The Resilient Nature of Prepaid: A Bright Spot in a Down Economy

The Resilient Nature of Prepaid:
A Bright Spot in a Down Economy

New Research Shows the Diversity of Prepaid to
Deliver Resilience Through Economic Slump

Boston, MA. - June 29, 2009 -- All 33 segments of the prepaid market operate in a significantly different environment and as a result, each faces its own unique circumstances. The diverse nature of the prepaid market makes it impossible to generate a single characterization that accurately describes the entire prepaid market, even though some experts have tried.

The latest report from Mercator Advisory Group "The Resilient Nature of Prepaid: A Bright Spot in a Down Economy" reviews all 33 segments to understand how the prepaid industry will ride out this economic downturn. The surprising finding is that 18 of the 33 segments are likely to continue to see positive growth while seven will likely see negative growth, while eight will either be neutral or are too hard to call. The common characterization is that consumer purchases of prepaid products at retail locations will experience negative growth, but this ignores evidence that indicates some retail categories have experienced a significant increase in growth rate.

For example, Open-Loop gift cards performed better than usual during the holiday season, likely driven by consumer fears that some merchants would go bankrupt. Other categories that have done well despite the poor economy include the digital content segment and the online games segment. However, the prepaid industry is far more diverse than just merchant gift cards. Prepaid handsets are the fastest growing mobile phone segment, some of our active troops are paid using prepaid cards, and prepaid is used to disburse funds associated with a wide range of social programs, including SNAP (food stamps), state unemployment, school loans, and as a financial instrument in prisons.

"It is understandable that many have focused on the challenges facing the prepaid industry solely on the downturn in consumer purchases, but to do this shows a lack of awareness regarding the power of channel development." Tim Sloane, Vice President of Client Services and Director of Mercator Advisory Group's Prepaid Advisory Service and author of the report comments. "Many merchants have expanded their gift card sales into online gift card malls, have established B2B sales departments that sell to businesses that utilize the cards for a variety of incentive purposes, and have established their brand at a growing number of retail outlets using prepaid mall distributors. Any sales channel can become saturated, but a growing number of leading merchants are now recognizing the critical need to establish gift cards that will be highly differentiated within each channel, so that its growth comes at the competitor's expense."

Highlights of the report include:

• A review of spend on credit, signature debit, and PIN debit by category indicates that consumers are spending differently on key categories due to the economic downturn and clearly this new behavior will also impact consumers purchasing behavior related to prepaid.

• While some prepaid categories have witnessed a significant drop in dollar volume, these declines are more than compensated for by categories that have grown. For example, while many consumers have reduced spending on clothing, they now typically spend more on home repair.

• Prepaid malls continue to be the bright spot in the prepaid market. Prepaid mall sales converted a potentially terrible 2008 into a decent year for many merchants. Some merchants that suffered negative growth for gift card sales in-store, saw significant growth in gift card sales as they increased the number of prepaid mall outlets at which they sold their gift cards.

• Even when talking to merchants who suffered a decline in year-over-year gift card sales, product managers indicated that prepaid gift cards remained a bright spot for the merchant. In some instances, store sales were down by as much as -30%, but gift card sales were only off by -6 or -7% - making the prepaid gift card business a bright spot!

• There are also several prepaid segments that, unfortunately, grow significantly in a down economy. Unemployment compensation is up significant and prepaid cards have now replaced checks in the most populated states, with the exception of California. TANF, SNAP, WIC and other social programs are likewise going to see increased spending and are widely using prepaid instruments for these disbursements to eradicate checks. Transit has also seen significant growth, although primarily due to the increased cost of gas. In short, any credible analysis of the impact the economy will have on the prepaid industry must evaluate all 33 prepaid segments, otherwise opportunities will be lost and the economic consequences overstated.
  

An Exhibit included in this report:

This report contains 40 pages and 7 exhibits.

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Mercator Advisory Group is the leading, independent research and advisory services firm exclusively focused on the payments and banking industries. We deliver pragmatic and timely research and advice designed to help our clients uncover the most lucrative opportunities to maximize revenue growth and contain costs. Our clients range from the world's largest payment issuers, acquirers, processors, merchants and associations to leading technology providers and investors.