Stacking the Cards In Your Favor

General purpose prepaid debit cards are rapidly gaining favor with consumers as an alternative to closed-loop gift cards.

By John Lofstock, Editor.

Sales of open-loop prepaid cards, issued by banks and credit card companies and able to be used at multiple establishments, are only going to go up as more consumers come to appreciate their benefits—and more c-stores come to understand the opportunities they offer.

Open-loop is a term used to describe general purpose cards that carry the American Express, Discover, MasterCard or Visa logo and can be used wherever those cards are accepted. Closed-loop cards, by contrast, can be used only in a single store or group of stores.

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Currently, more than 17 million people in the U.S. don’t have bank accounts, NACS recently reported. Experts predict that number could blossom as banks begin charging more for checking accounts to make up for the reduction in swipe fees.

The total dollars loaded onto prepaid cards will climb to $672 billion over the next three years, according to the Maynard, Mass.-based Mercator Advisory Group’s Seventh Annual Prepaid Card Forecast. That’s more than double the $330.03 billion loaded onto these cards in 2009.

Increased government activity, combined with growing consumer adoption, grew the prepaid market by $60.7 billion in 2009, the report found, and these same forces will accelerate in the near future.

Indeed, Mercator forecasts that while the closed-loop prepaid market will achieve a compound annual growth rate (CAGR) of 5.4% between 2007 and 2013, the open-loop prepaid market will achieve a CAGR of 36.6% over that same period. The firm also predicted the open-loop market will almost equal the closed-loop market in 2011, and will exceed closed-loop in total dollars loaded in 2012 by more than $60 billion.
That said, understanding who the prepaid customer is remains important to boosting in-store sales.

“While open-loop growth captures the most attention with smaller markets that have triple-digit growth, the closed-loop market, which represents two-thirds of all prepaid dollars, has also performed remarkably well,” said Tim Sloane, vice president of client services and director of Mercator’s Prepaid Advisory Service.

Closed-loop, in-store gift cards currently represent 87.4% of the total gift card market. Even with a compound annual growth rate of 26.7%, open-loop gift cards will only represent 24% of the total gift card market in 2013.

Serving C-Store Customers
C-stores are increasingly making open-loop cards part of their product mix.
“We have our own Fabulous Rewards store gift card that we carry and those are open loop,” said Laurie Bull, director of marketing for Fabulous Freddy’s Car Wash in Las Vegas. “You can refill them right in the convenience store.”

In addition to promoting the cards as gifts, Bull pushes the gift cards as a way to reduce credit card processing costs. “The rate at which these cards are processed is much more favorable than traditional credit cards,” she said.

Kwik Trip Inc. in La Crosse, Wis., also sees the potential for gift cards. The chain began installing open-loop prepaid card displays in its stores last November and has since been evaluating its role in the sales mix.

“Our understanding is that the top-selling periods are graduation time, Mother’s Day, Father’s Day, and then in November and December for the Thanksgiving and Christmas holidays,” said Jeff Wrobel, controller for the 350-store chain. “In between, there is not a lot, so you have to learn to be creative and capitalize on special occasions.”

Versatility, according to Ben Jackson, senior analyst for Mercator, is among the top reasons why convenience store owners should consider open-loop prepaid cards. “One of the things about these types of cards is that they give consumers a versatile financial tool that lets them do things in a controlled, budgeted way,” he said. “So when they are ready to spend, stores should be ready with a prepaid solution.”

When most people think about open-loop prepaid cards, they often think about the under-banked or the under-served, but these are hardly the only people opting for them.

“Prepaid users come from all backgrounds and demographics,” Jackson said. Their ranks also include people who want to shop online without putting their credit cards at risk. “It’s folks who want to budget for particular reasons and sometimes it is kids who want to play a game online. There are a lot of gaming cards, but there are still some games that don’t have cards.”

Thus, youngsters will often choose to use a prepaid card as a way to get access.

“These cards are becoming increasingly popular among people all across the economic spectrum,” Jackson said. “Then, of course, there is that un-banked population, people who need this card to serve as a substitute for a bank account. When convenience store retailers think about their clientele they are probably likely to see a lot of these folks at least stop in for morning coffee on their way to work, just because they see such a wide swath of people. Everybody goes to a convenience store, many more than once a week.”

Know Your Audience
While open-loop cards are utilitarian and undoubtedly growing in popularity, c-store retailers should not look to them as a magic bullet for new revenue streams. There is a fair amount of homework that needs to be done. Part of their success with them will hinge on how well they understand the consumers coming through their doors, and then choosing what kind of prepaid card they want most.

“If you’re looking at someone who needs a bank account substitute versus someone who wants to pay his bills online, those are different kinds of cards in terms of the solution you should offer your customers and how you market the cards,” Jackson said. “A lot of times they are functionally very similar, but the marketing is very different.”

Another caveat is that retailers and their consumers both need to know that open-loop prepaid cards are not gift cards. Retailers will want to avoid selling what is intended to be an online bill-paying card to a shopper in the market for a gift card. “Because then they just get cranky when they see there is an annual or monthly fee,” Jackson noted. “For this reason the way it’s marketed in the store is an important consideration.”
The cards should also be merchandised prominently enough so that regular consumers begin to identify them with the store. “Gift card retailers need to ask themselves, ‘Are these people going to think about my store as the place to get this?’” Jackson said.

When beginning to develop a business model for marketing these types of cards, operators need to factor into the equation how much they will be getting for selling it from the card provider. Another question that needs answering is, How much of the revenue are providers willing to share when it comes to things like reloads or residuals?

“One of the ways that this can become a continual source of income for a convenience store operator is if he sells a reloadable card,” Jackson explained. “He can also offer the services to reload that card in store. Typically, the cash-based consumer who is using this card will come in about once a month to add money to it.”

Education is Key
C-store operators can avoid the most common mistakes many retailers make with open-loop prepaid cards with a bit of savvy. The most common mistake, Jackson said, is mixing the cards in with the gift card display and letting customers get the impression that they are similar to gift cards.

Secondly, c-store owners should not discount the importance of educating both staffers and customers. “The staff needs to be thoroughly trained to answer questions to help consumers who may have questions, and there must be adequate signage available to explain to customers exactly what it is they’re getting,” Jackson said.

While the educational process is made difficult by most stores’ limitations of space and time, as well as typically high employee turnover, it is a necessary step for solidifying category sales. “We find that it’s often worth it for c-store chains to make the investment in time and space,” Jackson said.

Another tactic to consider, which could provide dividends in two ways, is to try to convince the card providers to give the cards to their employees, and to waive or at least lower the fees. The benefits are obvious: employees not only become familiar with the program by using the cards themselves, but also get to enjoy a perk, which could help stem turnover and boost sales. If an employee is happy with the product, they are much more likely to promote it effectively.

Closed-loop cards aren’t going to disappear, of course, but their open-loop siblings are going to become an increasingly important part of the mix.

“People aren’t going to stop giving gifts with these kinds of cards,” Jackson said. “It’s just that convenience store operators should think of how they can use these open-loop cards as part of their overall plan in terms of marketing the types of services that they can offer, and the kind of convenience that they can provide, as part of an overall prepaid strategy.”