Magazine article American Banker

Study: Banks' Best Prepaid Odds with Payroll/Benefits

Magazine article American Banker

Study: Banks' Best Prepaid Odds with Payroll/Benefits

Article excerpt

The market for prepaid cards will more than triple by 2008, to nearly $300 billion. But a report says it is doubtful banks will claim the whole pie.

Financial Insights singled out payroll and benefit cards as banks' best opportunity, as opposed to retail gift cards, which it says are waning.

Though merchant gift cards make up more than two-thirds of the roughly 900 million stored-value cards issued, they account for only 21% of total spending in the category, the report from the IDC Cos. unit found.

Payroll and benefit cards, on the other hand, are less than 2% of the number of circulating stored-value cards but account for 58% of the spending.

Aaron McPherson, an analyst with Financial Insights and the author of the report, said another reason banks might want to focus on the second prepaid category, the low-volume but high-value kind, is that most merchants do not want a bank-issued gift card that doubles as a general-purpose prepaid Visa or MasterCard.

"Merchants really want it to be just their own thing," Mr. McPherson said in an interview Friday. "They've effectively made a decision on the side of a closed-loop gift card."

He said those products have probably peaked -- half of Americans are already buying single-merchant gift cards and nearly all large retailers offer them --and that it should be clear to banks where the better market opportunity is. With interchange fees representing the main source of revenue for most bank-issued prepaid programs, spending matters more than the number of cards, he said. …

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