By David Fish
Mercator Advisory Group
Editor's Note: Editor's note: The following article was published in SellingPrepaid E-Magazine, Sept. 4, 2008, issue 08:09:A. For more news and insights regarding the prepaid sphere, please visit www.sellingprepaid.com.
Online merchants are well aware that consumer anonymity already poses a risk in the e-commerce environment, merely by virtue of the fact that they cannot see their customers face to face.
Prepaid cards introduce an additional dimension of anonymity in Internet-based card transactions due to the disassociated nature of prepaid gift products, but the risk to the merchant is significantly reduced if funds are available on the card.
Generally, if prepaid gift cards have been legitimately funded, the odds of the dispute process being successfully effected are significantly less than with debit or credit cards. However, online retailers, or the service providers that support them, have failed to modify systems sufficiently to account for the anonymity inherent in prepaid.
In the online retail environment, one of the key benefits of consumer prepaid adoption - anonymity - has been the very impediment to prepaid's successful use and implementation.
Mercator Advisory Group recently published a research report examining the payment acceptance capabilities of online retailers using anonymous, network-branded prepaid gift cards. Each of the retailers' Web stores was also examined for closed loop gift card acceptance abilities.
We determined there is substantial room for growth, both in terms of merchants' acceptance capabilities and in the amount of e-commerce volume resulting from changes in acceptance infrastructure that would allow more prepaid gift card use by online shoppers.
Mercator's primary research for this report examined the top 25 online retailers' Web stores in the second half of February 2008 and studied their practices related to sales of in-store gift cards online, acceptance of store-only gift cards for online purchases and acceptance of network-branded gift cards for online purchases.
The network-branded card tests were conducted using Visa Inc.-branded prepaid gift cards obtained from a prepaid mall in a retail location and activated at the POS. The online purchases and purchase attempts consisted of low-dollar totals ($30). While the research we did surrounding closed loop cards was interesting, the real story is on the network-branded side of the market.
Using our anonymous Visa gift cards, the research team fought long and hard to spend all of our gift card money. Remarkably, only 32 percent of the 25 merchants studied accepted the network-branded prepaid gift cards at their e-commerce sites.
Of those who did, none allowed a split-tender payment using the prepaid card and another bankcard. The 16 percent who did allow split-tender with two bankcards did not also accept the Visa gift card for payment.
The high rate of declines on the Visa gift cards likely reflects merchants' automated fraud controls that analyze Address Verification Service (AVS) responses returned by card issuers in authorization responses.
These controls have likely been implemented in a comprehensive manner in the e-commerce card processing environment (at least at top-tier merchants).
If there is a negative response on AVS, even if the three-digit card verification code is provided, it seems that the order is declined, and what would have been a transaction with lower risk than a debit or credit card purchase is rejected.
It should be noted that many issuers of open loop gift cards offer a registration process whereby cardholders can register cards by giving the name and address, which may be accessed by merchant AVS requests if the issuer enables it.
But card registration was eschewed in Mercator's methodology for the simple reasons that one aspect driving consumer adoption of prepaid cards is anonymity, and such anonymity should not stand in the way of merchants' prospective sales if there is good money left on cards.
Furthermore, in instances when the merchant offered a specific data field for "cardholder's name" or "name on card," the researchers alternately tried their own names and "A Gift for You" as that phrase is embossed on the plastic itself.
While it is difficult to determine whether this had any effect on merchants' decisions to accept or reject the transactions, it is known that cardholder name is not transferred through payment network processing systems and thus such fields might be extraneous from a network perspective.
However, if a merchant monitors data generated by this field in the transaction and prompts the network-branded cardholder to enter whatever is embossed on the card, such endeavors could lead to prepaid card identification when cross-referenced with AVS response data, and the merchant could capture good funds in transactions that previously would have been turned away.
In high growth markets such as e-commerce, merchants will often cut corners so they can participate in the revenue-generating opportunity without fully recognizing the potential risks of such quick action.
In the early days of e-commerce, prepaid was an ill-defined silhouette on the horizon. Now, prepaid represents a significant revenue opportunity for issuers, acquirers, gateway providers and merchants - including those with significant online sales channels.
Merchants who have introduced store-issued, closed loop gift cards in the retail environment have enjoyed the float associated with upfront sales, the breakage from un-redeemed cards and the lift in revenues due to aspirational purchases on the part of gift card-holding consumers.
Mercator has forecast that the multiple prepaid segments in the closed loop market, in which the cards are redeemable in the store only, have the potential to grow to $123 billion in loaded value by 2010.
Even more compelling is the estimated growth associated with network-branded prepaid cards - 67 percent calculated over the same five year period -which could reach $182 billion by 2010.
Though not all cards in all prepaid segments are eligible for use in online retail purchases, the combined closed loop and network-branded forecast total indicates a market opportunity of roughly $288 billion by 2010.
The current penetration of the prepaid opportunity by e-commerce is relatively low. Prepaid cards are generally used in brick-and-mortar retail environments. Mercator estimates current e-commerce prepaid volume to be in the $4 billion to $6 billion range and could be about $10 billion to $12 billion by 2010.
However, this presumes merchants' prepaid acceptance capabilities do not change much beyond their current state. If prepaid gift card acceptance is broadened on the Web, e-commerce volume placed on prepaid cards could easily approach $20 billion or more in the same time frame. The prepaid space represents a burgeoning opportunity for merchants of all types who seek the lift in revenues that both closed loop and network-branded gift cards afford.
This opportunity is just beginning to be realized in e-commerce channels as the consumer uptake of prepaid cards hits its stride.
In the coming months and years, Mercator predicts merchants with even modest e-commerce volume will be looking for ways in which to grow that volume as adoption of Internet shopping by increasingly savvy consumers continues to level off. One of those paths to growth will lead to, and be generated by, prepaid.
David Fish is a Senior Analyst at Mercator Advisory Group. Contact him by e-mail at dfish@mercatoradvisorygroup.com or by phone at 781-419-1718.
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