A new report from Mercator Advisory Group titled, “Open-Loop Prepaid Card Management: Strategies to Take Advantage of the Industry’s Inflection Point,” focuses on the near-term, medium-term, and long-term opportunities for prepaid providers. Near-term opportunities still exist in the traditional account replacement market, medium-term opportunities exist in the commercial market, and long-term opportunities exist in providing prepaid payment options in new technological contexts.
This report encourages providers to think about prepaid cards in new contexts and how they can enhance their programs to make prepaid part of a broad suite of financial services products. Open-loop prepaid cards also can have a major impact on a brand’s customer engagement and customer loyalty efforts.
Loyalty360 talked with Ben Jackson, director of the prepaid advisory service at Mercator Advisory Group (who authored the report) about the ramifications of open-loop prepaid cards among loyalty marketers.
Can you talk to our audience about the differences between open loop and closed loop prepaid cards?
Jackson: Open-loop prepaid cards are those that carry a major network brand and can be redeemed at multiple, unaffiliated merchants and service providers. They are typically issued by a bank.
Closed-loop cards can typically only be redeemed with the issuer. The most common example is store gift cards, but closed-loop cards include prepaid cards for uses such as transit and mobile phone minutes that aren’t typically used for gifting.
Why have most prepaid card companies been unable to create more vertically integrated value chains?
Jackson: Prepaid card companies have not been able to create more vertically integrated value chains because of the cost and complexity of operating all of the links in the value chain. While it is possible for one company to serve as an issuer, processor, and program manager for its cards, there is a lot of work and expense in operating all of those pieces. To manage costs and be flexible, it often makes sense to contract pieces of that work out to third parties.
What are the advantages of open loop prepaid cards and how will they impact the future of the industry?
Jackson: Open-loop prepaid cards carry advantages over other payment types for shoppers and merchants. They ensure good funds, protect against the loss of credit and debit accounts, and help people manage their spending. The versatility of an open-loop card means that it gives people an additional payments tool that can supplement the other cards and cash that they have in their wallets.
How can prepaid providers find new opportunities and make their current programs competitive?
Jackson: One way prepaid providers can find new opportunities and make their programs competitive is to watch how cardholders are using their cards. Many companies created online shopping cards when they saw that customers were buying open-loop gift cards for self-use. Many people wanted a way to shop online without using credit or debit cards and turned to open-loop gift. This led to the creation of new products.
Second, prepaid providers should pay attention to technological growth and change. They should be watching for new sales and payment channels and look for ways that prepaid cards can minimize risk for buyers and sellers. They can also look for new ways to communicate with customers and keep their brands top of mind. Sometimes the communication and interaction is as important as the payment.
What impact will any or all of this have on customer engagement/customer experience/customer loyalty?
Jackson: Open-loop cards can be a powerful tool for customer engagement and loyalty because of their flexibility and ease of use. A company that wants to provide a small reward can use open-loop prepaid cards to deliver an incentive that is almost the same as cash. That reward is immediately usable by the recipient–no time is lost to cash a check or wait for a deposit–and the funds can be segregated and “marked” as a reward with specially designed prepaid cards. Open-loop cards can be reloaded for those customers who are engaged in a long-term relationship with a company. They can also be delivered empty and then activated and loaded once a customer completes a particular purchase or action.
As the prepaid industry matures, more people will be aware of the benefits and uses of prepaid cards. This means there will be less friction to offering them as a reward in an incentives program. People will get that they can use those funds. Additionally, as prepaid card providers look for new places to sell their cards, they will design more robust card programs that can be integrated into rewards and incentives plans.