Prepaid Premonitions

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Prepaid Premonitions

By Barbara Grondin Francella

There aren't many c-store categories that appeal equally to immigrants, college students, 12-year-olds, cash-strapped consumers with no checking accounts and people looking for quick, easy gifts. Hello, prepaid products.

From the long-distance domestic calling card of the 1990s to the latest entrants in the business -- online gaming, mobile commerce and even adult entertainment -- the prepaid products category continues to evolve and grow. Branded and private label prepaid card transactions are expected to hit $178 billion by next year, up from $113 billion in 2007, according to a study by Aite Group LLC.

7-Eleven Inc., a retail pioneer in the prepaid category, transformed its stores into prepaid destinations, especially for wireless products, and successfully broadened its offer to include a large variety of cards for communication, entertainment and everyday purchases.

"There are more than 80 million unbanked or financially underserved customers in the United States who need these cash-based products to receive services similar to the banked customer," said Brian Haynes, the 7,800-store, Dallas-based chain's category manager for prepaid.

At 1,617 Speedway SuperAmerica stores, prepaid products also are treated as a core category. "We want someone to find a wide selection of great products -- an easy one-stop shop," said Tom Lefevers, director of merchandising for the Enon, Ohio-based retailer.

Online entertainment cards, including those used to access online gaming, virtual worlds and social networks, are gaining attention. "These categories are showing strong user growth, and with a young demographic that may not have access to credit, there's a demand for prepaid," said Mike Skinner, general manager, Coinstar E-Payment Services, based in Bellevue, Wash.

Sales of gaming cards have grown more than 200 percent year over year, according to Thomas Solomon, vice president of sales, grocery and convenience for InComm, the Atlanta-based prepaid product provider. "A growing number of metropolitan areas are building momentum in the online gaming arena," he said. "This is particularly true on the West Coast. That being said, you can't just throw gaming cards on the shelf and expect great things to happen. You need to have a solid marketing and promotional plan."

7-Eleven's Haynes has seen an upswing in sales of iTunes and gaming cards; Xbox and Nexon cards are 7-Eleven's most popular gaming offers. "Kids won't or can't ask their parents for their credit card to pay for games online," he said. "These cards allow customers to come in, pay cash and be on their way to spend them online."

Still, gaming cards "require customer awareness to take off," Lefevers warned.

One new entrant to the prepaid field: adult entertainment Web sites. Companies such as Njoy Now are offering prepaid cards that access portals to adult Web sites. Njoy cards are sold through 4,000 outlets, including c-stores, gas stations, newsstands and other retail sites.

"These cards act as a filter and makes going to these sites safer because people will not be handing over their credit card numbers, and customers have to be over 18 to purchase them," said John Sostak, president of JGC Inc., Njoy Now, while pointing out "one out of three adults with a home computer look at adult entertainment on it."

C-store operators would earn 30 percent to 40 percent of the value of the card.

The biggest challenge Sostak and similar suppliers face: C-store operators who do not want to sell adult products. "We wouldn't sell that type of card," said Speedway SuperAmerica's Lefevers said, echoing other retailers that have worked hard to clean up the industry's image.

Mike Zielinski, president of Royal Buying Group, which represents 6,000 c-stores and petroleum marketers, said the cards would be a difficult sell for the suppliers, but he can see why some retailers would be interested in them. "There is a demand for that product and every retailer is looking for more sales," he said. "But they need to consider who their customers are and what pushback they'd get from shoppers who would take offense.

"If a retailer did offer them and were rigorously checking IDs before selling them, they could gain respect in the neighborhood for selling adult products only to adults. But where do you cross the line? Some companies think Playboy and Penthouse are pornographic, others consider those magazines as 'adult sophisticates' but would not sell Hustler."

Reloadable debit card sales have grown at rates of more than 100 percent annually, as they become mainstream. Consumers are looking for ways to control costs and budget more effectively, Skinner added.

7-Eleven's Haynes sees reloadable debit cards as "a big opportunity for us in the near future."

And mobile commerce cards are coming soon. "Customers will load value on their cards through their cell phones and transfer money between these cards," Zielinski said.

Soon to be tested in c-stores, First Data Corp.'s GO-tag is a unique payment card that also comes with a "sticker" that may be affixed to a wireless phone or iPod. Customers may use either the card or the tag to access a reloadable account, using it as a contactless prepaid card, explained Don Morea, senior vice president of mobile solutions for First Data Corp.

A closed-loop prepaid version could be branded by the retailer and used in conjunction with a loyalty program. An open-loop version, carrying a major brand such as Visa, should be unveiled soon.

The reloadable category is still growing, Zielinski said, but because the cards have saturated most markets, the percentage increase in sales won't be as dramatic as in previous years. "But they are still the most significant prepaid item out there," he said. "Much of their popularity depends on the price of gasoline. They were used a great deal as corporate incentives last year, when the price of gasoline was $4. Now, there isn't as much interest in using them that way."

But discounter and mass merchandiser cards, such as Walmart, are selling well now, he added, because "people are looking for a value."

Both 7-Eleven and Speedway SuperAmerica report sales of closed-loop cards are easing. "We have to be careful not to offer certain regional retailers that may be popular, but aren't found in all of our markets," Lefevers noted, adding he relies on its vendor partner and category managers for insight into the best matches for its stores' demographics.

But open-loop gift cards -- fixed-value cards branded Visa, MasterCard or American Express, for example -- are selling well at c-store operators and other channels. Often purchased as a universal gift card, "some are being used as bill pay cards," InComm's Solomon noted, adding a recent addition is a Verizon-branded card.

Also, international long distance cards and international bill pay cards are two products expected to see sales jumps, Zielinski said.

While many elements of the prepaid category are growing, retailers need to understand this category requires commitment on their behalf, Coinstar's Skinner said. "It's not like selling a candy bar. There should be a close partnership between the retailer and the aggregator that brings focus and ongoing attention to the product mix, marketing, display compliance and employee training. The commitment to ongoing employee training for prepaid is critical."