Higher Profits in the Cards

Technology is making it faster, easier and more convenient for consumers to purchase, manage and reload prepaid cards.

By Marilyn Odesser-Torpey, Associate Editor.

The direct-to-consumer prepaid market, including general-purpose, reloadable cards, such as Green Dot and NetSpend, phone cards and gift cards of all types, is growing by leaps and bounds. Last year, dollars loaded onto these cards totaled $210.5 billion, up 17% from $179.8 billion in 2010, according to Mercator Advisory Group, global payments industry specialists. That number is expected to continue to climb to over $350 billion by 2015.

In 2011, for the fifth year in a row, gift cards topped American consumers’ holiday wish lists in a National Retail Federation survey. Close to 60% of the respondents said they would like to receive a gift card during the holiday season. And over 80% of the survey participants said they intended to purchase a gift card during last year’s holiday season as compared to a little over 70% in 2010.

Capitalizing on Opportunities
For convenience store retailers, the benefits of getting into the prepaid market can be three-fold. First is the profit that the store makes on every card sold, said Ben Jackson, Mercator senior analyst, prepaid advisory service. Second, is the high probability of incremental sales.

“By offering the convenience of a card mall, stores are likely to increase foot traffic, and once people are in the stores they rarely purchase only one thing,” Jackson explained.

Finally, by providing consumers with a one-stop place to top off their mobile minutes and buy the kinds of cards they might need to replace repeatedly, such as long-distance calling cards, they are cultivating a repeat and loyal customer base. Again, Jackson emphasized, that means virtually unlimited opportunities for incremental sales.

But prepaid card activation technology has moved far beyond the original process of scratching off a panel on the back to reveal a pin number that was so irresistible to thieves. The addition of a magnetic stripe that required swiping at the point of sale made things more complicated for the petty thief, but could not deter criminals with card readers.

With that simple piece of equipment, they could swipe cards to collect the information on them, then just keep track on line or by phone of the cards’ status. Once the cards were purchased and activated, the thieves could easily drain the money right out of the accounts, Jackson said.

Bar codes eliminated that problem, making scanning and activating easy and quick anywhere a phone line or Internet connection is available. But now a growing number of c-store retailers are eschewing the stand-alone terminals and opting for host-to-host communications, which allows them to ring up and activate prepaid cards in one step at the cash register.

Westlake, Ohio-based TravelCenters of America (TA), which operates 165 units across the U.S., switched from a standalone terminal to host-to-host communications in April 2011. In addition to expediting transaction time with one-swipe activation, the move allowed TA to streamline its point-of-sale (POS) set-up.

“We were able to get rid of a separate piece of equipment at the already congested pay point,” said Kathleen Roseman,  TA’s contracts and lease manager. “It also helps with back end reporting because we no longer have to match sales at a standalone terminal to sales at the register.”

Combating Fraud
Direct host-to-host POS integration is an effective way to mitigate prepaid card fraud due to all transactions being conducted in a single place, the retailer’s POS system.

Host-to-host has also given TA the flexibility to offer variable-load cards, an increasingly popular category subset. A variable-load card allows the consumer to choose an amount of money to load onto a card at the time of purchase rather than buying a card with a set amount pre-loaded onto it.

Something that should be on every retailer’s radar is the EMV-compliant card, which is going to totally change the face of prepaid, Jackson said. Named for the three credit card giants, Europay, MasterCard and Visa, these EMV circuit chip-implanted smartcards, now in widespread use in Europe, are making their way into the U.S. market.

The chip adds another level of security because it is so difficult to counterfeit.

Jackson noted that MasterCard and Visa are pushing hard for adoption and that the “spoken target dates” for changing over to EMV-complaint ATM cards is 2013. For all other types of cards, it is 2015.

“Stores are going to have to put in EMV-compliant terminals, not just for prepaid cards, but for other transactions as well,” Jackson said. “So, this might be a good time to look at other up-and-coming technologies that will require changes in the ways they synch up with their card suppliers. The up-front cost of tweaking their current POS system or even putting in a new one may be higher than simply getting a new standalone terminal, but the flexibility will enable these stores to keep up with consumer demands for more speed, convenience and security.”

Already, contactless payment, using credit or debit cards with RFID chips, like Visa’s PayWave and MasterCard’s PayPass, is making inroads at the gas pump, at drug stores and in other retail establishments. Jackson said c-store retailers can expect consumers to want to carry over that swipe-free payment process to their in-store transactions.

Then, of course, there is the mass move to mobile commerce for just about every product. Mobile payments can take place in a couple of ways. Near field communication (NFC) allows enabled devices, such as two smartphones or a smartphone and a chip-embedded tag, located within a few centimeters of each other to send and/or receive information wirelessly.

For some retailers, this may be on their roadmap, but they don’t yet have it in place today, whereas other progressive retailers, such as Cumberland Farms, have already implemented the service. In the meantime, as NFC continues to evolve, bar code payments are beginning to take hold in many stores. This is a solution that many retailers can take advantage of now and gain similar benefits to NFC.

Starbucks as an innovator in this latter technology currently offers free mobile apps for iPhone and Android that give customers a bar code number when they enter their Starbucks Card number. The bar code can be used to check balances, reload cards, transfer balances between cards and track reward program point totals. Dunkin’ Donuts introduced a similar app in August.

More than 50% of customers have smartphones, but not all of them utilize them to make bar code payments yet. However, he said, if the Starbucks’ experience is any indication, their willingness to conduct transactions this way is evident, and this model should gain a great deal of momentum within the next 12 months.

Capitalizing on Prepaid

Hess convenience store locations throughout the East Coast are introducing Blackhawk Network’s Gift Card Mall and Prepaid Center. Blackhawk Network’s Gift Card Mall offers consumers a wide variety of prepaid cards from some of the nation’s leading retail brands. Its Prepaid Center features PayPowerT Visa prepaid debit cards, REloadit Packs and telecom products.

Hess customers are now able to purchase prepaid cards from a selection including Lowe’s, Sears, JCPenney, Applebee’s and Outback in more than 800 Hess c-store locations throughout the East Coast. The Prepaid Center will feature products from Verizon, Tracfone and T-Mobile.

“Our prepaid cards and telecom products are perfect for these locations,” said Talbott Roche, p
resident, Blackhawk Network. “This partnership provides an important avenue to reach consumers with our innovative products that offer convenience and added-value. This is what consumers look for in Hess locations.”

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