August 16, 2007

Which applications in prepay will be the drivers of future growth

Identifying successful prepay applications is not just down to technology, brand or especially budget—just ask American Express’s head of travellers check cards. Careful consideration of the problems the application is solving will help you avoid failure.

If you’re not solving a problem, you’ve got one
Tony Craddock, CEO, Giftex Prepay, [email protected]
(Excerpted from Global Prepay Intelligence, Volume II Issue 8, available at

Since entering the gift and prepay market three years ago, we have seen some successful programs, especially in simple consumer propositions such as gift cards, but many investments in more complex propositions fail to deliver.

Identifying successful prepay applications is not just down to technology, brand or especially budget—just ask American Express’s head of travellers check cards. Careful consideration of the problems the application is solving will help you avoid failure.

The heated debate about which applications in prepay will be the drivers of future growth in the sector continues. There is a simple way to identify the winners and losers. It’s all to do with the problems they solve.

In the last month in the UK we have seen Barclays and Caxton FX launch prepay cards for travellers and American Express, despite having sold £20bn of them, withdraw their travellers check cards after three years of investment. Consumers of the plastic version of the traditional paper voucher simply did not find that the additional costs of buying the plastic over the paper version – not only an up-front fee but a hefty percentage transaction fee of 2% too – worth paying for. And that is despite a reputed £20m investment in promotions in 2006 to encourage them to do so.

We are all enthused about the potential for prepay. But how do we identify which of the prepay applications and which of the prepay business models are most likely to succeed? This is the $64,000 question.

The problem with technology
As in any sector where technology is changing fast, there is a tendency to find out what the technology can do and develop a product that uses that capability. The product developer goes through a test-learn-revise-test cycle until he comes up with something that consumers will buy. With the travellers’ check card example, technology allows us to issue a travellers’ cheque on a plastic card. It makes sense commercially, providing customers will pay a suitable fee and charges, i.e. additional costs.

So the product developer thinks, ‘let’s launch one and see if it works’. But as with the American Express example, this can be an expensive route to follow. The difficulty is that many product developers do not understand enough about how consumers behave to know what problems their product is solving. Or they start with the technology rather than the customer. Readers of Global Prepay Intelligence, Giftex Prepay’s regular research journal (see www.giftexprepay/intelligence) will recognise this theme: understand the customer’s problem first, then work out how the technology and the other facets of the product will solve it. Technology alone is not enough.

So which problems are we solving?
Gift cards solve problems for consumers and businesses. Dan Horne has described these in previous issues. They include, ‘I don’t know what the receiver wants’, ‘She does not have enough time to seek out the right gift’, ‘She has enough stress in her life already and does not need to risk of getting the wrong gift as well’.

And the receiver has problems too. He knows that around one in three of the gifts he receives are unwanted. He ‘does not want to fabricate an enthusiastic but inauthentic response’. Or ’His inventory of consumer products – the Playstation, fashion accessories, men’s toiletries - is so complete that only he knows what is needed to complement it’. The ‘gift of choice’ – a.k.a. gift card or voucher - solves these problems.

Gift cards and vouchers solve problems for businesses, too. For the human resources manager in a corporation, they include, ‘I want to motivate my sales team’, ‘I want to change the behaviour of my channel partners’ and ‘I have to incentivise my new joiners’. For the company enabling the processing or manufacture of the card or its distribution, problems will include, ‘I need to fill my production capability’, ‘I want to leverage my brand’ and ‘My other routes to market are too expensive’.

Retailers’ problems are also solved by gift cards. ‘Some of my customers visit but don’t buy’, ‘Our returns costs are high’, and ‘I need to maximise the value of each customer’ are some of them.

So gift cards and vouchers solve problems for everyone in the supply chain. Which is why 1,000 retailers in over 25,000 outlets around the world sell over $100bn of gift cards to satisfied consumers each year, growing at 15% p.a.

Cash is not the problem
Let’s now look at non-gift prepay, often quoted by banks as being their way of solving the problem of processing cash. Which consumer problems do prepay applications solve? Visitors to a nightclub in London, The Ministry of Sound, prepay for entry and receive a bar-coded ticket to their mobile phone on the day it is valid. Entry to the club depends on showing a mobile phone ticket or else the partygoer incurs the wrath of the bouncers. The problem this is solving? Consumers want to be around other ‘good guests’. With the paper ticketing process, this cannot be assured. By filtering out bad guests through the selection and payment process using a database and scoring mechanism, and ensuring the e-tickets cannot be passed on (which reveller will want to lend his phone to a friend on a Saturday night?) this innovation solves a consumer problem.

Wireless phones are also becoming popular as carrier of payment value. Fans of the Atlanta Hawks, based near to loyal Giftex Prepay Network members, InComm (Hi, Lori!), have been testing specially adapted Nokia handsets linked to their VISA cards to enter the stadium and buy root beer and burgers. The consumer problem? A combination of security, ’the balance is secure if you lose your card’, cost efficiency, ’you get a bonus for topping up’ and tribalism, ‘only loyal fans will take the trouble to get one’. It is no wonder that Arthur D Little, a research company, predicts that payment using mobiles will rise from $3.2bn in 2003 to $37bn by 2008. This is more than 100% growth in five years.

In Asia, mobiles are used to buy a lot of things. In Japan, hundreds of thousands of transactions, from travel purchases to everyday shopping items such as groceries, take place every day. The cards have an RFID/Contactless/NFC activation and redemption capability and a stored value processing capability. Most Japanese have at least one credit card, but they tend to stay in their owners’ pockets. Unlike the cities of many of the Network’s members, street crime does not exist in Japan, so cash is king. Cash solves the problem of payment for not only daily shopping but payment of utilities through the payment network in convenience stores or banks.

Problem-solving prepay
So how are mobile prepayments making an impact on these deep-seated habits in a progressive market such as Japan? Dan’s article on developing markets in this issue will shed some light on this, as will the piece on our new member, TNX, from Lisa. For customers in a hurry, being able to pay with their keitai – mobile phone - is a lot quicker and easier than paying in cash. Sure, the technology is pretty cute too: using a Near Field Communication (NFC) chip called FeliCa, handsets perform the various functions of cash, keys, ID and credit cards, as well as making calls. But what is assuring their success is that, like ordinary gift cards, these applications solve customer problems—and problems for others in the supply chain too.
For some the problem solved might be, ‘I’m in a hurry’, ‘I don’t trust plastic’ or ‘I don’t want to risk carrying cash’. For others it might be, ‘I don’t want anyone to know that I am making this payment’ or ‘I want to look trendy’.

Prepay cards, such as those used by London’s Oyster system or Hong Kong’s Octopus system, provide consumers with a great deal of convenience, solving the problems of ‘not enough time’, ‘not enough change’ or ‘need the lowest cost ticket’. The Oyster card now accounts for over 75% of all journeys and only 5% of journeys are paid for in cash, partly driven by the significant discounts available to card users. And once the Oyster/Barclaycard/Visa prepay card product called OnePulse gets launched in September, we will see NFC-enabled prepay cards solving the problems of many millions of Londoners every day.

But payments made using many open loop prepay cards attract fees, either to buy, use or top up, otherwise the economics do not stack up. For example, a $100 Amex gift card costs $9 to buy. But the Milo card issued by InComm has recently had its purchase fee removed, to the surprise of some industry operators whose business models depend upon an up-front fee to pay for their issuing costs.

According to Dave Carr at Altair Financial Services, “We will see more and more no-cost prepay travel cards coming to market, such as the Caxton FX travel card”. The Caxton card is free to obtain and free to load, provided it is done online and via a debit card. “Crucially, the company is promising to offer the best rate of exchange in the market” says Carr. Purchases in shops incur no charge, but users pay €2 or £1.50 to make cash withdrawals at ATMs. Users have to load a minimum of £500 on to the card and their account is then credited with equivalent number of euros on that day. The card can be used anywhere in the world and, if used outside the Eurozone, the customer gets the rate of the exchange on the day.

“The price needs to represent reasonable value for money” says Greg Sheppard from First Data. “And this differs between how cards are used in each segment. In the youth segment, prepay cards tend to have lower transaction values so issuers need to charge more; and yet there is less willingness to pay these charges by consumers” he says. Greg goes on, “There is a risk with charging too little for a prepay card. If consumers have not had to incur a meaningful cost, or the product is free, then their usage behaviour will be different to if they had paid for the product.” He concludes that free prepay cards may promote dormancy and find it hard to create brand or even product loyalty, and therefore profitability.

In time other sources of revenue, perhaps revenue from marketing or channel partners, could make the prepay card less reliant on revenue from the consumer. For example, an airline issuing a prepay travel card that rewards consumers with air miles when it is used could be free. With KLM’s gift card issued by Mercurius, Loyalty is built in.

If prepay becomes as cheap for the consumer to use as cash, then retailers could even charge consumers for using cash. After all, it costs retailers more to process a cash transaction than some prepay transactions. ‘1% extra for cash’ or ‘No cash allowed’ could become familiar on signs at the POS.

From pay-now to pay-before
We are not only seeing a change in where the value is carried, from paper (cash) to a mobile phone. We are also seeing a move from pay-now and pay-later to pay-before. From debit and credit to prepay. Instead of taking up some of the several hundred credit cards on offer, Japanese consumers are adopting prepay by topping up their mobile phones with spending money in advance using cash. They are not flocking to prepay because it is prepay. They are using prepay because it solves their problems at an acceptable cost.

Having spent fortunes on branding and enjoying very profitable businesses, credit card firms do not want to see prepay gaining ground at their expense. Banks are worried. Or they should be. Historically, banks have controlled both the hardware (chequebooks and debit/credit cards) and distribution (banks, ATMs, web sites). Banks could lose customers and reduce the size and profitability of their credit card operations.

Winners and losers
Credit and debit cards do not solve a range of new consumer problems as effectively as some prepay cards. To identify the prepay winners, look out for those that solve consumer problems. It might be related to gift-giving. Shopping. Gambling. Travel. Or receiving benefits. Prepay ‘solutions’ that do not solve consumer problems will have a problem: consumers will not use them.

Posted by staff at August 16, 2007 12:30 PM