From The Analysts

by Tim Sloane

   More than 155 million consumers used prepaid solutions in 2003 to the tune of $158 billion. This $158 billion includes both money received by the consumer in the form of payroll cards and benefits ($58 billion) as well as money spent on prepaid goods and services ($100 billion). These consumers were actively spending money across more than 31 different market segments, a small sampling of which is reflected in Figure 1 below.

Figure 1: The 31 Prepaid Market Segments A

   Each market segment demands a different go-to-market effort, based on the details of how the prepaid instrument is implemented, the target audience, and the market requirements. It is also important to recognize the current spending within each segment, and how this relates to the total addressable market, since some market segments are approaching the point of market saturation, which suggests new entrants will need to offer a solution compelling enough to capture customers from existing solutions.
   There are five primary implementation attributes that differentiate prepaid solutions. The most basic decision is regarding the selection of an open or closed solution. This decision will also impact the ownership of the prepaid account, the card issuer or the consumer, because the card issuer owns the accounts in a closed network. Coupled to the decision of account ownership is the question of anonymity. If the market demands anonymity, then funds can't be placed in a consumer-owned account since the consumer is unknown. There is also the question of funding the account. Will the consumer buy the prepaid instrument or does a third party load the account, as when an employer pays an employee using a prepaid instrument. And lastly, what is the level of reporting required. Will basic reporting that includes current value and transaction history be sufficient or does the solution demand special reports such as the generation of 1099 or W-2 forms, complex reports that satisfy multiple participants (retailers, consumers, distributors, or perhaps information the consumer requires to enhance monitoring and control.
   Note that these five primary attributes are only the starting point, since some market segments are differentiated in unique ways. The prepaid travel card is differentiated by the support it delivers to the traveler in the country being visited. A prepaid payroll card must address the needs of the enterprise, which includes integration to enterprise systems and federal and state mandated reporting.
   The largest market is in gift cards, which had a spectacular 2003 having collected more than $40 billion in prepaid spending. As was described in the article "Prepaid Products Go Mainstream" written by Ken Sturm in the April 2004 issue of Transaction World, the benefits offered by gift cards are already compelling, but research suggests that the adoption of point-of-sale activation (POSA) will help this market segment grow significantly larger in the future. While many questions remain regarding how quickly POSA will be adopted, it has the ability to expand the role of Gift Cards (potentially making the term "Gift Card" a misnomer) converting them into a new device for the distribution of products and services � and the gift card total addressable market size of $200 billion reflects this opportunity.
   POSA has the potential to dramatically change the existing market dynamics in two ways. The first and most well developed influence is that using POSA the traditionally closed prepaid instruments, such as gift cards, can now be incrementally opened on a bilateral basis to selected sales partners. Gift cards are no longer relegated to just the issuing merchant's shelf, they can be placed with other merchants, and POSA enables card activation only when purchased. In theory, Movie theaters can sell action figures, DVD's or any other item represented as a gift card, and because the gift cards have no value until activated at the point-of-sale the inventory carrying cost is zero. The second opportunity, which is less well developed, is the creation of pre-paid card distribution networks (see Figure 2 below).

Figure 2: The Evolving Role of Prepaid Card Distributors

   AT&T;, CellCards and Q Comm, to name just three, are attempting to increase the line of prepaid card products they carry and expand their presence in retail locations. The gift market is already poised for significant growth in 2004, but should these POSA-based opportunities meet with rapid market acceptance, the growth could be significantly larger than even the most optimistic forecasts.
   Another prepaid market that has garnered significant interest is the Payroll & Benefits segment. More than $11 billion in salaries and benefits were delivered to employees using prepaid instruments in 2003, but this represents minimal penetration since the total addressable market size is $109.8 billion. As already described, how the prepaid account is structure for a salary card implementation is a well-discussed topic, but discussion does not mean all issues have been resolved or that opportunities do not exist. Any company interested in saving money by eliminating paper checks must do so gradually because current employees cannot be forced to accept a prepaid instrument. Either prepaid cards will be deployed gradually as new hires sign a document indicating they recognize that the terms of employment include the acceptance of a prepaid card, or the employees must opt in to the prepaid card implementation. Ultimately employers may want to introduce additional benefits associated with the prepaid card to speed acceptance across current employees.
   Prepaid gift cards and payroll and benefits are two excellent market opportunities, but there are 28 other markets that may be a better fit. Determining which market is the best fit for your firm depends primarily on your firms current market and technological expertise. Recognizing your current position will help guide the selection of a prepaid market opportunity that leverages your firm's current market position. With the market opportunities reduced to only those that will keep market entry costs manageable, the focus can shift to those that provide the largest dollar opportunity.