C S P June 2012 115

L ike the proverbial roads lead-

ing to Rome, in the migration

of everything prepaid—from

gaming to gift and general-purpose

reloadable (GPR) cards—all subcat-

egories seem to be converging into the

cellphone of tomorrow.

That’s because the growing ubiquity

of high-tech smartphones and the move-

ment of payment to “mobile wallets” are

acting as magnets, pulling prepaid in.

“I think it is only a matter of time

before prepaid mobile-phone payments

are as common as using a plastic card for

the same type of transaction,” says Scott

Hartman, president and CEO of Rutter’s

Farm Stores, York, Pa., giving a nod to

both mobile wallets and the growing use

of prepaid in general.

Several documented prepaid trends

back this scenario:

▶ “Open loop” market to surpass

closed loop. The use of prepaid cards in

lieu of personal credit and debit cards

and even bank accounts (with employees

getting their paychecks downloaded onto

cards) will exceed volumes for closed

loop—or cards tied to specific entities

or retailers—by 2014, according to Mer-

cator Advisory Group, Maynard, Mass.

The trend indicates the growing use of

prepaid as a payment option.

▶ Prepaid long-distance falls as

wireless rises. A 7% drop in prepaid long

distance (land lines) from 2009 to 2010

(most recent data available) is projected

to continue, falling from $3.7 billion in

2010 to $2.8 billion annually as a subcate-

gory by 2014. Meanwhile, prepaid mobile

Prepaid, Cellphone ConvergeMobile payment, GPRs, unredeemed gift-card dollars prompt change

By Angel Abcede || aabcede@cspnet.com

C S P June 2012116

minutes and plans went in the opposite

direction, rising 16% from 2009 to 2010,

with projections going from $23.8 billion

in 2010 to $32.9 billion by 2014, Mercator

says. The trend is the ripple effect of the

rising use of mobile phones.

▶ Retailers believe mobile payment

is inevitable. In a joint survey by CSP

and Mercator, almost a quarter (23%) of

responding retailers said they were con-

sidering technology changes to accom-

modate mobile payments. (See sidebar

above.) Retailer buy-in is a must for any

new payment trend, especially when

change requires a financial investment.

Still, mobile payment faces many

obstacles, including data-security

concerns, competing mobile-phone

technologies and the cost of upgrading

pumps and point-of-sale (POS) regis-

ters [CSP—May ’12, p. 75]. But retailers

such as Woodbridge, N.J.-based Hess

Corp. are positioning themselves for

the future.

“We’ve been evaluating a lot of dif-

ferent options in the digital [payment]

space,” says Ethan Fitzsimmons, direc-

tor of foodservice, who also covers the

prepaid category. “We’re working with

[our supplier] to ensure we have the right

technology so that we’re ready.”

GPR GrowthOne of the reasons open-loop cards are

projected to surpass closed loop is the

growing number of businesses and gov-

ernment entities loading employee pay-

roll onto debit cards, says Ben Jackson,

senior analyst for Mercator.

Two indications of prepaid growing as

a financial service are the entry of major

operators and the positive forecast for

GPR. Jackson points to Dallas-based

7-Eleven working with Austin, Texas-

based NetSpend Corp. to bring the pre-

paid NetSpend Visa product to the chain.

He says Englewood, Colo.-based Western

Union has also entered the game with its

prepaid reloadable product.

Frank Squilla, senior vice president of

sales for InComm, Atlanta, adds to that

the entry of internet payments provider

PayPal, San Jose, Calif., and even celebri-

ties such as hip-hop recording artist and

producer Russell Simmons.

Mercator numbers show $57.2 billion

loaded on GPR cards last year, projecting

the number to more than double to $167

billion by 2014.

“This is a function of more and more

people using these cards for a variety of

reasons,” including budgeting efforts and

banking costs, Jackson says. “As you look

at [prepaid’s] role in the c-store world,

it can become not only another item to

sell and potentially on a repeat basis, but

[a foundation for] a relationship with

that customer, who’s now looking at the

c-store for financial services.”

People who don’t have bank accounts

or have minimal contact with banks—the

“unbanked” and “underbanked”—have

always been prime candidates for finan-

cial services, Squilla says. GPR is becom-

“We’re starting to see an upside in sales and areas of double-digit increases.”

Dialing Down into PrepaidRetailers appear to be benefiting from larger prepaid trends with open-loop prepaid cards and are considering newer payment

technologies, including those involving cellphones. For more on this survey, see the 2012 CSP Category Management Handbook.

Preparing for New Payment Types

Considering MadePayment type changes changes

Loyalty 29% 12%

2-D barcodes 29% 0%

Mobile payments 23% 0%

Near-field communications 18% 6%

New card types (EMV**/contactless) 12% 6%

Sources: CSP/Mercator Advisory Group 2012 survey involving 17 retail chains. * General purpose reloadable ** Europay, MasterCard, Visa—a standard for chip-based card payment

Prepaid Numbers

$16.5 millionAverage annual revenue

$1.3 millionAverage profits

$71,000Annual revenue per store

$300,000Annual profit per store

[Note: the following charts are taken from 2012 CSP Category Management Handbook.]

Financial Services Offered

Percent of retailers offering

Financial service

Prepaid phone cards 88%

Open-loop gift 65%

Closed-loop gift 65%

Money orders 59%

Prepaid financial-services 41%

Reload for GPR* 35%

Bill-payment services 29%

Check cashing 12%

Remittance 0%

C S P June 2012 117

ing a more viable way for c-stores to offer

those services.

As more players enter the GPR space,

the goal is to allow reloads from all of

them at the local c-store. “It’s exciting

for us,” Squilla says. “[We’re develop-

ing] a financial network to top up at all

locations … where it’s tied to PayPal,

Netspend and Russell Simmons. As more

sign on, they’ll have a presence at 150,000

[c-stores nationally].”

The other half of the equation is

consumer awareness, says Teri Llach,

chief marketing officer for Blackhawk

Network, Pleasanton, Calif. As the cards

become more visible in other channels,

c-store operators are seeing demand

rise. “The awareness is growing,” she

says. “[Prepaid is] morphing as the use

becomes more self-use.”

Gift-Card Diversion: A Statewide PulloutThe growth of prepaid has its drawbacks, with the category catching the eye of

lawmakers eager to repair budget shortfalls. In a current development, prepaid

suppliers have said they will pull all product out of New Jersey in response to a state

law attempting to claim unused gift-card dollars.

Based on laws that allow states to take over unclaimed funds from forgotten

bank accounts or overpaid cable bills, the New Jersey law passed in 2010 requires

retailers to get customers’ ZIP codes in an attempt to usurp gift-card dollars left

unused after a couple of years.

“There is an argument to be made for the role of government … but the whole

purpose is to reunite [the owners] with their unclaimed property,” says John Holub,

president of the New Jersey Retail Merchants Association, Trenton, N.J. “With gift

cards, there is no logic, because a gift card is purchased and given to someone as

a gift. But it’s potentially regifted 10 times over, so knowing the bearer of product

is quite difficult.”

Requiring only a ZIP code further clouds the matter, Holub says, with the plan

having logistical problems: “Clearly, there was never any intention of reuniting an

individual with the unclaimed balance.”

As a result, Blackhawk, InComm and American Express announced they will pull

product at the end of June. “New Jersey has always been a business-friendly state,”

says Frank Squilla of InComm. “We hope for a resolution.”

At press time, the pullout plans were still in place.

C S P June 2012118

Closed-Loop GrowthAs a side note, Jackson of Mercator says

closed-loop cards are still viable products,

with in-store gift cards and “incentive”

cards (wherein businesses give employees

these cards as rewards to drive behavior)

being the fastest-growing segments.

In fact, Mercator had to revise its ini-

tial projections about when open-loop

would surpass closed because the closed-

loop segment was actually larger than it

had originally estimated, Jackson says.

Branded gift cards were one of the

reasons Hess switched prepaid suppliers

at the beginning of the year, Fitzsimmons

says. Its new supplier, Blackhawk, offered

cards from the branded retailers Hess

customers were looking for.

“[Blackhawk] brought a variety of

options in prepaid, gaming, fashion, din-

ing, home improvement and digital con-

tent and all best in class—Xbox, iTunes,

Lowe’s,” Fitzsimmons says. “Brand makes

the difference.”

The category has been somewhat

flat the past two years, a reflection of

the changing telecom arena and the

various phone plans flooding the market,

Fitzsimmons says. But “we’re starting to

see an upside in sales and areas of double-

digit increases.”

“With gift cards and creative cards like

Groupon and digital content and gaming,

we’ve seen an uptick,” Llach of Blackhawk

says. “But not just for gifting but [again],

self-use. The last thing I want is to tie my

credit card to [my daughter’s] iTunes

account. A month later, I’d be knee-deep

in charges for her music.”

For many consumers, prepaid is the

right way to go with digital content, she

says. “That’s a big trend with reloadable

debit. The consumer says, ‘If I overdraft or

do something wrong on my bank account,

it’s [a fee]. I’d rather pay $3.95 to buy a

reloadable card and pay $2.95 to load it.’ ”

Mobile MovementIn tandem with GPR developments,

Squilla connects the dots back to the cell-

phone. InComm is working with provid-

ers to develop a prepaid mobile-payment

platform, where much of the reloadable

activity with cards at c-stores can now

happen using a cellphone.

The mobile wallet has the potential of

aggregating everything from credit and

debit cards to loyalty reward points and

gift-card totals. Payments and rewards

programs, such as the one deployed last

year by Seattle-based Starbucks, can

reside in apps on people’s phones.

“If people want to have apps, where are

they going to load value? They’ve got to go

to retail to do this,” Squilla says. “They’re

walking around with computers in their

pockets now. They need ways to transact

their commerce over their phones.”

And it’s not just the unbanked, Squilla

says. It’s the teenagers and college stu-

dents whose parents need ways to budget

their children’s spending. “Companies are

out there that are trying to build … trans-

actions geared to kids who purchase over

the Web, where there’s an online budget,

a virtual piggy bank,” he says. “Right now,

through the consent of a parent, they’ll

buy a cool ringtone. That’ll be $1.99 that

happens to be on the phone.”

In the future, Squilla believes that’s

the way most transactions will occur. “It’s

changing the way people do business.”

Retailers are already marketing to

customers online with their websites,

such as slurpee.com or speedway.com.

It’s the concept of digital delivery. A rel-

evant example today would be the online

Brand Pull: Officials with Hess Corp. say brand is important within the prepaid space.

C S P June 2012 119

“It’s the ‘now’ economy. I don’t want to go to the store; I want it now.”

purchase of a gift card that’s sent via e-mail or through a social

network. The recipient ultimately gets a bar code representing

a $25 credit sent to his or her cellphone.

One vision of this new process is people paying over the Web

vs. when they’re actually at the store. It becomes more of a pickup

or even delivery task vs. shopping and paying. “It’s the ‘now’ econ-

omy,” Squilla says. “I don’t want to go to the store; I want it now.”

Facing a Digital FutureRetailers still have time to respond to mobile payment, Hartman

of Rutter’s believes. Customers still need to feel comfortable

with apps with regards to security and the safety of their money.

In addition, retailers would have to invest in new equipment.

“Inside the store is the easiest place today to execute a mobile

prepaid transaction for c-stores, but even that often requires an

upgrade to a scanner and some software,” Hartman says. “Out-

side, however, is where the majority of our industry transactions

take place, and that is going to be a much heavier lift for our

industry because it may require the installation of a scanner or

[radio frequency] card reader at the pumps, both of which are

very expensive.”

In the face of these changing payment options, Squilla says

it’s important for retailers to position themselves for the future.

POS devices should be geared for mobile payment, either con-

tactless options or scanning, where price-look-up keys allow for

multiple denominations. Two more requirements are reloadable

capabilities in a price range of $20 to $500, and the ability to

settle daily transactions.

“All those things come into play as business continues to

morph with mobile payment, services, mobile communications

and top-ups,” Squilla says.

From his perspective, Hartman keeps an open mind. He

believes the push over the top for this type of transaction will

come from “left field.” The easiest way to envision prepaid

mobile happening is with the same mechanisms currently

used for credit and debit transactions, with the same proces-

sors, such as credit-card giants Visa and MasterCard, he says.

However, “I expect that in the next two years I’ll wake up and

see an announcement of a new, out-of-the-box approach to

handling these types of transactions,” Hartman says. “It will

make everyone say, ‘Why didn’t I think of that?’ ” n