Prepaid Cards in Europe >>

 Prepaid Guru & expert: Mike Hendry, Freelance Consultant - 30 Sep 2008

This article considers the growth of the prepaid cards business in Europe with a comprehensive overview of the legal framework, infrastructure, and business models and user groups.

There is a high level of interest in prepaid cards in Europe, largely because of the size and growth of the US market: from zero in 1999, the US market in 2007 has been estimated at more than seven billion transactions and US$175bn in volume¹. Most of the literature on the prepaid cards business assumes that it is a single industry, fairly similar in all markets. The words 'prepaid card' imply that the focus is on the card itself and the functions that it offers, rather than the account that lies behind the card.

When we look in more detail, however, not only the applications but also the regulatory structure and business models are likely to be quite different in Europe from those in the US. It is only by analysing individual user segments and their likely or possible evolution that useful forecasts can be made; even then the margin for error is considerable because of the potential impact of regulation and technology development.

Legal Framework for Prepaid Cards in Europe

In the US, prepaid grew from two separate products: closed-loop retailer 'gift cards' and bank-issued corporate products such as salary cards. Scheme-branded cards came later (but are growing much faster). In the US, banks and quasi-banks issue all open-loop prepaid cards; they represent access to deposits. In Europe, prepaid cards - other than closed-loop cards - are (by definition) e-money.

Definition of e-money from the E-money Directive

monetary value, as represented by a claim on the issuer, which is:
(a) stored on an electronic device;
(b) issued on receipt of funds; and
(c) accepted as a means of payment by persons other than the issuer.

Applications and User Groups

Prepaid cards are usually designed to meet one of three needs:

1. Corporate customers who want to reduce costs or improve control.
2. Provide a payment instrument to underserved customer groups who are otherwise restricted to costly, inconvenient or socially unacceptable methods.
3. Address a particular application for which a prepaid card or account is more suitable than a current or credit account.

Applications: corporate focus

• Payroll cards are still important in the US but are not widespread in Europe, where direct payments to a bank account are greatly preferred by employers and tax authorities.
• Insurance claims represent a growing market; they allow the issuer to restrict claimants to specific outlets and goods. Cards are particularly valuable for travel insurance; the card is issued before travel and can be loaded by the insurer remotely if a claim (particularly for lost or stolen money) is made.
• Card-based incentives and bonuses are not widely used, but trend is growing.

Underserved customer groups

• Know Your Customer money-laundering rules make it difficult for many people (including students, temporary workers and those who have recently moved) to get a card. Such people often live in defined communities: issuers need to penetrate that community.
• Under-18s are not allowed to use credit cards, and often face restrictions on their debit cards. This has led to many small prepaid brands with 'hip' marketing or co-branding links. This has been seen as a high-spending group but may be reaching a plateau; innovative propositions are needed to maintain its growth.
• Those with poor credit records need to rebuild their record. This is not a popular market position but can be very profitable; it is addressed directly by loan consolidators and indirectly through overlap with other segments.
• Most elderly people do have access to standard accounts and instruments, but they are often deterred by barriers of language and procedures; minor disabilities exacerbate the problem. Prepaid cards are often sold and used in familiar outlets, and explained by people they know, which can make them attractive. There is probably an opportunity for contactless prepaid cards here, because of their simple operation.

Applications that need prepayment

• Overseas remittances account for large sums (e.g. from UK the total is £2.3bn). This application needs distribution networks at both ends of the chain, avoiding dependence on ATMs.
• Gaming is safer but faces competition from online accounts run by the game operator.
• Universities, colleges and schools are expanding from closed-loop to scheme-branded in order to allow acceptance off-campus. This offers opportunities for acquirers as well as issuers.
• For Internet shopping, prepaid cards limit the risk if the account is compromised; many debit-card holders say they want such limits but few have moved to prepaid in practice.
• Travel cards are convenient for customers and offer the issuer income from foreign exchange and float as well as card issue: often one subsidises the others.
• Gift cards are increasingly moving from closed-loop (retailer-issued) to scheme-branded. They can be sold in 'gift card malls', which simply offer a choice of brands to the purchaser.
• Loyalty and rewards cards may be limited to closed-loop and business-to-business, as selective authorisation is often needed.
• Mobile payments are being used in trials; there is a long association between mobile and prepayment.
• Many people still like to use electronic biscuit-tins (allocation) to manage their spending in different categories (travel, snacks, holidays).
• Cartes ville, issued by a municipality for use on local services, are popular in France and Spain but not yet elsewhere.