefully train retailers, who in turn will train consumers. Western Union is working on that abroad to break open emerging markets. But even domestically, prepaid providers will have to join forces to work on consumer awareness together.
“It’s not a simple thing to solve, and the overall industry knows that,” said Hafer. “The industry will have to work together. We are all moving toward a common goal in making consumers as aware as possible. It’s one of those [situations where] the high-tide rises all boats.” •