August 16, 2007Which applications in prepay will be the drivers of future growthIdentifying 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 Synopsis 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 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? 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 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 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 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 |