Credit, debit, prepaid

[Dave Birch] I often find myself using "credit card" as a generic term for payment card.  It’s a reflection of my age, I suppose, and a deep-seated response to the first payment card I ever had: a Barclaycard that I rather unwisely obtained as a student.  But credit cards are in retreat online and shunned elsewhere, mostly in favor of debit cards.  Visa says that about 55% of its e-commerce transactions are now debit cards rather than credit cards.  This is more than double the proportion of just two or three years ago!  Now, I don’t get this.  I use my credit card for absolutely everything, but clearly I’m in the minority.  In the U.S., debit card transactions grew nearly a fifth last year issuers expect continued strong growth this year.  Bizarrely (to Europeans), signature debit grew 20%, PIN debit only 16% and active cardholders performed about 11 signature debit transactions and 5 PIN debit transactions.  Anyway, I was wondering if in a decade or so, we might be seeing debit cards becoming the minority as prepaid products come to dominate globally.Visa debit card. “The platform is designed to instantly send (SMS) text alerts to the FaithFone handset anytime the accountholders VISA Debit card is used for purchases.Visa debit card. “The platform is designed to instantly send (SMS) text alerts to the FaithFone handset anytime the accountholders VISA Debit card is used for purchases.

Technorati Tags: banking, credit cards, debit cards, e-purse, prepaid

I’m focusing on "open" prepaid at the moment.  Both MasterCard and Visa have been active expanding prepaid product ranges and cutting deals to extend the load networks.  Visa, for example, has announced Visa ReadyLink, which will rapidly expand the accessibility of Visa’s prepaid load network service.  They recently announced an agreement with Blackhawk Network’s alliance partner stores, making Safeway the first in Blackhawk Network’s alliance of 60,000 stores in North America to implement Visa ReadyLink. (ReadyLink lets consumers easily add funds to eligible Visa reloadable prepaid cards at participating retail locations.)

"Open" doesn’t mean universal and there are plenty of niches to be exploited within the open prepaid umbrella.  Government and benefit cards are an obvious case.  In the UK, Alliance & Leicester has launched a pre-paid Visa card designed for public sector organisations that can be used to deliver welfare payments.  Being in the UK, it is a chip-and-PIN card of course.  Importantly, the card does not require the recipient to have a bank account.  This doesn’t necessarily mean that it will be easy or convenient to get: for all I know you will still have to turn up with a passport, gas bill and a note from your mother.  Nevertheless, as has been discussed before, products like these are critical for social inclusion.  A typical target for such a product is migrant workers, of whom there are a great many in the UK — an estimated 600,000 Polish workers have arrived in the UK since accession, and they sent an estimated 1.6 billion pounds back to Poland in 2006 — with more arriving every day.  That’s why there’s a Maestro card being marketed at major migrant arrival points, such as Victoria bus station in central London which can also be used to send money abroad.  This should become even more convenient now that MasterCard are tying up with the GSM Assocation.  Note that the Daily Mail-based article says that this inevitably raising fears that criminals and illegal immigrants in Britain could use the card to send cash to foreign accomplices financing terrorism" as if they haven’t figured out how to put 500 euro notes in an envelope.  The Maestro card has a maximum balance of £2,500, with a £1,500 daily load limit. And only £200 can be sent abroad daily, which seems entirely reasonable to me.

The reason I’m looking at prepaid a lot at the moment is because we have clients who want to focus on this growth area.  One of our clients has been carrying out a survey of the existing products in the UK and they are, frankly, rather poor, so there is plenty of opportunity to come in with better products.  I’ve been thinking about how existing business processes need to be modified to really capture market share.  Putting prepaid cards products, in particular, on top of existing credit card infrastructure can lead result in situations that actively drive customers away.  Here are a couple of examples.

The first concerns a guy who used his prepaid card at a hotel in SF, then a few weeks later got a letter from the issuer asking for payment because his prepaid was overdrawn by a significant amount.  As the customer notes, "I was mystified how this was possible".  The issuer customer services agent told him that it is possible for a merchant to overcharge the card if they force the transaction, and do not abide by the rejection.  You can see how a customer who thought that prepaid meant prepaid would find this strange: one of the reasons I want my kids to have anonymous prepaid cards to use on the Internet is precisely so that they cannot be overcharged if they stupidly give their card number to someone dodgy.

The second concerns a girl who bought a $1 bag of popcorn and found her card debited $50.  She used her $50 Visa gift card to buy the popcorn but when she tried to use the card next day at Walgreens, it was declined.  Why? Because she used the card at a gas station, so her popcorn purchase showed up as a "gas" purchase at the issuer, causing them to deduct $50 automatically, as a safeguard.  To prevent customers from swiping their card and pumping more gas than they have money for in their accounts the issuer deducts $50 and then waits for the merchant to report how much the customer actually spent, and refunds the rest, a process that takes about three days.  So the girls card was declined, then the money was refunded a couple of days later. But the girl would never find this out: if you’ve been told the card balance is zero, why would you check it again three days later?

I’m not making a point about the specific issuers or schemes here, I’m just pointing out that there are tremendous opportunities to for people to design and deliver prepaid programmes that work better.  How about a card that sends you a free text message following every debit or credit, a bit like the Visa debit card linked to a phone in the Faithfone service?

My opinions are my own (I think) and are presented solely in my capacity as an interested member of the general public. [posted with ecto]