[Dave Birch] The “jam jar” theory of prepaid is well-known, if not well-understood. The basic concept is that consumers seem comfortable with, in fact some show show a preference for, partitioning money into separate “jam jars” for separate purposes: the phone money, the holiday money, the going out money, that kind of thing. Apart from other reasons, this is why prepaid products can be so popular when properly targeted. My kids have closed-loop prepaid cards issued by their school for storing lunch money. They have prepaid mobile phones. Until recently, one of them had a prepaid open-loop card as well but it was a rubbish product, but my point is that although I have only one debit card and a couple of credit cards, I am the potential purchaser of several prepaid cards.

What’s true in physical commerce is also true in virtual commerce. My younger son has a prepaid card for World of Warcraft, for example, and soon he will want his own prepaid open loop card so that he can buy things on the Internet. So if I gave him an open loop card, would that mean that all of the closed loop cards would become redundant? Or suppose a closed loop card for all games came along?

People have said to us “what happens if some universal gaming card puts you out of business?” and we say there’s already a universal gaming card — it’s called a pre-paid Visa. If people really want to get their cash onto the web you can buy a pre-paid Visa at millions of outlets across the country.

What we have seen — not only from our digital and retail partner side but from our consumer side — is that the individual cards are very positively received, even just down to consumers enjoying the collectability of them, because we refresh the art periodically. In addition, we have the ability to do a lot more when the cards are individual — for example, with Zwinky, when you bought a card you also received your choice of a free super power. That’s the kind of value you can add when you’re doing a specific unique branded card, rather than when you have a card that merely acts as a payment method.

[From Worlds In Motion – Interview: GMG Entertainment On Pre-paid Cards’ Potential In Retail]

I couldn’t comment on the use of free superpowers as promotional devices, but you can see the point here. If a closed loop card is just a payment mechanism, then what’s the point? A key reason for using closed loop cards is to provide specific value-added services around the payment transaction.

There’s a general discussion to be had here. If the general shift in spending from credit cards to debit cards continues on to prepaid cards, then is the best strategy to increase the acceptance of open loop cards and hope for competition to improve the products on offer or is to facilitate the spread of value-added closed loop cards? The competition point is, I think, a strong one. It links with the forthcoming Payment Services Directive (PSD). The European Commission

The European Commission estimates that its reform of the e-money Directive will stimulate a €9 billion growth in the value of Europe’s e-money market, from €1 billion in 2007 to €10 billion by 2012. The Commission hopes to attract between 125 and 300 new e-money institutions to add to the 20 (plus 127 operating under a waiver) currently licensed.

If there really are going to be this many new Payment Institutions (PIs), then most of them will surely have to look at specialist value-added services in order to get a market share because payments are just not that interesting! There’s another factor here though. Prepaid cards are not just about payments, they are about financial inclusion and some people think that having an open loop card has a kind of financial dignity with it. The New York Times had a nice piece about this in a US context recently.

In recent years, another alternative has emerged: instead of converting a paycheck into cash, prepaid cards let users pour it into a piece of branded plastic. Aside from competing on the basis of price (check-cashing fees can be brutal) and convenience (a prepaid card can be used to pay a utility bill online, for instance), at least some of this plastic purports to offer something less quantifiable. Consider, for instance, the Prepaid Visa RushCard… Russell Simmons, a founder of Def Jam records and the Phat Farm apparel brand… devised the card because he “thinks everyone should be financially empowered.”

Ram Palaniappan, general manager of RushCard, offers the more sober formulation that the cards are meant to offer the “dignity” of inclusion to consumers otherwise left at the margins of American money culture.

[From Consumed – Social Currency – NYTimes.com]

I think this is angle that is sometimes forgotten when we consider both the products and their regulation purely from a commercial perspective. One of the reasons why prepaid is the next big thing — or, at least, one of the next big things — is because of the financial inclusion agenda but in order to fulfill that agenda we need better products than we have in the marketplace right now. Cards that cost a tenner, cost two quid to load, three quid to use at an ATM, two quid if you don’t use them for a month etc etc are not the way forward.

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

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