(September 24, 2009) The year 2012 could mark a milestone for the prepaid card industry. That’s when load volume on so-called open-loop, or general-purpose, prepaid cards could surpass load volume on closed-loop cards, if predictions by Mercator Advisory Group Inc. prove true.

Maynard, Mass.-based Mercator recently released several prepaid market reports, the latest of which was its sixth annual assessment of the closed-loop sector. With the gift card as the foundation, retailers, restaurants, and other merchants started building the closed-loop prepaid card sector in the 1990s as a replacement for gift certificates. That market is now huge. Mercator estimates users loaded $187.2 billion onto closed-loop cards last year, up 4.3% from 2007’s estimated load of $179.6 billion.

But open-loop or network-branded prepaid cards offered by banks and payment processors are coming on strong. Mercator pegs their 2008 load value at $60.4 billion, up 48.5% from 2007’s estimated $40.7 billion.

Open-loop cards are showing healthy growth in most of their subcategories, but government is especially strong, Tim Sloane, director of Mercator’s Prepaid Advisory Service, tells Digital Transactions News. For example, the U.S. Treasury Department’s new program to pay Social Security benefits to unbanked or underbanked recipients via prepaid cards is poised for big gains. Mercator estimates some $1.2 billion was loaded onto the cards last year, but forecasts $7 billion this year. “The trajectory is just mind-boggling,” says Sloane. Treasury’s Social Security card program, called Direct Express, is offered by processor Affiliated Computer Services Inc. and issuer Comerica Bank (Digital Transactions News, July 28).

The recession also is boosting load volume on unemployment-insurance prepaid cards now offered in about 20 states, Sloane adds. Mercator estimates $5.9 billion was loaded onto such cards last year and $11.2 billion will be loaded this year. “Most of the big states have converted [to prepaid card payments],” he says. “The one big holdout is California, but they have a bid out.”

Meanwhile, with their fortunes tied to those of their sponsoring merchants, closed-loop cards are suffering with the retail industry in general. But at many companies, prepaid load volumes are holding steady or increasing even as same-store sales decline, according to Sloane. He recounts a conversation he had recently with an executive who manages the prepaid card program of a large national retailer who told him, “‘our growth rate dropped considerably, but we’re still positive so I’m the hero.’”

Some of the 23 closed-loop market segments Mercator identified did quite well in 2008. Load volume on digital media cards grew 24%; consumer incentive cards, 19.3%, and petroleum cards, 23.2%. Closed-loop issuers still have plenty of opportunity despite tough economic times, according to Sloane. He cites incentive cards as an example. While growing for closed-loop issuers, the network-branded versions of incentive cards are doing even better because of superior marketing that includes cobranded cards, text-message reminders, and other communication tactics, says Sloane. “The open-loop suppliers are being innovative,” he says. “The closed-loop guys are just sitting there. They could do the same.”