With credit card and identity theft on the rise, prepaid cards have become a safer alternative for those seeking more disposable, anonymous payment options.
Unlike big box and drug stores, convenience retailers have been struggling to gain a foothold in this segment. However, the opportunities are evident.
Prepaid cards include retailer, debit, long distance phone and cellular minute reloads. Merchant revenue is dependent on average monthly sales, with commissions averaging about 8%, according to merchant services company Prineta, based in Overland Park, Kan. Convenience stores are the fastest growing retail outlet for this segment, according to the company.
According to Los Angeles-based IBISWorld, prepaid card revenues experienced almost 22% annual growth between 2011 and 2016. While the slow recovery following the recession hampered many other industries, the weak economy played to the strength of these products. Fewer consumers qualified for credit and bank accounts and instead opted for prepaid cards.
A growing need for electronic payment forms and rising fees in traditional banking institutions made prepaid cards attractive. In the next five years, industry revenue is expected to continue its strong performance.
Prepaid cards are categorized as either gift cards or closed loop retailer cards. Open loop cards like Visa, Master Card and American Express offerings can be used anywhere those brand credit cards are accepted.
These are typically one-time use with a designated amount or reloadable to add cash onto the card.
“Prepaid continues to grow in popularity in the U.S. specifically, but not at the rate expected due to regulatory and compliance challenges,” said Kevin Morrison, senior analyst at Aité Group, a Boston-based research and consultancy company. “There are certain legislative pieces going through right now from the CFPB (Consumer Financial Protection Bureau) and other regulatory agencies that are ensuring consumers are not hurt by these cards.”
When prepaid cards first came on the market, this regulatory scrutiny didn’t exist. It has been in about the last five years that more attention has been given to this segment, thus resulting in the CFPB’s 1,689-page rule focusing on full disclosure with their use (see sidebar on p. 103). According to the CFPB, the amount consumers put on “general purpose reloadable” prepaid cards grew from less than $1 billion in 2003 to nearly $65 billion in 2012. The total dollar value loaded onto these prepaid cards is expected to nearly double to $112 billion by 2018.
“There’s a segment of the population that uses prepaid cards to load funds for government subsidies like unemployment and child support payments, for example,” said Morrison. “It’s more economical and efficient to electronically transfer funds to a card, rather than issuing and sending a paper check.”
According to a recent Forbes article, prepaid cards provide a safe, cheap and important banking alternative to low-income unbanked households. A study by Pew Research Center in Washington, D.C. revealed that 41% of prepaid card users do not have a checking account. These users tend to be young, and many are single mothers or disabled with annual incomes below $50,000.
Warrenville, Ill.-based The Pride Stores Inc., which has 12 locations in the state, has a strong prepaid card business. Its main movers are the Visa and Amazon gift cards.
“We typically have a floor display spinner rack with different prepaid cards, including phone cards,” said Mario Spina, Pride CEO. “Then we have a small eight-card countertop display we keep next to the register where we sell the VISA card, Amazon gift card, fuel gift cards (either BP or Mobil depending on the brand of fuel we sell at the site), then a few other miscellaneous cards, depending on what sells at each store.”
Spina still sees the profitable potential of prepaid cards, but has been faced with some challenges.
“We would be able to sell a great deal more prepaid cards if we could offer more of the premier retail and restaurant cards at our locations,” said Spina. “But we have not been successful in obtaining a vendor to provide those cards.”
Busy Bee Stores Corp., which operates 18 stores and travel centers in Florida and Georgia, is in the process of changing to another prepaid card program. The company currently offers in-house gift cards, Burger King and Dunkin’ Donuts cards for the dining sites located inside many of its stores.
“We’re not happy with where we’re at, as it’s not to our standards or where we want to be,” said Marshall Beck, director of marketing for Busy Bee.
Megan Forcey, Busy Bee’s director of advertising and e-commerce, said Busy Bee wants to grow this business, but needs to find the right angle to do so. Currently, the stores’ collection of prepaid cards are displayed by the register, but with the change will be moved to floor racks.
“We’re still not sure how big this business will be with CVS, Walgreens and Walmart, in addition to so many other retail channels and organizations that offer these cards,” said Forcey. “The best month we’ve had was during the picking season with seasonal farm workers purchasing phone cards to call home.”
Prepaid cards are a very small segment at Las Vegas chain Green Valley Grocery’s 53 stores, which utilizes InComm as its primary provider.
“From what I understand, our sales in this category are down a lot due to online card sales,” said David Crawford, vice president of operations. “The gift cards specific to fuel brands sell best.”
He added that this is a necessary category for open loop cards, but it is still evolving.
“We’ve looked at a few options to revamp our program,” said Crawford, who added Green Valley Grocery’s prepaid cards are displayed on a counter rack and in a floor display. “There’s a seasonal aspect to this segment, so we tend to do better with these cards around the holidays.”
IN NORTH CAROLINA
Campbell Oil Co., which runs Minuteman Food Mart, an Elizabethtown, N.C.-based operation with 23 stores, also does not do a lot with prepaid cards.
“The third party prepaid gift cards, such as Lowes, Starbucks, etc., don’t seem to do well in our markets,” said Wesley Campbell, co-owner and vice president of retail operations for Campbell Oil. “The prepaid phone cards, such as Verizon, Boost, etc., which used to be a big part of our business, have slowly died due to the government subsidy cell phones now passed out and the deal that Walmart offers on the ‘Straight Talk’ phones.”
It’s possible the segment could be rejuvenated for some convenience store retailers with some of the more recent transit cards, such as Uber. Also, with the latest technology, consumers can reload their cards from smartphones with a bar code quickly and easily.