Prepaid Cards: a Payments Revolution
Prepaid cards (or stored-value cards) have been in existence for some years, with the US leading the way in finding applications in both the private and public sectors. The European prepaid market is currently only in its infancy, but this is set to change with the number of cards in circulation estimated to grow at over 110% a year for the next four years. It is predicted that by the end of 2010 the use of prepaid cards across the eurozone will generate 2.3 billion transactions with a €75bn turnover.
Prepaid cards represent money on deposit and function in much the same way as conventional debit cards. However, the key difference is that funds are not stored in an account that is directly linked to the card holder (i.e. an individual’s current account), but are ‘loaded’ onto the card and held at a remote database with a financial services provider. In this respect there is no actual value stored on the card itself; they do not act as a substitute for cash, so lost or stolen cards can be easily stopped and replaced.
Many individuals will be familiar with the idea of the cards through applications such as prepaid gift cards, or electronic ticketing schemes such as Transport for London’s Oyster card. Indeed, one advantage of prepaid cards is that the infrastructure is already available and in place: the cards can use magstripe or chip and PIN technology, and link ups with electronic payment schemes such as Visa mean that the cards can be used anywhere that accepts conventional debit or credit cards.
Clearly such revolutionary payments technology will have a significant impact on UK corporates, with uses falling into several categories – expenses, payroll and ad-hoc remittances, as well as customer-based payments such as gifts, refunds and incentives. In all cases significant benefits accrue.
The advantages of using prepaid cards for employee expense accounts are significant. As well as the general cost savings that are realised in all cases when switching from paper-based payments, employers using prepaid cards can exert significantly more control over expenses. Payments can be ring-fenced by corporate providers, allowing them to limit the scope of where goods and services can be purchased, while a record of all transactions is automatically generated and stored. Auditing and compliance are enhanced through eliminating costly paper-based verification techniques and the associated potential for human error or fraud. Also, employee travel abroad can be easily facilitated as the cards can be loaded with a currency of choice – thus eliminating costs associated with using a debit or credit card outside of its issuing domicile.
The key benefit of using prepaid card technology for payroll involves the ability to involve the still large numbers of people in the UK who are paid through paper cheques or cash as opposed to payments into a bank account. Indeed, in industries such as construction and agriculture, payments using cash or cheque remain the norm. And it is in these areas that prepaid cards are likely to have the most significant impact. From the employer’s point of view the benefits are most acutely felt through the elimination of costs associated with issuing paper cheques or assembling cash pay packets. Costs of replacing lost or stolen cheques are also significantly reduced through the issuance of a generic payment card. Prepaid cards will also improve security and control over payments, reducing the potential for errors and fraud.
The benefits for employees are also significant. Staff with limited access to banking facilities will avoid the costs incurred in cashing cheques through a third party, while in all cases funds are available to the recipient immediately. The use of prepaid cards avoids the need to carry large amounts of cash and allows easier access to those products and services only available on the Internet.
Finally, the use of prepaid cards reduces the stigma attached to cash or company cheques. Credit or debit cards have always held a certain cachet – an esteem that is now extended to the unbanked. Indeed, it is worth noting that increased numbers of migrant workers in the UK, as well as an increasing number of personal insolvencies, means that the number of unbanked people is steadily rising – making the use of payroll cards a more relevant and attractive proposition for many corporates with a large cash or cheque based payroll.
An extension of the use of prepaid cards for payroll or expenses is their use for ad-hoc employee remittances such as bonus payments – and a similar set of cost savings and efficiencies will benefit both card issuers and recipients.
While the use of prepaid cards is still in its infancy in the UK, corporates in the US have been realising the benefits for some time. U-Haul International – a self-drive removals business – employs nearly 20,000 people across several states and began using payroll cards as a substitute for paper cheques in November 2001. The reported savings have been significant. Before U-Haul began to offer prepaid cards to its employees, 57% were paid using cheques and the processing costs to the company were significant at around $0.25 (£0.13). Since migrating these payments onto prepaid cards, the cost per transaction has dropped by around 70%.
In addition to these savings, less labour-intensive payroll processes means that the business has been able to reduce its payroll administration staff by 26% (from 15 to 11). Currently, over 2000 employers in the US are using similar prepaid card payroll schemes.
Starbucks Coffee Company has also made use of prepaid cards, primarily to reduce the issuing costs of paper gift certificates. Indeed, such closed-loop systems (the cards can only be used in Starbucks outlets) have proved popular among retail firms that issue gift certificates. Yet the benefits to Starbucks have reached further than was first anticipated. In this case the cards are reusable, with research showing that one out of every three recipients of the cards has reloaded value on to it. And for a company that receives a large number of small payments from customers, any shift from cash to electronic payments will help to reduce payment processing and cash handling costs.
Beyond the corporate sphere, prepaid cards have found a variety of applications. For instance, in the public sector, an area where the US is again leading the UK and Europe, all 50 US states now use prepaid cards for the delivery of benefits. Indeed, 17 states have completely phased out paper cheques for child support and unemployment payments. Again, in instances where a complete migration to prepaid cards has taken place, the cost savings have been significant. Monthly fees for payment processing incurred by the State Government of Georgia have dropped by around 80% from an average of $9 (£4.50) per month to $1.66, while the average Georgian benefit recipient has an additional $7.15 per month – saved as a result of paying bills with the prepaid card rather than using money purchase orders.
Another sector achieving significant cost savings and improved control with the use of prepaid cards is insurance. Many insurance companies are migrating claims payouts to prepaid cards, not least to ensure that payout for replacement items are used for the correct product. Indeed, in virtually all sectors requiring some form of payment to employees, customers or beneficiaries, the potential for prepaid card solutions are abundant.
The increasing range of prepaid card applications is a good indication of how important their role will be in corporate applications.