Cash-free formula begins to add up

2.3 billion prepaid card transactions will take place in Europe next year

The banking and card industries are placing their bets on prepaid cards to offer greater flexibility for payments, but more innovation needs to be added to boost uptake.

Similar to electronic gift coupons, prepaid cards are not linked to bank accounts, but can be used in a similar fashion to credit or debit cards after being loaded with cash to pay for goods or services on and offline.

The retail sector is a keen proponent of the cards as a tool to encourage customer loyalty via affiliation and loyalty schemes.

And the banking industry is investing in the model, with a view to using it in a range of applications including the potential substitution of paper cheques and as a currency exchange aid.

Technology investment is an important factor in boosting the uptake of prepaid cards, but the industry still needs to work on changing consumer behaviour, said Fiona Duncan, vice president of innovation and acceptance at Visa Europe.

Visa has 50 card-issuing members subscribing to its prepaid card platform.

The firm defines interoperable standards and systems that affiliates can use, such as prepaid virtual shopping vouchers.

The company is currently working on 22 different innovation platforms for the cards, including mobile applications for the pay-as-you-go cards, and will be trialling a contactless system this summer.

“In a year’s time we expect to see huge quantities of prepaid cards in the market, with the government and retail sectors strongly buying into the proposition. There is also scope for growth in the instant assurance field as well as salary cards,”
said Duncan.

Recent research estimated that 2.3 billion prepaid card transactions will take place in Europe annually over the next two years.

A total prepaid transaction value of £100m puts the average transaction value at about £46.

Banks including Citi and Lloyds TSB, as well as a range of smaller card issuers and retailers such as Spar and Carphone Warehouse, are already offering or about to launch their prepaid offerings.

The pay-as-you-go product model still needs to meet the growing consumer demand for integrated systems, said Consult Hyperion director Dave Birch.

“The products are still catching up with what the market wants to do, and systems are beginning to be developed to offer better functionality geared up to the demand of the prepaid market,” he said.

“The most significant factor in boosting prepaid card use is balance. If you don’t know how much money is left on the card that really dictates whether you are likely to use it on point of sale. But being able to check your balance over a mobile phone in effect changes the way you use the card,” he said.

The trend for prepaid card use will shift increasingly towards multi-interface cards that can be used to connect with multiple devices such as visual, swipe and contactless readers.

There will also be a growing demand for multi-function cards that can be used in areas such as identity management, security and transport, said Jason Deering, director in consulting at Deloitte.

“We will see banks exploiting transit to increase usage and adoption to build volume and make the economic case pay. This was the ‘killer app’ for Barclaycard in its Oyster collaboration [the three-in-one OnePulse card],” he said.

Similar collaborations will be “once-in-a-lifetime” deals for many card issuers, with greater use expected in large metropolitan areas, said Deering.

“There is also a lot of potential around the exploitation of embedded loyalty and affiliation. There hasn’t been significant evidence of this as yet, but we certainly expect more,” he said.

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How prepaid cards work

Simple “closed-loop” schemes, such as a campus catering or purchase cards, can use “dumb” memory cards based upon technologies such as Philips Mifare. A lower security threshold suits such environments where the greatest loss, for example, is the cost of a Snickers bar. They involve simple read or write security keys.

“Open” schemes (such as those backed by Visa or MasterCard) demand much stronger embedded security mechanisms which prevent duplication or message replay and as a consequence they demand more sophisticated microprocessor cards.

Visa and MasterCard pre-payment schemes run on the same infrastructure, and the pre-payment applications can sit alongside other applications on the same card so the use of a prepaid card is transparent to the retailer.

The trend is now towards multi-interface and multi-function cards. A multi-function card has more than one use, for example, identity management, security (building access, computer access) and transport.

Growth will come from Visa and Mastercard-backed products and larger retailers
­ anything proprietary will be squeezed out.

Source: Deloitte