Good news on the prepaid card front: after losing ground in 2013, retailer gift cards rebounded in 2014. Total dollars loaded onto retail gift cards grew 9 percent last year, according to a new report from Mercator Advisory Group.
"Closed-loop gift cards continue to be popular for retailers and their customers," said Ben Jackson, Director of Prepaid at Mercator Advisory Group, and author of the report, Retail Gift Card Trends in the United States: 2014 in Review. "Despite downward pressure in 2013, the market rebounded last year, and customers showed their affinity for closed-loop prepaid cards."
Closed-loop card programs may also soon enjoy a regulatory advantage over open-loop prepaid card programs. The Consumer Financial Protection Bureau has been working on a set of proposals that would amend federal Regulations E (consumer EFT transactions) and Z (truth-in-lending) to cover general-purpose, open-loop prepaid cards. The rules, which are expected to be finalized in 2015, would not be applied to closed-loop retailer cards (gift cards), provided retailers issuing the cards operate physical locations where customers can obtain their prepaid gift cards.
Merchants of all types and sizes have been embracing prepaid cards as a way to grow revenues and drive customer loyalty. In fact, many have begun aggressively selling prepaid, according to Aite Group LLC Senior Analyst Madeline K. Aufseeser. "The number one reason that U.S. merchants embrace prepaid cards is because the cards create revenue and increase incremental store sales. Merchants may vary the types of prepaid cards they sell, but their commitment to the product set is clear and evident," she wrote in a recent Impact Note.
But can that commitment continue in the face of new regulatory strictures? The Network Branded Prepaid Card Association and scores of others think not, and have blasted the pending CFPB proposals.
"The imposition of unnecessary compliance burdens, when trying to fashion a one-size-fits-all rule, could ultimately limit consumer access to safe and reliable prepaid products and drive users to seek out riskier and less consumer-friendly alternatives," the NBPCA wrote in the comment letter it submitted to the CFPB regarding the proposal.
Evidence already indicates that retailers are retracting from open-loop card sales. When Aufseeser surveyed merchants earlier this year she found 78 percent offer closed-loop gift cards, while 2 percent were planning to do so by 2016. Only 27 percent are selling third-party, open-loop gift cards; 53 percent sell third-party closed loop cards. When she asked the same question in 2014, 89 percent of merchants were selling third-party closed-loop cards; only 74 percent were selling their own closed-loop gift cards.
Prepaid cards – both open- and closed-loop – remain popular with consumers. According to Mercator, which regularly sizes the prepaid market, 56 percent of U.S. adults purchased prepaid debit cards last year, up from 53 percent in 2013 and 47 percent in 2012. The cards are especially popular with younger adults: two out of three consumers between the ages of 18 and 34 purchased prepaid cards last year, up from three out of five in 2013, Mercator reported in its December 2014 report titled Consumers and Prepaid: Rising Use, Especially by Mobile.
Mercator said the two fastest growing segments of the prepaid market last year were general-purpose reloadable (GPR) and general-purpose non-reloadable cards. Mercator's 2014 survey also pointed to changes in buyer demographics; high-income earners ($100,000 or more a year) were more likely to purchase GPR cards than in previous years.
Aite estimates Americans made more than $200 billion in retail purchases using prepaid cards last year, or about 5 percent of all retail spending in the U.S.
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