Banks gave the electronic purse a try back in the 1990s, but largely abandoned their efforts when the products failed to gain any real traction in the marketplace. But new technology means that the e-purse is back again with more potential for success, and it isn’t only banks who are playing with it, says David Birch, director Consult Hyperion.
Learning the lessonsWe all know about the electronic purse (e-purse): a strange bank thing, tried out in the 1990s (Mondex and VisaCash, GeldKarte and Danmont and so on) but then abandoned. Something that was never going to happen. Clearly, banks thought, people didn’t want pre-paid or stored-value payment cards for low value transactions. Yet the continued rise of pre-paid instruments is evident. The majority of digital mobile phones are pre-paid. Employee, benefit and similar cards are growing strongly. The gift card market continues to grow around the world. In the US, gift cards were sold in their millions over the holiday period and account for more than 8% of retail transaction value [1].
Some of these pre-paid cards have achieved real traction. Starbucks is an interesting example: its card accounts for more than 10% of its retail transaction value and they have sold millions of them. The convenience chain 7-Eleven has had similar success and attributes much of its sales growth to its pre-paid card [2]. So perhaps banks were wrong. Perhaps consumers do like using 'e-purses': it’s just that they like the ones from Vodafone and Starbucks, not the ones from banks.
The growth in 'open' prepaid cards (ie, cards that can be spent on the Visa, MasterCard and Discover networks) is also substantial with around $3.5 billion loaded last year. Visa USA estimate the pre-paid market at around $2 trillion, spread across consumer (eg, teen cards, gift cards), business (payroll cards, insurance cards) and government (eg, benefit cards, travel cards) [3]. TowerGroup forecast that open cards will have more than a third of the market by 2007 [4].
It looks as if we’ve been through an electronic cycle. Banks tried to introduce the e-purse and it didn’t work. They then thought (incorrectly) that there was no market for pre-paid cards for small transactions. Meanwhile, other people (who understood marketing and brand) launched pre-paid cards and turned them into a successful product. Now banks are going back into the business, but a new factor is coming into play: contactless smart cards.
I don’t necessarily mean cards, of course. One of the joys of contactless is that it frees issuers from the tyranny of form factor. The Dexit scheme, launched in Toronto, uses contactless smart cards in the form of key fobs (for about two-thirds of its users) or stickers for mobile phones and PDAs (for about one-third of its users) as a simple pre-paid payment device [5]. When you add the convenience of contactless payments to cards, key rings, badges and whatever else using a combination of microchip and radio-frequency identification (RFID) technology, you have a market that is set to boom.
Radio StarsI’ve been using a pre-paid, contactless 'touch and go' payment card for more than a year. It’s my Transport for London Oyster card that I use to pay for underground and bus journeys in London (how I wish taxis and railway ticket machines used it too). I can report that it works splendidly well. I think about my Oyster card a lot. Every time I have to drive my car to the station because I don’t have money for the bus, every time I have to drive out of the station car park and visit an ATM and a newsagents (to buy a paper I don’t want) because the one solitary credit card machine in the car park doesn’t work, every time I have to queue for 15 minutes to buy a ticket at the station because the train ticket machines only accept notes (occasionally) and coins. Every time I fancy a quick coffee but don’t have any change. In fact, every day I wish that I could use my Oyster card everywhere. It’s so quick and easy.
In fact contactless payments are quick and easy precisely because of their origins in the mass transit sector. The key case study is the Hong Kong mass transit smart card, Octopus (which has around 7 million cards in circulation). The cards are used in phone booths, vending machines (Octopus-enabling vending machines led to a 15% increase in sales), snack bars and coffee shops in addition to the subway. Travellers can load the cards at convenience stores or in the stations and the under–18’s can have their Octopus card in the form of a groovy watch (around 150,000 issued so far) rather than a boring old card if they so desire [6]. It was a great success and is being replicated around the world (not just in London) as transit operators switch to contactless.
There are, of course, other places where quick and easy operation is important. Examples include concerts, events and sports. The recently-built City of Manchester stadium, the home of Manchester City Football Club (MCFC), has contactless gates and no paper tickets. MCFC tickets are RFID cards, containing an electronic purse (for a cashless environment in the stadium) and a loyalty scheme in addition to the match ticketing application [7]. Speed is again the dominant factor here: the system must be able to handle 1000 fans per hour through each turnstile.
This speed translates directly into consumer acceptance. Feedback from the various payment scheme pilots including American Express (with their ExpressPay product), MasterCard (with their PayPass product) and Visa (with their Visa contactless programmes) seems very positive. In Japan, Sony have been integrating their Edy contactless e-purse into mobile phones. A nightclub in Spain has taken to injecting the RFID chips into the arms of its patrons! More innovation is sure to follow. People like the convenience, retailers like the speed and issuers like eating into cash payment volumes.
It seems to me that bringing together consumers’ revealed preferences is straightforward: pre-paid payment products (or pre-authorised debit products) on contactless payment platforms look like a winning combination. Just as the last few years have seen debit volumes climbing past credit volumes, so the next few years may well see pre-paid and pre-authorised contactless (ie, e-purse) volumes overtake debit volumes as the electronic payments world ramps up its assault on cash.
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www.chyp.comAuthor's e-mail:
dave.birch@chyp.comThe author is the organiser of the 8th annual Digital Money Forum to be held in London on 16th/17th March 2005. Please visit www.digitalmoneyforum.com or e-mail Jo Lancaster for further informationReferences
1. Furletti, M. Prepaid Card Markets and Regulation. Federal Reserve Bank Report (Philadelphia: Feb. 2004).
2. Prepaid Cards Boost 7-Eleven’s 2003 Revenues in Dallas Morning News (25th Feb. 2004).
3. Palmer, G. Prepaid Payment Cards in proc. of Alternative Solutions for Reliable Online Commerce, ASROC (London: Jun. 2004).
4. Kountz, E. Prepaid Micropayments and the Bankcard Industry: Ways to Play a Growing Trend in Bank Technology (24th Feb. 2004).
5. Gamble, D. Instead of Cash in proc. of 7th annual Digital Money Forum, Consult Hyperion (London: Mar. 2004).
6. Ramstad, E. Octopus Has Legs in Wall Street Journal (19th Feb 2004).
7. Vago, G. City of Manchester Stadium, Home of the UK’s first fully RFID FC in proc. of Contactless Cards, SMi (London: Jun. 2003).