Pre-paid Cards Threaten Debit in Some Markets

Pre-paid cards, especially general purpose reloadable and payroll cards, are increasingly becoming a threat to debit cards in some markets worldwide.

Debit cards have added the most in absolute volume of any financial card type over the last decade, growing $3.9 trillion in absolute terms worldwide, according to the latest figures from Euromonitor International.

Though debit has posted double-digit growth rates in terms of transaction volume over the last decade as well, it is pre-paid that has grown the most of any card type across the world. Pre-paid cards posted a CAGR from 2000 to 2010 of 20.8% for transaction volume with the open-loop function having a slightly higher growth rate than the closed-loop function.

Pre-paid cards have become increasingly popular in parts of the world like India and Thailand where the banked population remains low. Pre-paid cards do not require the customer to have a banking relationship or credit history for that matter so it is an attractive product for the unbanked population.

In India, for example, the postal department has recently partnered with banks to launch a program to sell pre-paid cards in the 800 post offices across the country as part of a new initiative to allow customers – even those in more rural areas – to purchase goods and services without having to carry cash.

The growth of pre-paid cards in Saudi Arabia partially has been driven by the unbanked youth who could not previously qualify for debit cards or credit cards and the success of pre-paid card operators to target a specific consumer group with distinct benefits. In examples like these, pre-paid cards have shown to be a more efficient, convenient and safe method for introducing the unbanked population to financial services as compared with other card initiatives.

In Canada, specifically, MasterCard and Visa pre-paid cards have made giant leaps in terms of market penetration in 2010, and are starting to cannibalize debit and credit card transactions and retailers gift cards as well. In fact, the number of cards in circulation and transaction volume in Canada has slowed for debit and credit cards since 2000 while pre-paid cards began to post double-digit annual growth rates. Visa, for example, co-branded one of its pre-paid cards with the 2010 Vancouver Winter Olympics, which gave it considerable visibility.

The number of pre-paid cards in circulation grew by 15% in 2010, to almost 26 million. The value of transactions in that year was about 69% higher than in the previous year, helped by a flurry of activity in the various segments of pre-paid cards. The most active has been pre-paid retailer gift cards, which saw substantial growth during the holiday season, and open loop pre-paid cards, mostly led by Visa and MasterCard’s offerings, which almost doubled in value from 2009 to 2010.

The rapid rise of pre-paid cards worldwide has demonstrated the pre-paid concept’s adaptability and capacity to reach a wide array of consumer segments across numerous markets that previously were untouched.

As a result of this wider reach across merchant channels, global competition is high and there is practically unlimited potential for new players to get involved in the future. The main threat looming for pre-paid transactions is the lack of mobile and Internet payment options.