While debate about which prepaid card applications will be the drivers of future growth in the sector continues, UK-based prepaid business analyst Giftex Prepay has found that the key to a successful application is simply to solve consumers' problems.
According to Tony Craddock, CEO for Giftex Prepay, "Successful prepay applications aren't just down to technology, branding, or budgets. They come from careful consideration of the problems the application is solving for consumers."
Technology is not always king
As with any sector in which technology is changing fast, there is a tendency to find out what the technology can do and then try to 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. But the end product often represents the solution to a problem that doesn't exist, or a solution that's less effective than some other existing mechanism.
This approach can be an expensive route to follow, and many product developers do not really understand enough about how consumers behave to know what problems the product is really solving. The only successful path is usually to start with what the customer needs or wants, and then develop the right technology.
Which problem comes first?
True, gift cards can and do solve a number of problems for consumers and businesses. These include problems - cited by surveyed consumers - such as: "I don't know what the receiver wants", "I don't have enough time to find the right gift", "I have enough stress in my life already and don't want to risk getting the wrong gift".
And of course the gift recipient has problems, too. One in three gifts received is unwanted, and nobody wants to fabricate an enthusiastic but inauthentic response to a gift. Or the recipient often has so many of the things they want that it's impossible for anyone else to know what to buy for them. And those are real problems that gift cards solve.
Gift cards and vouchers solve similar problems for businesses, too. For the human resources manager, problems include: "I want to motivate my sales team", "I want to change the behaviour of my channel partners", or "I have to incentivise my new joiners". For the company enabling the processing or manufacture of the card or its distribution, problems might include: "I need to fill my production capability", "I want to leverage my brand more effectively" or "My other routes to market are too expensive".
And retailers' problems are also solved by gift cards. For example: "Some of my customers visit but don't buy", "Our returns costs are high", or "I need to maximise the value of each customer", among many others.
According to Giftex Prepay's research, these problems explain why some 1,000+ retailers in over 25,000 outlets around the world sell over US$100 billion worth of gift cards to satisfied consumers every year - a figure that is currently growing at around 15% per year.
Cash is not the problem
But think for a moment about non-gift prepaid cards, which are often cited by banks as being their best way of solving the problem of processing cash. So which consumer problems do these applications solve? Visitors to The Ministry of Sound nightclub in London can prepay for entry and receive a bar-coded ticket on their mobile phone on the day they intend to go.
But what problem is this solving? Well, consumers want to be around other 'good guests' and, with a paper ticketing process, this cannot easily be assured. But by filtering out 'bad guests' through the selection and payment process using a database and scoring mechanism, and by ensuring the e-tickets can't easily be passed on to others, this is a solution to a perceived problem of guest quality.
Prepay with mobile phones
Mobile phones are also becoming popular as carrier of payment value. In the US, fans of the Atlanta Hawks have been testing specially adapted Nokia handsets linked to their Visa card to enter the stadium and to buy food and drinks from concession stands.
The consumer problems being addressed are a combination of security ("It's secure and means you don't have to carry cash"), loyalty ("You get a bonus for topping up") and tribalism ("Only truly loyal fans will take the trouble to get one"). It is perhaps significant that research firm Arthur D Little predicts that payment using mobile phones will rise from 2003's total of US$3.2 billion to some US$37 billion in 2008.
In Asia, mobiles are already 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. They have a contactless facility using RFID (radio frequency identification) and NFC (near field communication) technologies in conjunction with a stored value processing capability (for details of RFID and NFC market developments, see The Wise Marketer's sister publication, Using RFID).
These prepay mobile phone applications solve a number of problems for the consumer. For some the problem might be "I'm in a hurry", or "I don't trust plastic", or even "I don't want to risk carrying cash". Other reasons might include "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 transit system or Hong Kong's Octopus transit system, provide consumers with a great deal of convenience, solving the problems of "not enough time", "not enough loose change" or "I want the lowest cost ticket". The Oyster card now accounts for over 75% of all journeys, while only 5% of journeys are paid for with cash - partly driven by the significant discounts available to card users. And once the Oyster/Barclaycard/Visa prepay card product called OnePulse is launched in September 2007, NFC-enabled prepay cards will be actively solving the problems of many millions of consumers in London every day.
Fees and charges
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. 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. Purchases in shops incur no charge, but users pay �2 (1.50) to make cash withdrawals at ATMs. Users have to load a minimum of 500 onto the card and their account is then credited with equivalent number of Euros on the same day. The card can be used anywhere in the world and, if used outside the Eurozone, the consumer is charged based on the current rate of exchange at the time.
In time other sources of revenue - perhaps 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 done for free. And if (or when) prepay becomes as cheap for the consumer to use as cash, retailers could even charge consumers a premium - or at least offer restricted service - for using cash. After all, it now costs retailers more to process a cash transaction than some prepay transactions.
Shift in payment timing
Craddock concluded: "We are not only seeing a change in where the value is carried, from paper (cash) to a mobile phone, but we are also seeing a move from pay-now and pay-later to pay-beforehand - from cash, debit, and credit to prepay. Instead of taking up some of the several hundred credit cards on offer, most 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."
Credit and debit cards do not solve the whole range of new consumer problems as effectively as prepay cards can, Craddock argues: "To identify the prepay winners, look out for those that solve consumer problems. It might be related to gift-giving, shopping, gambling, travel, or even receiving benefits. But prepay solutions that don't solve consumer problems have a problem all of their own: consumers will simply not choose to use them."