Reports: Prepaid Card Market Slows But Can Rebound (September 2013)

By Bill Grabarek, Senior Editor 

Following double-digit growth in previous years, open- and closed-loop prepaid card market growth slowed from 2011 to 2012 as an economy that started to soften a few years ago caught up to the industry last year, among other factors, according to Mercator Advisory Group.

Total dollars loaded in the open-loop prepaid market grew by only 6 percent to $194.5 billion year over year, according to the report, U.S. Open-Loop Prepaid Cards Market Assessment and Prepaid Market Overview. From 2010 to 2011, the open-loop prepaid card market grew 24 percent to $184.1 billion. The market’s growth in 2010 was 19 percent.

“In broad terms, the entire open-loop prepaid market has seen a significant slowdown due to the weak economy, reduced government spending and new regulations that require prepaid suppliers to rethink or restructure all aspects of their business,” Tim Sloane, director of Mercator’s Prepaid Advisory Service and author of the open-loop report, tells Paybefore.

“The dual routing requirement [of the Durbin Amendment], on top of the CARD Act, has created an incredibly difficult environment for open-loop gift card suppliers that operate on regulated networks,” he says. “At the same time, unemployment load values dropped 17 percent in 2012 as the Emergency Unemployment Compensation federal program and the Extended Benefits federal program both ran out of funds.”

Although the industry is no doubt paying attention to that 6 percent growth, Mercator’s report found segments within the category that are outperforming the norm. “While the market has slowed down, some segments continue to have growth rates that other payment types can only dream of,” adds Sloane.

For example, of the 19 open-loop prepaid market segments tracked, the cash access category—which includes travel cards, open-loop gift cards and financial services cards, among others—was the fastest-growing last year at 12 percent, with a total load of $83 billion in loads in 2012, up from $74.1 billion a year earlier (See Figure 1). The second-fastest growing category was the payroll and benefits category, which grew at 9.7 percent to $40.1 billion in 2012, up from $36.5 billion a year earlier. The category includes payroll cards, benefits cards and health savings account and flexible spending account programs.

The closed-loop prepaid market, as measured by total dollars loaded, grew to $309.1 billion in 2012, up 3 percent from $299.1 billion in 2011. Growth in the closed-loop card market has hovered around 14 to 17 percent between 2008 and 2011 (See Figure 2).

Though the growth of closed-loop cards has slowed, market segments for digital content, games and ringtones “grow at a rapid pace as more people choose to download songs, games, books and other content from the Internet,” according to Ben Jackson, Mercator senior analyst and author of the closed-loop prepaid card report. 

Despite the significant drop in growth rates for open- and closed-loop prepaid cards in 2012, Sloane says the industry can return to double-digit growth again if the economy recovers, if regulators and legislators cease actions that increase implementation costs while limiting addressable markets and product features, and if government agencies return to policies that make investments in disadvantaged citizens.

“Note, however, that most prepaid segments are maturing, so the high double-digit growth seen in the past is unlikely to return,” Sloane adds.

Mercator has not yet published its prepaid card forecasts, but the market will continue to be impacted in 2013, according to Sloane. Once the industry has adjusted to current macroeconomic conditions created by compliance and regulatory issues, for example, prepaid providers “will return to making investments in payments and fee-based products, and be limited only by end consumer adoption trends,” he says.

Mercator’s prepaid market forecast, which will include estimates for loads in 2013 through 2016, will be published later this year.