Trends & Tactics: Prepaid Cards Help Fill a Growing Void

Quick—which of these five common financial products was the only one to grow last year: credit cards, debit cards, prepaid cards, checking accounts, or personal savings accounts?

If you answered “prepaid cards,” give yourself a gold star. New research from Javelin Strategy & Research says fewer consumers in 2011 reported owning a general-purpose credit or debit card, or having a checking or savings account than they did in 2010.

Pleasanton, Calif.-based Javelin assessed prepaid cards’ current market position and prospects through a random online survey last October of 3,210 U.S. adults, and compared the findings with those from a similar study in September 2010. In the wake of the recession and more regulation, Javelin found that only prepaid cards grew, though their customer base is still fairly small.

The recession cut deeply into banks’ earnings, which caused many to add or increase fees on consumer products, with attrition being the predictable result. Plus, more regulation through a tightened Regulation E governing electronic funds transfers and the Durbin Amendment regulating big banks’ debit card interchange gave financial institutions even more reasons to seek compensating fee income or cut expenses.

“Many banks, especially the larger ones, eliminated free checking, and that’s caused less people to have a checking account,” says Beth Robertson, director of payments research at Javelin, adding that reduced ownership of debit cards is no surprise since banks issue them to checking-account holders. On the credit side, banks still remain risk-averse in the wake of the recession, she says.

Prepaid cards, however, are one bright spot in the consumer product lineup, though they’re still mainly the province of the underbanked, those Javelin defines as not having a personal or joint checking account; the unbanked, those with no financial accounts whatsoever; and young and lower-income consumers. While only 13% of all consumers reported owning a prepaid or payroll card last year, 18% of underbanked consumers did, as did 18% of so-called Generation Y (those born between 1979 and 1999). Seventeen percent of consumers with annual incomes under $15,000 carried a prepaid card vs. 11% in the $100,000 to $149,999 bracket.

Despite prepaid cards’ gains, cash still remains highly popular with underbanked consumers, cited by 72% of that cohort as their most frequently used payment option versus 21% for all consumers. But prepaid cards are quite popular among the underbanked when shopping online. Some 56% of underbanked consumers cited online shopping as the most common thing for which they use a prepaid card, far more than any other type of purchase.

“I do think it’s because they don’t have alternatives,” says Robertson. “A lot of underbanked are users of cash, and in most online cases you can’t use cash.”

How to make prepaid cards more popular? Asked which features would encourage greater usage, 49% of all respondents cited rewards. Rewards even trumped fewer or lower fees, which 33% of all respondents said would boost their prepaid card usage.

Prepaid cards represent an opportunity for banks to develop customer bases among young adults who at the moment have few financial relationships. Some 32% of Gen Y members reported getting their prepaid cards from a merchant or retailer, below the 37% figure for all consumers, while 31% of the young adults got their prepaid cards from a bank, higher than the 27% figure for all consumers.

Robertson notes that prepaid cards get a lot of usage from college students, who because of regulations aren’t being solicited as actively as they once were for credit cards.

“This is a good opportunity to begin a relationship with somebody who could evolve into a more extensive and valuable traditional banking relationship as they mature and … need a wider array of services,” she says.

The Latest Salvo in the Interchange Wars

With their victory in the battle over debit card fees, it was only a matter of time before merchants reloaded their siege guns for an assault on credit card acceptance costs.

They fired their opening shot last month when the NACS, an association for convenience-store operators, released a report claiming that card discount fees in general—and especially credit card fees—are partly responsible for the high price of gasoline.

According to the report, which the Alexandria, Va.-based trade group distributed on Capitol Hill as well as to the press, discount fees in general amounted to about 7 cents out of the average per-gallon gas price of $3.94 on April 1. Credit card fees, however, come to as much as a dime per gallon, the report says.

Since discount fees are based on interchange pricing, which typically includes both fixed and percentage-based components, they rise as the amount of the sale rises. Merchants pay discount fees to their acquirers, which then pay interchange to card issuers.

For the card networks and others on the other side of this debate, the timely linking of interchange with mounting pump prices is a little too opportunisitic. Eric Grover, principal of Intrepid Ventures, a payments consultancy in Minden, Nev., says card interchange has nothing to do with rising pump prices. Gas prices, he asserts, are driven instead by supply and demand. The report’s claims are “hogwash,” he says.

True enough, gas prices have risen dramatically nationwide in recent weeks. The average per-gallon price shot up 15 cents in March alone, according to the NACS.

And that presents an opening for merchants in the wake of their success in debit cards, where regulations for the nation’s largest banks that took effect last fall cap interchange at a level that is roughly half of what it had been before. That merchant victory has sent banks reeling.

And now, having tasted victory, “the public-policy partisans are quite keen to go after credit cards,” notes Grover.

Lyle Beckwith, senior vice president at the NACS for government relations, says that while his group’s report is aimed squarely at credit card fees, the organization is not recommending any particular policy solution. He says the report is meant to uncover what the group calls the “hidden” cost imposed on both consumers and c-store operators by card-acceptance fees, which are buried in the price of goods.

“We’re pointing out the scope of the problem,” Beckwith says. “The lack of transparency [in card pricing] leads to a lack of competition, which leads to market power for Visa and MasterCard.”

Indeed, he says, rising gas prices have thrown the spotlight on card-acceptance costs as higher pump prices mean less profit for operators. The c-store industry as a whole, Beckwith says, pays more in card-acceptance fees than it earns in profits.

“In total, for all sales at our stores, the amount paid to the credit card industry is about double what we earned in profits” in 2011, he maintains. For gasoline in particular, the problem is exacerbated because margins are compressed as wholesale prices rise, Beckwith says, adding that competitive forces prevent operators from passing on the full weight of the cost increases.

“Swipe fees are running amok,” Beckwith charges, using a term for discount fees that interchange opponents popularized during the debate over the debit card pricing controls, which were made law by the Durbin Amendment to the Dodd-Frank Act of 2010. “And it’s hard to know the scope of the problem when the fees are hidden.”

Grover, however, points out that network pricing on gasoline hasn’t budged in recent years. Indeed, Visa Inc.’s consumer credit card interchange rate for gas sales has remained steady at 1.15% plus 25 cents since 2008.

And a spokesman for MasterCard Inc. says the network several years ago capped credit card interchange on transactions at the pump over $50 in an effort to stem the effect of rising gas prices at that time. “We’ve been working very closely with the industry,” the spokesman argues.

Bill Pay’s Electronic Transformation

If anyone needs more confirmation about the gains in electronic bill payment and the long-term decline in consumer check writing to pay bills, look no further than data from the automated clearing house network for 2011.

A year-end report from ACH governing body NACHA shows that transactions under the so-called WEB standard entry class code for Internet bill-payment debits grew 9.4% to 2.68 billion from 2.45 billion in 2010. WEB transactions typically are consumer payments from biller-direct Web sites or third-party processors. The data from Herndon, Va.-based NACHA exclude on-us traffic.

Another bill-pay code, CIE, for customer-initiated entry, grew even more, though from a much smaller base: 156.2 million transactions, up 13.3%. A CIE is a credit transaction for a bill payment initiated through an online-banking site. The code picks up two new ACH products, the Secure Vault Payments system for one-time, online retail or bill payments and the EBIDS bill-payment service, which had its commercial launch in February 2011 (“Under Construction,” April).

The 2011 data support a prediction by a NACHA official late last year that online bill payments through the WEB and CIE codes are on track to hit 3 billion annual transactions. In contrast, the ARC (accounts-receivable conversion) electronic-check code for bill-payment checks mailed to lockboxes continued to fade in 2011, slipping 9.3% to 2 billion transactions.

NACHA introduced ARC in 2002 and the application boomed for years as banks and billers embraced its truncation of paper checks through the clearing process. But now, as many observers predicted, the overall decline in check writing has caught up with ARC.

Meanwhile, two e-check applications to convert checks written at the point of sale took divergent paths in 2011. Back-office conversion (BOC) saw volume increase 7.9% to 195.5 million transactions. Introduced in 2007, BOC may still be picking up new corporate users. The POP (point-of-purchase) code declined 3.9% to 493.3 million transactions.

TEL, the e-check code for telephone-based ACH payments, garnered 367.3 million transactions last year, up 3.7%

NACHA’s biggest percent gainer in 2011 was the young IAT code for international ACH transactions, which saw volumes increase 372% to 29.4 million transactions. The code superseded two earlier ones.

“My suspicion is that part of the reason it is growing is that people are starting to understand what they should code as IAT,” says researcher Nancy Atkinson, a senior analyst at Boston-based Aite Group LLC.

In a related development, NACHA recently issued a request for comment on its plans to streamline health-care payments with ACH transactions. Comments were due April 27.

Intuit Picks up Some Checkout Tech

With rivals like PayPal Inc. and Square Inc. having made moves recently to enhance their point-of-sale payments offerings, Intuit Inc. may have felt a little isolated. So last month it bought AisleBuyer LLC, a 3-year-old startup whose technology lets consumers check themselves out of stores with their handsets.

Terms of the deal were not disclosed, but some press reports placed the purchase price at $80 million to $100 million, a hefty sum that could be an indication of how intense competition is becoming for handset-based point-of-sale activity. Mountain View, Calif.-based Intuit, however, said it is not disclosing the price because the deal’s terms are not “material” to its business.

Intuit, which since 2009 has been marketing a card-swipe dongle for mobile devices as part of a service called GoPayment, said in a statement that it bought AisleBuyer because the Boston-based company will “provide the technology platform that aids the transition of our existing Point of Sale solutions and GoPayment, our mobile payment processing solution, to the cloud. Their technology will also assist in opening up this mobile POS ecosystem to our own as well as third-party developers.”

Intuit refuses to comment beyond this statement and a short post on its GoPayment blog announcing the acquisition. AisleBuyer did not return calls asking for comment.

With AisleBuyer, a user can scan merchandise barcodes in a store, receive promotional offers, and pay for the item while standing in the aisle using card credential stored in a digital wallet. The user then shows a receipt displayed on his phone screen as he heads out the door.

Users who can’t find what they’re looking for in the store can use the same wallet to order from the merchant’s Web site and arrange for home delivery. To ease data entry, AisleBuyer also lets users capture card information using their phones’ camera.

Last spring, the startup had deployed its system to a four-unit toy-store chain in Boston called Magic Beans. While it’s not clear how many other stores have installed the system, AisleBuyer 11 months ago had signed agreements with unnamed retail companies accounting for 19,000 locations, with two chains accounting for the bulk of those stores, Andrew Paradise, the company’s founder and chief executive, told Digital Transactions News at the time.

Intuit’s move to acquire AisleBuyer isn’t surprising in light of what its competitors have been up to recently. PayPal, for example, in recent weeks introduced its own mobile-acceptance app and revamped its digital wallet to include a raft of new features for users. It, too, has been promoting a cloud-based approach to mobile payments, rather than push for card credentials to be stored on the device.

Relying on a similar cloud approach, Square last year introduced a service that lets users open a tab with participating merchants and then make purchases merely by giving their name to a cashier.

Such moves indicate payments players are seeking ways to enhance their offerings in ways that go beyond simply processing payments. “Going forward, the value these guys have to compete on is what else do you guys do for me besides take cards,” says George Peabody, director of the emerging technologies advisory service at Mercator Advisory Group, Maynard, Mass.

Intuit will now be able to market AisleBuyer’s technology to its own merchant base, which consists of clients of its in-house independent sales organization, of its QuickBooks accounting software, and of its GoPayment service. In this way, the deal “plays to Intuit’s strengths,” says Peabody. “Now they can lock their merchants into something more than card payments.”