Relative to most payment products, prepaid is still in the early stages of its evolution. However, as far as new payment products go, it has passed the test of time that was not as kind to many other products. As such, factors that drive prepaid success are now evident with many being “must haves”. In other words, several of these factors are mandatory with little margin for error given the unique attributes of prepaid:
1. Distribution: In our opinion, distribution is and will remain the most critical requirement of prepaid success. Distribution is binary – you either have it or you don’t, and without it the business case for even wonderfully developed products is dodgy at best. The quality of distribution is more important than the quantity – steady access to prepaid prospects, the nature and frequency of customer visits, the presence of a seamless reload network, and other attributes separate great points of distribution from mediocre ones.
2. Delivery: Distribution is about getting the product to a location where the consumers are; delivery is about how you take full advantage of the channel to attract and engage cardholders. H&R Block’s Emerald product, Wal-Mart’s MoneyCard, and NetSpend’s ACE product have distribution and delivery advantages. Delivery can take many forms – bar-coding and self-service kiosks help ease point-ofpurchase challenges, while text-messaging and web-based account management features improve service.
3. Design: Product design will be even more important as issuers attempt to address remaining untapped market segments. Some design elements can come straight out of the credit card playbook – co-branding, affinity sponsorships, and segment specific cards (i.e., student, premium) are examples. However, there is plenty of ground left to cover particularly in the area of product integration, specifically how prepaid and credit products can work in unison to expand and deepen the customer experience.
4. Displacement: Unlike credit cards, prepaid is almost entirely dependent upon tender displacement whether cash, checks, rebate coupons, government disbursements, incentive awards, allowances, tokens, etc. Successful products need to deliver a displacement-based value proposition to the end consumer and/or the prepaid decision-maker such as the unbanked consumer, human resources manager, cash manager, account payable executive, or parent. Having an advantaged position relative to displacement is critical and, once again, distribution and delivery go hand in hand with displacement. It is hard to displace other payment forms without being in the right place.
5. Denomination: Just as revolving balances play a role in the revenue generating power of a credit card, load (and reload) amounts are equally vital to the open-loop prepaid economic model. At the extreme, there is only so much money to be made on a low dollar denominated card absent high fees or a subsidy from a program sponsor such as a retailer. That is not to say that there aren’t other sources of value in low dollar denominated cards, but your business case needs to be that much more compelling (e.g., incremental sales, lower cost than legacy solutions, etc.). Securing customers prone to using high dollar denominated products on a repeated basis can solve a lot of problems hence the success of programs in the check cashing space. On the other hand, the denomination choices and packaging of closed-loop products is a key demand driver and likely to become even more so with budget conscious consumers.
6. Duration: Consistent with almost every other product, prepaid economics become much more attractive as the average life of the card/customer increases. Reloads and transaction intensity increase with higher levels of customer engagement and the net present value of the relationship follows. In our view, prepaid is in the early stages of using account management tactics similar to those in the credit card industry. Marketing to the cardholder base, partnering with merchants to provide offers, and using technology such as wireless devices to engage the cardholder will take on more importance especially for players with significant scale.
7. Data: Similar to credit cards, the most successful prepaid products will be those that are developed, priced, marketed, and serviced using rich behavioral data. Those institutions able to use prepaid data to later inform credit underwriting decisions will reap attractive benefits with the potential to price prepaid products based on the true lifetime value of the customer beyond the prepaid relationship alone. Retailers able to mine prepaid data to secure additional store visits will be able to price prepaid products accordingly.
8. Demographics: We would be hard pressed to identify more ambiguous terminology than “unbanked” and “underbanked”, but it reinforces the importance of catering to the needs of specific demographic segments with your prepaid strategy. Maintaining the delicate balance of being able to customize products for niche segments while avoiding diseconomies of scale will be a difference maker.
9. Defensibility: As the prepaid market evolves, it will follow the well-trodden path of almost every other payment product. Competition will intensify, consolidation will accelerate, a handful of early winners with defensible advantages will vertically integrate, and regulators will play catch up and introduce uncertainty. Defensible advantages will dwindle over time, but brand strength, unique distribution and access to customers, scale, and exclusive long-term partnerships will have the most staying power. Other attributes will be important, but look no further than the credit card industry to see how quickly many product features can be replicated.
10. Deposits: Prior to the credit crisis and the rapidly evolving regulatory environment, deposits would have been too obvious to make this list. No matter how fundamental, consumers need to have full confidence that their money is readily accessible and protected in the event of an unforeseen event. On the marketing side, deposits are to prepaid products what open-tobuy is to credit cards. Having the right tools, partnerships, and promotional strategy to capture prepaid balances and direct prepaid spending will be more critical as the level of prepaid balances grow.
Blackhawk Network: A Fresh Prepaid Market Perspective
Talbott Roche is a founder and Senior Vice President of Blackhawk Network, where she is responsible for Business Development, Product Development and Marketing of Blackhawk’s growing prepaid card business. Through her vision and leadership, the company has leveraged its retail heritage to become a market leader in product innovation and merchandising techniques. She has played a key role in the evolution of the prepaid market and this interview is particularly timely given the dynamic regulatory environment and challenging economic conditions.
Blackhawk Network, a prepaid and payments network, has quickly established itself as a leader in the prepaid industry. Today, Blackhawk Network offers retail-branded gift cards, network branded prepaid cards, proprietary sports and ticket cards, and prepaid telecom products. The company has also built a distribution network that reaches over 80,000 stores and touches 165 million shoppers each week.
Distribution has proven to be the sweet spot in the prepaid value chain. How does Blackhawk balance its established retail gift card distribution model with the continued expansion of open-loop prepaid products in terms of shelf space, positioning, and consumer value? Blackhawk’s distribution, product development and marketing is all centered around meeting the needs of the consumer.
We conduct primary research on an ongoing basis to ensure we are developing a program that meets the needs of the end user as well as the needs of all our retail partners.
Recently, we conducted a retail cluster analysis to understand the needs of consumers in different retailers as well as to understand how different stores have varying consumer needs within the same retailer. We identified 4 distinct clusters of stores serving 4 different types of consumers and are using this information to optimize our product offering, marketing and messaging to better meet consumer need and drive sales. For instance, we have developed new prepaid telecom and General Purpose Reloadable displays for the Working Hard and Budget Living Clusters to better match product offering and consumer need. In sum, consumer research drives continual improvement of our offering and increased sales for the network at large.
How does Blackhawk view the evolution of distribution in a maturing market as it relates to securing new distribution arrangements and maximizing existing distribution? How much runway is left? We continue to realize new distribution opportunities in grocery, drug, big box and specialty retail outlets. And while we are adding thousands of new stores this year we are also working closely with our existing retailers to improve their adoption of Blackhawk’s best practices to drive higher sales. For perspective, our average distribution partner has sales today that index approximately 40% of our top selling chains. Our best practices have proved to optimize the program on multiple fronts, including a comprehensive and relevant product selection, enhanced merchandising display designs, and improved marketing. We are also introducing new categories of cards such as digital content, online brands, and moving beyond gifting solutions with general purpose reloadable products. Retail partners who have fully adopted these best practices have realized up to 80% increases in sales of prepaid products.
Blackhawk has established a presence in international markets in recent years. How do international markets (Canada and Europe) compare to the U.S. as it relates to the evolution of gift cards and the gift card mall concept? Like each retailer in the U.S., international markets are also in different phases of maturity in terms of prepaid cards. As third party distribution expands internationally, more consumers are exposed to prepaid in all its variety and with added convenience. The mass marketing (third party) distribution has not only grown the awareness of prepaid products but it has enhanced purchase and motivated product development. Some markets like Canada are more mature and have had prepaid cards in third party locations for several years. Consumers in these markets are embracing the convenience and variety of third party prepaid and the markets are growing. Australia is another market that is in a healthy growth phase. Other markets are expanding as we speak and prepaid is going to continue to be a growing business internationally.
The legislative environment has been active with the recent CARD bill that included open and closed loop gift card requirements. How can the industry strike the right balance with Congress and regulators going forward given the many other forms of prepaid products? The CARD bill brought more focus to the prepaid industry. Actually over the last few months I have been actively engaged, along with a coalition of 13 other companies in the prepaid industry, in educating members of Congress about prepaid products. Collectively the coalition worked to educate lawmakers regarding the benefits of prepaid products. During our meetings with members and staff, it became clear that there was very limited knowledge of prepaid industry and considerable confusion on how different products work and serve different consumers, corporations and government agencies. These products are very different than credit or debit and have unique advantages for the consumer, whether it be for gifting or self use. As the industry grows and there is heightened focus on the regulation of financial service products I believe the industry needs to engage in more education of Congress and applicable regulators. One way companies can get is engaged is through the NBPCA, Network Branded Prepaid Card Association, which is a growing traded association with over 30 members. As a Member of the Executive Committee, I can say the NBPCA includes many of the industries leading companies - we need to strengthen our voice on The Hill and educate consumers and media to the benefits or prepaid products. The NBPCA is a great way for companies to be involved in this process.
In general terms, how have prepaid card sales fared in the recession given the slowdown in consumer spending? Given the very nature of prepaid - pay as you go, flexibility and convenience - they have done very well in this economy.
From a gift card perspective, consumers demand prepaid cards because they give the gift recipient exactly what they want or need. Gift purchasers waste no money on unwanted gifts and nothing has to be returned.
On the budgeting side, consumers are purchasing prepaid for self use. They use the cards to keep track of how much they spend by purchasing prepaid cards in specific amounts, for specific purposes. By allocating specific amounts to gas, clothing, food and entertainment, consumers can stay within their financial boundaries.
We are also seeing an increase interest in prepaid debit as an alternative to credit cards.
Acquiring Pricing Observations for Multinational Merchants
In recent research and analysis, First Annapolis examined multinational merchants to evaluate the pricing charged to them by acquirers in the merchants’ home markets versus pricing in certain of the merchants’ other international markets. We looked at 23 airlines, retailers, hotels and petroleum retailers processing with 20 different acquirers, and we looked primarily at merchants with locations on a NAFTA axis (U.S., Canada, and Mexico) and a U.S./U.K. axis. These merchants are all very large players in aggregate – they average over $1 billion in sales volume – though they are not large in every market.
As we expected, these merchants paid significantly less in their home markets than in their international markets – 6 basis points versus 11 basis points on average across the sample. There was significant variation from segment to segment as illustrated in the table below. This variation had a rough relationship to the relative size of the merchants in their home market versus their international markets. In most cases, it is true that multinational merchants are much larger in their home markets than they are in international markets. There are also many other factors that influence pricing outcomes across countries, especially including POS environments.
Our sample is admittedly small, and there will be great variation in the absolute level of pricing among a more diverse set of merchants by size, geography and industry. However, we believe the relative pricing between home and international markets described above to be generally descriptive of the disparity most multinationals face.
These observations underscore the challenge for multinational merchants and the opportunity for the growing ranks of acquirers focused on developing a multinational offering. From the merchant’s perspective, they very often have a different acquirer in every market, and each acquirer has a different cost structure and set of technical and servicing capabilities. This leads not only to divergent pricing from market to market, but exception processes – differences in file formats and settlement processes, cut off times and reporting output, etc. Consolidating suppliers across geographies offers a cost savings potential from raw pricing (not to mention improvements in efficiency using a single acquirer). All of our analysis points to legitimate demand, as a result, for this type of multinational service among merchants in this segment. It is clear, however, that smaller markets simply yield higher prices and that large merchants emigrating from the U.K., U.S., or Canada into smaller card markets almost inevitably pay higher prices.
From the acquirer’s perspective, this phenomenon offers the tantalizing prospect of higher margins on a segment with otherwise crushingly low margins. A scale acquirer may be able to price a large merchant below the merchant’s international price point but above what the acquirer gets in its home market. For acquirers, however, there are many hurdles to pursuing this strategy – in short, the investment in time, people, and money to provide a multinational service over a broad set of geographies and diverse point of sale environments is daunting. Most acquirers prefer instead to attack the market incrementally, leveraging home-market resources as much as possible while deferring local resource needs such as terminal operations or support in certain local languages. Nevertheless, it is hard to see these sorts of pricing disparities persisting indefinitely. The multi-national merchant segment, it seems to us, will be a niche market addressed by only a few specialized players in the long run, and competitors in smaller markets would be wise to aggressively defend their current market shares in this segment.
Rewarding Multiple Types of Payments: A Review of the Top 100 Retailers
As discretionary spending tightens, retail loyalty programs, which have the potential to reduce customer acquisition and retention costs, may be more important than ever. While reward and payment card (e.g., co-brand and private label) value propositions for the customer vary, one might expect the rewards program decision to be a direct function of the inherent business characteristics of the retailer, and; therefore consistent across industries. However, when First Annapolis conducted a review of the top 100 retailers by sales in order to determine commonalities, we found some interesting results1. Two primary themes surfaced: the moderate presence of tender neutral programs; and the lack of consistency within market verticals.
Tender neutral programs have not proliferated top retailers. In fact, although 85% of retailers with a private label or co-brand program have card-based rewards, only 21% of those with card programs have developed a tender neutral scheme. If the population is expanded to include all 100 retailers, the number with a tender neutral program rises to 39, which is only slightly higher than the number of retailers with no loyalty program.
Adoption of loyalty programs within market verticals is also inconsistent. Some of this can be attributed to the fact that retailers have different customer bases, pricing strategies, and brand objectives, among other things. However, no matter how the data is cut, there is a lack of consensus among industry players. Take the grocery sector for example; while most competitors have either a tender neutral only or no loyalty solution, nearly 20% use a combined (card-based and tender neutral) solution1.
Moreover, individual retailers may be reliant upon a payment card partner or program to execute a loyalty strategy. The current economic environment may, and probably should, cause many retailers to re-examine their customer relationship management strategy, and utilization of incentives should certainly come under consideration. While incorporating a tender neutral program has important financial ramifications, it also allows retailers to reach a broader customer set. Particularly to the extent that collection and analysis of robust customer data can support a more focused strategy to attract, stimulate and retain valuable customer relationships. 1 For purposes of this study, a rewards program is defined as one that requires enrollment and accrues value to the customer. Everyday value programs and coupons are not included. For more information, contact Sarah.Phelps@firstannapolis.com.
First Annapolis is a management consulting and M&A advisory firm with a focus on the consumer financial services industry and a specialty in payment-related products, services, and delivery. Our clients include financial institutions, retailers, travel providers, technology and service providers, trade associations, government agencies, and affinity groups. Our services include strategy development, program management, portfolio/ risk management, and marketing support/execution in areas such as product design, rewards/loyalty program development, and customer segmentation. We also offer a suite of M&A advisory services.
