Holiday sales in the fourth quarter of 2008 spurred retailers' interest in general purpose reloadable (GPR) prepaid cards, said Brent Watters, Senior Analyst at Boston-based consultancy Mercator Advisory Group, in a February 2009 teleconference.
While MasterCard Worldwide's SpendingPulse 2008 Holiday Wrap-Up Report said total retail sales were down between 5.5 percent and 8 percent from 2007, Watters claimed retailers experienced a "surge in sales of open-loop gift cards" in the last 48 hours before Christmas. "And this really helped boost what would have been a bleak holiday season for them," he said.
The performance of GPR cards has therefore increased retailers' interest in implementing such programs.
According to Watters, the elusive target for GPR cards are the unbanked - individuals without access to bank accounts - which represent approximately 80 million U.S. consumers with a buying power of $1 trillion annually.
But reaching that segment is tricky, Watters said. The unbanked are leery of payment methods that appear to "jeopardize consumers' privacy, especially related to reported earnings and citizenship status," he said.
In a report entitled Reload Networks and the Growing Interest in GPR Card Issuing, Mercator found average retention rates for consumers using GPR cards are short. GPR card users commonly load cards once but then don't reload them after they are depleted. The cards are either lost, forgotten or otherwise discarded. "Cardholders of GPR products are exhibiting minimal brand loyalty," Watters said. "And this is quite problematic."
The reasons consumers exhibit this behavior is not well understood. Watters said primary research has not yet been conducted on this phenomenon. But Watters suggested "high churn is likely indicative that the effort and the cost associated with reloading the product simply exceeds the consumer's perceived value in retaining that product."
However, retention rates seem to soar once cardholders reload their cards just once. Watters cited the research of prepaid card distributor Green Dot Corp. that said after the first reload, cardholders can be counted on to become repeat customers 85 percent of the time.
Thus, Watters highlighted the importance of how reload network setup and end user perceptions at the POS drive retention. For example, the average reload fee is around $4.95. If an individual reloads $20 onto a card, the reload fee amounts to 12.5 percent of that amount. "It's likely that more times than not that consumer will find the fee too high," Watters said.
But if a cardholder reloads $150 onto a card, that $4.95 represents only 3 percent. It is no surprise, then, that the average reload amount just happens to be $150, according to Watters. "High reload cost makes it unlikely consumers will perform low dollar loads, which in turn reduces the network's, ability to gain scale from high volume, low dollar transactions," he said.
Therefore, Watters believes market forces will drive reload fees down to increase low dollar reload amounts.
Watters highlighted availability and ease of use as two other important factors in making reload networks function effectively. The POS locations - also called endpoints - where users access reload functions must be in well-lit, high-foot-traffic areas. Reloading must not be separated from other POS activities, such as normal transaction functions.
Additionally, "extended operating hours are crucial to identifying best endpoints," Watters said. According to Green Dot research, consumers reload their cards most often at the noon hour and from 7 p.m. to 11 p.m. The peek reload time is from 8 p.m. to 9 p.m. So long operating hours are "very important" for reload networks, Watters said.
Another dynamic in play is the single versus the two-step process for reloading cards. The single step, or swipe method, involves cardholders swiping cards at the POS, at which point the network performs the back-end functions, such as real-time validation and account access queries. In contrast, the two-step process "shifts that effort to the consumer," Watters said.
In the two-step process, consumers select plastic cards called reload packs that hang from j-hooks in retail stores. For example, consumers can choose from various Green Dot MoneyPaks that display various money amounts.
At the POS, consumers pay for the packs in what amounts to standard transactions. But the store clerks (also called load agents) scan the barcodes on the packs to "activate" the accounts - that's the first step.
The second step, which actually moves funds onto cardholders' prepaid card accounts, is performed by the cardholders themselves when they contact card issuers via the Internet, interactive voice response services or call centers. Cardholders must provide appropriate information at that time, usually including secret PIN numbers. Only after that process has been completed are funds loaded onto the cards.
"While effective for loading prepaid accounts - for merchants and the networks and cardholders - it's definitely not the most user friendly," Watters said. "There are some challenges, some confusion associated with the two-step process."
Watters concluded that much more research needed to be done to understand the complexities of reload networks and determine which business models are most effective in encouraging consumers to utilize GPR cards and access reload networks.
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