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October 31, 2007updated 04 Apr 2017 1:15pm

Prepaid spending set to soar in Europe

While the prepaid card market in the US has flourished in a myriad of forms including gift, remittance and corporate cards during the past decade, it has only recently begun to establish a cultural and financial foothold in Europe. Sensing the opportunity for customer acquisition and branding in previously untapped markets, a multitude of financial players have been entering the prepaid space either as issuers or co-branders Analysts from financial research and consulting company Tower Group recently predicted that prepaid spending in Europe will reach 75 billion ($107 billion) by 2010, with 375 million cards in circulation

By Hugh Fasken

While the prepaid card market in the US has flourished in a myriad of forms including gift, remittance and corporate cards during the past decade, it has only recently begun to establish a cultural and financial foothold in Europe.

Sensing the opportunity for customer acquisition and branding in previously untapped markets, a multitude of financial players have been entering the prepaid space either as issuers or co-branders. Analysts from financial research and consulting company Tower Group recently predicted that prepaid spending in Europe will reach €75 billion ($107 billion) by 2010, with 375 million cards in circulation. This represents a staggering growth rate of 600 percent.

MasterCard launches new cards Most recently, MasterCard has announced that it is launching three new prepaid cards for the corporate and government sectors, allowing companies to control and improve the management of funds. Chris Reddish, group head of Prepaid Europe for MasterCard, predicted “fantastic opportunities” for the government and transport sectors when he spoke to RBI.

Nevertheless, a number of speakers at the Prepaid Cards Summit 2007, held in London in late October by VRL KnowledgeBank, publisher of RBI, were quick to point out the challenges that exist within the prepaid cards market, alongside the opportunities for growth. If there was an overriding theme for the summit, it was one of a ‘reality check’ for the industry. The exit of major companies such as Western Union and American Express from the prepaid space has perhaps had a sobering effect on the sector, following the hype surrounding the market in recent years.

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Potential obstacles Potential obstacles for the prepaid industry would most notably come in the form of regulation and profitability. As the sector grows in volume, it has begun to attract the attention of financial regulators across the globe. The issue over breakage fees in the US, as well as compliance concerns regarding the varying purse limits across European countries, serve as good examples of this.

Ken Howes, a director at consultancy  Edgar, Dunn & Co, told conference attendees that substitution economics was in many instances a key driver for prepaid card growth in the form of cash or vouchers. However, he noted it is the non-bank institutions that have proved to be more innovative, targeting a variety of consumer sectors that have struggled with profitability.

Howes argued that banks, having had their fingers burned with stored-value initiatives, are proving to be slow to adopt general-purpose prepaid cards. Consumer fees are also an issue, as in some markets they remain unsustainable without any significant added value. The solution to all of this, according to Howes, is for institutions to team up with third-party organisations to provide additional customer value through their products.

He stated that by introducing partnerships into the prepaid proposition, programme managers will be able to share or even reduce their fixed and variable costs, thereby generating increased value for the consumer.

Howes cited merchant-driven travel and shopping cards, plus co-branded prepaid models such as Cetelem Orange, a France-based initiative that offers bank and credit services managed by Cetelem, the specialised subsidiary of BNP Paribas, as well as online services linked to Orange mobile.

He referred to these type of value-added products and partnerships as “prepaid by default” and stressed the importance of redefining prepaid as not just for the under-banked but also for budget-conscious customers.

It was a concern shared by other speakers at the summit: MasterCard’s Reddish spoke of the need to change ingrained consumer psychology to combat the prevalence of using cash for payments.

Increasing regulatory challenges However, the increasing number of non-financial institutions entering the prepaid sector also presents regulatory challenges in some cases, according to John Casanova, a partner with law firm Sidley Austin, who says that these companies tend to be less aware of financial regulation. This may potentially impede growth or in some instances create legal problems for any joint initiatives that do not take into account compliance and regulation issues.

Kevin Phalen, senior vice-president International Cards & Public Sector with JPMorgan Chase, suggested that future opportunities for prepaid, especially within developed markets, lie with consolidation and these “odd joint ventures”. He stressed the potential of partnerships between the public and private sector, citing JPMorgan’s own ventures with the UK Post Office as well as its NavyCash financial system, which enables sailors and marines to buy almost anything they need on or off ship without carrying cash and to access checking and savings accounts at ATMs around the world.

In the case of JPMorgan Chase, partnership is essential for schemes of an international scope, as the bank has no global reach in terms of POS providers.

MasterCard’s Reddish stressed that the opportunities presented by continued acquisition within the prepaid sector were key to enabling further development. He predicted a market saturation level of 10 to 12 percent by 2010, driven by several factors.

The past 12 months have seen the first wave of acquisitions within the industry. Capital One acquired prepaid marketer NetSpend and Accor Services purchased PrePay Technologies, a specialist in the design and development of prepaid cards and management payment authorisation platforms.

Reddish also highlighted the importance of immigration as a key driver for prepaid growth in Europe, claiming this “increased transience”, as well as a desire for financial inclusion, would be a “key cornerstone” of the market.

Technology growth Another recent development highlighted at the summit is the growth of mobile technology within the prepaid space. This is particularly notable when dealing with emerging markets, where mobile phones are more common than bank accounts, according to Stuart Butler, head of business development and sales at prepaid card provider Altair. He cites mainland China as a prime example: 60 percent of the population own a mobile phone, while only 20 percent have a bank account.

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