Prepaid Cards: The Sky’s the Limit

Prepaid cards have been used in the U.S. for about 20 years, and forward-thinking marketers continue finding new ways to use and promote them. This is a boon for convenience retailers, many of whom have been instrumental in growing the category.

Prepaid cards were invented in Europe in the mid-70s when Italians found themselves short of coins to use in payphones. The trend spread rapidly. Today, international phone cards are available in more than 185 countries, and the anticipated sales for calling cards worldwide will be $10 billion by next year.

While the sales of prepaid phone cards has declined in some parts of the U.S. as a result in the boom in mobile phones, phone cards are still in big demand in other areas, particularly those with a large immigrant population.

Meanwhile, prepaid cell phone cards from companies like Virgin Mobile or Boost Mobile have gained ground with parents who want to control the amount of time and money their youngsters devote to cell phone calls.

The Gift Card
It was a natural step for gift cards to follow the success of prepaid phone cards and replace paper gift certificates as a more tangible gift option. Today, most major retailers and restaurants offer gift cards in various denominations, and an estimated 80% of those third-party gift cards are sold at three major holidays: Christmas, Mother’s Day and Father’s Day, in that order.

“The holidays are by far our biggest opportunity,” said Robert Perkins, director of marketing for Rutter’s Farm Stores, the York, Pa. -based chain with locations in Pennsylvania, Maryland, Delaware and Washington. “We even had a big bump over the Easter holidays.”

At Rutter’s stores, the prepaid category has increased during the past three or four years, Perkins said, and continues to grow well. “Especially our proprietary card. It gets people in the store and is a great branding opportunity.”

“Most of our prepaid business is done around Christmas time,” said Matt Paduano, vice president of information for Nice N Easy Grocery Shoppes in Canastota, N.Y.

The company also offers its own branded card, which was introduced to customers just prior to Christmas, last year. While the company has collected only a few months of data, “we saw huge,  huge sales right up to Christmas and after,” said Paduano. “Now we’re seeing redemptions.”

Both Paduano and Perkins said the proprietary cards were often being used by recipients to purchase fuel. “Probably the majority,” Paduano said.

Meanwhile, major credit card companies, such as Visa, MasterCard and American Express, urge gift givers to let recipients buy what they want and are producing cards in wide range of denominations. The Vanilla Visa gift card is one example of a card that allows holders to shop at thousands of brick-and-mortar locations or make purchases online.

With the look and feel of a real, plastic credit card, these cards also are used by consumers without checking accounts or credit cards to pay for purchases. Often called the “underbanked” or “unbanked,” these consumers regularly use a combination of cash, money orders, payday loans and other non-traditional arrangements to manage their finances on a day-to-day basis. Reloadable prepaid cards are a reliable option for this demographic.

Using gift cards in place of credit cards has its advantages. First, there is no credit check, and second, holders can’t go over the limit of the card without supplementing their purchases with cash. However, prepaid cards do require an activation fee and some require a monthly participation fee. For “unbanked” consumers, using a gift card in place of a credit card does nothing to help them establish a credit history.

Playing Games
While gift cards see a big spike in sales during holiday periods, prepaid cards for purchasing online games or iTunes downloads sell well throughout the year, according to Brian Haynes, category manager for prepaid services at 7-Eleven.

iTunes Gift Cards are used to download music, videos, TV shows and audio books from the online iTunes Store, while gaming cards allow game fanatics to compete with the masses in competitive online games from xBox, Nexon and Gaia.

While most online games can be played for free, Haynes said, “competitors who want extra benefits, such as a special costume, enhanced weaponry or a super-human power for their virtual player, must purchase them.”

Prepaid cards were developed when enthusiastic fans began mailing coins to game producers to add value to their accounts because they did not have a credit card or other means necessary to purchase those extra benefits. When non-game-oriented adults question the logic of the prepaid game card business, Haynes will tell them simply, “It’s a lot like paper dolls.”

With gaming revenues hitting close to $2 billion in 2008, this is a form of paper dolls to be reckoned with. “The growth is going to be explosive year over year for the next few years,” Haynes said. “This should be a healthy category for years to come.”

Currently, an estimated 60% of the gamers are male and 40% are female. “There are games for ages 8-14 and for those 16-34,” he said. “A lot of families play the games together.”

7-Eleven has done a promotional tie-in with Nexon, featuring Slurpee cups with gaming artwork and special codes that allowed customers to claim exclusive game content, such as a 7-Eleven T-shirt for a virtual character to wear.

Don’t Lose Those Cards
An estimated 50% of all gift card recipients redeem their cards within the first 30 days of receiving them. About 90% do so within 90 days. But not everyone is as diligent, leaving gift cards hidden in a desk drawer or the back of a wallet. “I’ve talked to other retailers, and they expect about 6-8% breakage,” said Paduano of Nice N Easy. “That includes losing the cards or leaving a few cents on the card.”

Of the $80 billion in gift cards purchased in 2006, experts estimated 10% or $8 billion, were not redeemed. According to one New York Times report, Best Buy alone earned approximately $16 million in 2006 from unredeemed gift cards. An unredeemed gift card isn’t a plus for the retailer. While the retailer receives the face-value of the card, each state has different laws regarding accounting practices for unclaimed gift cards.

But this hasn’t discouraged marketers from coming up with new ways to use prepaid cards. Maybe one day consumers will go to the corner convenience store and pick up a prepaid health care card. It’s not so far-fetched, according to Solomon.

“Looking at the way unemployment is going,” Paduano said, “people need some type of health coverage, maybe a short-term plan or discount. There’s a lot of discussion growing around the concept.”

One concern for the industry is legislation included in a bill last month approved by the U.S. House of Representatives calls for a sweeping reform of the credit card industry. The bill might also permit states to pass stricter gift card regulations than the federal ones.

The resulting higher cost will result from the need of gift card suppliers to create a unique gift card portfolio for each state that creates a unique set of pricing and fee constraints. In fact, American Express is no longer shipping gift cards to the states of Conn., Hawaii, New Hampshire, and Vermont. Discover now refuses to ship to the Colorado,, Hawaii, Rhode Island, Tennessee and Vermont. With reduced competition, consumers in these states will have to pay higher prices and choose the prepaid cards they buy from a smaller selection.–CSD

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