The Prepaid Market: Trends for 2018

The global market for prepaid cards is projected to reach US$3.1 trillion by 2022—fueled by the financial needs of unbanked and under-banked customers, innovative card features, online transactions, and the need to go cashless worldwide.
Mercator Advisory Group forecasts that the use of open-loop prepaid cards in the U.S. will increase by seven percent through 2018, reaching a total of US$343 billion. Closed-loop prepaid cards will experience a three percent CAGR through 2018, for a total of US$371 billion.

EuroPay, MasterCard, and Visa

The fraudulent use of prepaid cards for money laundering concerns financial institutions. Recent fraud in the prepaid card industry have highlighted fraudsters’ preference for gift cards as the prime channel of payment to other fraudsters.

Because prepaid cards are generally low denomination, service providers do not find it cost-effective to convert to them to EuroPay, MasterCard, and Visa (EMV) chip and pin cards. (The Chase liquid card is chip-enabled, and other prepaid players are expected to embrace EMV.) The cost of issuing chip cards will be offset by reducing prepaid card fraud over time.

As customers become educated on the benefits of EMV, they may be willing to incur the additional cost of the chip in prepaid cards.

The infrastructure groundwork to accept chip cards in the U.S. makes it possible to turn on contactless payment. So, while banks have been slow to recognize the magnitude of the opportunity, more terminals are being readied. Roughly 3 out of 12 million—and counting—terminals feature full EMV acceptance and are contactless capable.

Contactless Payment

Contactless payment is a highly desirable prepaid card feature. Contactless payment—tap-and-go—reduces the friction related to dip-and-swipe with predefined transaction limits. Contactless payment offers a convenient option for low-value transactions.

The following section is a comment on the contactless payment market from allpay Limited, a UK-based prepaid card provider.

According to one of the experts in prepaid area Kevin McAdam, Director of Prepaid at allpay Limited In more recent years, the desire for speed and ease has been responsible for the unstoppable growth of contactless. Last year, contactless payments accounted for £25billion of spending, compared to only £7.75billion in 2015. This comes as no surprise to us at allpay Limited, following an increased demand from our customers for contactless, with upwards of 90% of new orders requiring contactless functionality.

Furthermore, while it is not compulsory, in the last six months we have seen many of the local authorities that we work with seek contactless in their tenders. A lot of the local councils, and housing associations, that we work with deal with vulnerable tenants living in social housing who are elderly or infirm.

For this reason, many of them lack access to certain technologies or may not understand how to use the technology at all. Therefore, minimising the risk of error is key. Contactless presents great opportunity for these people, who do not need to remember a PIN number to use the payment method. Small payments are also processed with minimal intervention and stress. Transactions are processed quickly, easily and with peace of mind. But it could be even easier. Clearly contactless is a useful method and far from disappearing any time soon. But how might it improve?

Prepaid cards are now evolving to include the functionalities of contactless. Prepaid cards enable easy, swift and secure transactions in the same way as contactless cards, but are not in competition. Rather, moving forwards, the two payment methods will combine to optimise ease for the payee and the speed of transactions.

• Change driven by growth in customers choosing contactless – usage almost tripled in 2016
• By 2026, contactless is forecast to account for more than one in four (27%) of all payments

US Market

Meanwhile the US is so behind the contactless payments.
The migration to EMV started much later and, yes, it is much more complex than it was for the concentrated markets I described. But, the fundamental technologies, drivers, and consumer sentiments are very much the same. US now have around three million new contactless capable POS terminals, yet contactless penetration is near non-existent on the consumer side. Why is that?

Large U.S. stakeholders made the big mistake of not taking the global lessons to heart (especially from those that are years ahead of us). Perhaps the biggest mistake comes from the issuing banks: banks were mandated to issue EMV compliant chip cards by late 2016 and most of them chose the minimalist path. They saved ~35 cents per card by sending us “single-interface” chip cards with no contactless antenna.
So expect 2018 to be the year of contactless for the U.S.

Know your Customer—UK and EU

The Fourth EU Anti-Money Laundering Directive

Prior to the Fourth EU Anti-Money Laundering Directive (4MLD), Know Your Customer (KYC) 1 cardholders could load 2,500 onto prepaid plastic or virtual cards before identity and address information required verification. With 4MLD in place, identity and address information must be verified to allow a spend of more than 1,000.

Verified cardholders become KYC 2, and the full range of services of your program would be available under KYC 2 limits.

As the use of prepaid cards continues to rise, the need to address the risks associated with anonymous transactions has also risen.  In an effort to identify customers using such methods of payment and balance transferal, it has been proposed that the threshold for identifying holders of prepaid cards be lowered to €50 and the maximum monthly payment transaction be lowered to €150 from €250.  With this user verification, requirements have also extended.

What’s Next for Payroll Cards?

Evolving application and financial back-end technologies are changing the market, making it possible for payroll card providers to meet or exceed traditional bank card functionality. For employees, new value-added options may allow them to take the following actions:

Receive email and text alerts: Cardholders can receive real-time alerts that let them know when they’ve been paid and how much money is on their card. Users can also create low balance alerts to ensure they don’t overspend.
Build a better budget: Advanced mobile apps let cardholders see real-time account info, view transaction details, and manage money across mobile and desktop platforms.
Shop, pay, live: Digital standardization makes it possible for users to pay bills online, purchase items, or set up automatic billing accounts.
Add money from multiple sources: Payroll cards are expanding beyond the single-source income model. It’s possible for users to add cash to their cards at thousands of stores nationwide; receive pay from other jobs; or load money from government benefits, tax returns, or child support.

Advancing technology comes with benefits for employers as well. Improved encryption means more secure transactions, while the standardization of digital financial services helps ensure that money is available to users immediately and automatically, reducing HR overhead.

Payroll cards for employees were originally designed as a bank account alternative, but the rise of cloud-based technology, combined with the millennial predisposition to use nontraditional finance providers, is reshaping the market, making payroll cards a win-win for employees and enterprises alike.

Softjourn has worked with prepaid card providers since 2009. We have assisted PEX, PayPartners(acquired by TransCard), iCard, and others to deliver optimized solutions and services.

Source: Softjourn inc.