Pre-paid payments tipped for growth

Pre-paid payments tipped for growth

Pre-paid applications are forecast to double in value to $500 billion over the next four years, making significant inroads in consumer markets and threatening the banking industry's payments franchise, according to research from TowerGroup.

The TowerGroup study suggests that this rapidly evolving payment category is in the early stages of a long-term expansion that will impact consumer, business and government use of cash and cheque payments.

TowerGroup believes the early success of pre-paid applications in closed environments like telecom and retail gift cards will lead to a new variety of opportunities over the coming decade - particularly where enhanced user convenience and control are key, cash and cheques can be displaced, or existing credit and debit card products are a poor fit.

Edward Kountz, senior analyst in the emerging technology solutions practice at TowerGroup, says the early emergence of pre-payment in closed user groups has made it easy for traditional banks to overlook its potential.

Pre-pay offers financial services institutions new opportunities to expand their customer base, says Kountz, through deepening their relationship with present customers and by providing a gateway into the youth and unbanked markets.

Pre-paid payment applications accounted for over US$240 billion in payments globally in 2003, according to TowerGroup estimates, and are tipped to exceed $500 billion worldwide by 2007.

With pre-paid products leading innovation in card technologies, Kountz states: "It's time for financial institutions to re-examine the impact of these applications on their businesses, in light of both the potential opportunities and the real risk of disintermediation."

TowerGroup's findings are backed up by the 2003 Coinstar National Currency Poll of 1000 US citizens, which finds that pre-paid cards are among the budgeting tools many are using to better manage their household finances. In fact, the survey revealed that 32% of Americans surveyed report having used a pre-paid card to make a purchase or transaction, which compared to other payment methods, including cash, is not far off from those who report using debit cards (45%).

Almost one-in-three say pre-paid cards are also good to give as gifts; and 29% say they are especially good to give to kids. When asked what methods they would consider using to refill or replenish their pr-paid cards' spending value, self-service kiosks, by cheque and by phone were each cited by about 20%of the respondents, followed by online (14%) and credit card (12%).

Despite the increasing number of payment methods available to consumers, however, 21% of Americans do not see a future without cash, and 45% believe society going cashless is at least 10 to 20 or more years away. Even pre-paid card users (51%) report they carry as much cash in their wallet today, as they did one year ago.

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