As the prepaid market in Europe grows
and evolves, so too do the opportunities for the wide range of
prepaid products now available in the marketplace. Here, MasterCard
Worldwide evaluates the market and its main growth areas.
 
There is tremendous growth potential for prepaid as a category,
driven by consumers’ growing preference for electronic payments,
the availability of reload networks and the expansion of key
verticals. Beyond the traditional gift cards, the prepaid cards
industry now includes a variety of product offerings and very
effective funds disbursement vehicles. On the consumer side,
prepaid cards are a big step towards a cashless society, giving
cardholders a convenient, flexible and secure access to funds and
the means to control spending – benefits that cash and cheques
cannot match.

TowerGroup research estimates the global prepaid transaction market
to have a spend potential of more than $2 trillion, while Aite
Group projects that a total of $257 billion will be spent on
prepaid cards by 2009. Prepaid has huge potential to displace
paper-based payments.

MasterCard Worldwide commissioned independent research, conducted
during May 2007, into the development of the worldwide prepaid
market which revealed a promising future for prepaid in Europe, as
well as identifying how the market is expected to progress across
different product categories and in each country.

MasterCard’s research predicts that aggregate spending on prepaid
payment cards in Europe is estimated to reach $163 billion by 2010.
This amounts to 25.4 percent of the estimated global total spend on
prepaid of $645 billion, putting Europe behind the US ($296 billion
and 45 percent of the global total) for market spend, but well
ahead of Japan ($59 billion and 9 percent of the global
total).

While the consumer segment will remain strong, there are a number
of emerging segments offer significant growth opportunities.
MasterCard sees particular opportunities in the unbanked and
underbanked sector, in government disbursements, and the travel
market.

The exclusion solution

The underbanked and unbanked represent a diverse market segment
that cuts across different demographic groups and income levels.
According to Visa International, there are more than 2 billion
unbanked individuals worldwide. In the US alone, it is estimated
that unbanked and underbanked people receive almost $1 trillion in
annual income. There is tremendous opportunity for financial
institutions and their partners to extend the depth and breadth of
their offerings and reach this emerging customer segment, and in
the US, prepaid companies such as NetSpend have become market
leaders by focusing on satisfying the needs of the financially
excluded, which include such groups as recipients of benefits, the
overindebted, migrant workers and other vulnerable groups. In the
UK, the cashplus card launched by APS in 2005 serves exactly this
market.

There are many countries around the world where a minority of the
population has access to traditional banking services, one of the
lynchpins of a successful economy. In many cases prepaid can
provide a bridge to traditional banking relationships by offering a
secure gateway to funds and enabling consumers to participate in
the economic markets without unnecessary risk.

Good fit for basic bank accounts

Prepaid cards offer a great facility for those customers who have
been rejected by banks for similar type of payment products.
Prepaid cards provide a good fit for capabilities that match the
key benefits of a basic bank account, ie, depositing and
withdrawing funds at cash withdrawal machines and having the
ability to pay in wages or standing orders.

Prepaid cards take the utility of the account one step further by
providing the customer with the ability to use the card on the
internet and anywhere in the world where branded cards are
accepted.

Prepaid cards enfranchise consumers by offering them the financial
freedom of using a payment card without having to open a bank
account or undergo credit referencing. Prepaid cards present a
strong solution to the problems that both this market segment and
the banking industry are faced with when dealing with the provision
and use of payment systems in a cost-effective and sustainable
manner.

Prepaid cards have also begun to offer pricing structures that
create sustainability for providers and value for the consumer, a
balance that has been missing from the industry, in order to make
products for the financially excluded actually work in practice.
Prepaid payment cards have taken much of their pricing strategy
from the mobile phone industry, and in doing so have also
eliminated most of the penalty pricing seen in current basic bank
accounts today. Prepaid payment cards offer fixed costs either on a
monthly or a transaction basis. This method, although appearing
more expensive than a ‘free’ basic bank account that charges
penalty fees, actually results in a less expensive product and a
safer price alternative for the financially excluded as the fear of
penalty costs is eliminated.

Replacing cash in the public sector

MasterCard’s research shows that another of the main drivers of
European prepaid spending by 2010 will be the use of prepaid card
for the payment of government benefits and allowances. This market
segment is expected to play a lead role in driving growth in the
prepaid market sector across Europe and has already gained traction
in most of the markets around the world. For example, in the US, a
growing number of states are leveraging prepaid cards to distribute
state-sponsored benefits such as child support or unemployment
insurance.

The use of prepaid cards for government benefits is expected to
account for a minimum of 23 percent of total spending on prepaid
cards in each of the European markets. The government categories in
Spain and Italy stand out in the report, with 33.3 percent of
Spain’s total prepaid market expected to be generated by government
cards by 2010 and a prepaid spend of $14 billion expected in Italy
by 2010.

Government agencies are seeking ways to move away from cash,
cheques and vouchers for making commercial payments. These more
traditional payment methods for disbursing government benefits and
allowances, for example, are costly and often burdened with
administration.

 
So, both local and central government bodies are increasingly
turning to prepaid card-based solutions to reduce costs, improve
efficiencies, and enhance the transparency of the payment process.
Safer and more convenient than cash or cheques, prepaid card
payment solutions can be used for a wide range of disbursement
needs and can also help the public sector to reduce welfare benefit
fraud by driving cash out of the system and ensuring that payments
reach those they are intended for.

Governments throughout Europe are now distributing various forms of
public benefits through prepaid cards. These government to-consumer
payments include child support payments, pension and unemployment
benefits, scholarships, disability benefits and poverty
assistance.

Taking into consideration the anticipated growth in both the
broader prepaid market and the government product stream, together
with the clear benefits for government of applying a prepaid model,
it is a product proposition that is a win-win for all parties
involved, including the cardholder.

Tapping into the prepaid travel market

Today’s travellers are seeking a more globally accepted, more
convenient, and more secure alternative to traveller’s cheques and
foreign currency. Financial experts indicate that prepaid travel
products will become one of the most successful payment segments in
Europe. While sales of traveller’s cheques are in decline, the
market for prepaid travel products is growing.

Particularly popular are open-loop prepaid products that utilise
international card scheme brands such as MasterCard and Maestro.
Current examples of cards in the market include the first prepaid
travel programme in Europe, the Swiss Banker’s Travel Card launched
in 2004, and the Western Union Travel Card launched in 2005.

MasterCard’s research shows that the global predicted total
spending figure on prepaid travel cards is expected to reach $18
billion by 2010. This represents 4.7 percent of the anticipated
$380 billion total spend on consumer travel.

In other independent research, conducted by PSE Consulting on
behalf of MasterCard, it is anticipated that the total European
turnover for prepaid travel products in 2010 will be €11 billion,
which represents 15 percent of the forecasted European prepaid card
market.

The major target markets for expenditure on prepaid travel products
are likely to be for consumers in Germany (40 percent) and the UK
(31 percent), with the remaining geographies only accounting for
approximately 30 percent across the board. This concentration is
linked to both the relative wealth (and therefore expenditure when
travelling) of these two countries, and also their propensity to
travel.

According to the PSE research, by 2010 the average transaction
value (ATV) for European credit/debit cards will be €57.30. Prepaid
travel cards are likely to have an ATV above this value at €119,
although at a lower frequency. Furthermore, average annual prepaid
travel card spend by 2010 is expected to be €1,843 compared to an
average annual spend on debit/credit cards of €2,285. This
comparison illustrates that prepaid travel products are likely to
show return on investment similar to traditional card
products.

Discernable benefits for card issuers

The benefits of prepaid travel products for existing issuers of
travel money and for new entrants to the market are numerous. It is
a proven business model that will continue to have traction in key
markets. There is also the potential to build a stand-alone
business case for this prepaid segment, given the international
dimension, with opportunities for cross-border revenue.

For existing issuers of travel money and traveller’s cheques, there
is the opportunity to reduce paper disbursement and settlement
costs, as well as the chance to provide a defensive offer to
maintain market share against new prepaid market entrants and
rising credit and debit card usage. Prepaid travel cards also allow
issuers to appeal to those consumers who are more accustomed to
using cards, and the ability to innovate within in the market
appeals to both established and potential new customers.

For new market entrants there is the opportunity to enter a new
high-value market at relatively low marginal cost, and to leverage
existing travel brands and relationships, such as car hire and
travel agents. The attractiveness for these businesses is further
enhanced by the high average annual spend, potential fee income and
the opportunity build a long-term relationship with the customer
base.

Competing with credit cards?

One of the major challenges to the uptake of prepaid traveller’s
cards, identified by the expert community interviewed for the PSE
research, was the prevalence of credit cards, which many people use
for overseas payments. In the case of prepaid travel cards, the
nearest alternative may not always be the traveller’s cheque
(against which it performs well) but the credit card.

While prepaid cards may seem to compete with credit cards,
experience with products to date shows that the products are
complementary in the same way that traveller’s cheques have
historically been. However, the use of prepaid travel cards does
bring new challenges. An example of such a challenge is that after
a number of transactions, cardholders may find it difficult to
remember how much remains on the card. Issuers therefore need to
consider options for educating customers on ways they can check the
balance on their prepaid cards while travelling – whether by using
web, interactive voice response and/or mobile phone text message
technology.

Anticipating the challenges and understanding consumer concerns,
card issuers can consider options for greater product innovation
and services to allay consumer concerns and provide them with the
information they need. Furthermore, there is real potential for
positioning and targeting prepaid travel products at specific
consumer segments, such as young people travelling with the
financial support of parents. This differentiates the product from
traditional credit cards and tailors the offering to specific
market segments.