2015 OUTLOOK PREPAID - Mercator Advisory Group

2015 Outlook: PrepaidDecember 20142 0 1 5 O U T L O O K : P R E PA I DA trifecta of strategic considerations will continue toshape the industry.The shape of both the open-loop and closed-loop prepaidindustries will be affected by the confluence of changes inthe economy, technology, and regulations. Prepaidproviders will need to be forward and strategic thinkersin order to thrive in 2015.by Ben Jackson,Director, Prepaid Advisory Service8 Clock Tower Place, Suite 420 Maynard, MA 01754phone: 1(781) 419-1700 e-mail: group.com 2010 Mercator Advisory Group, Inc.1

2015 Outlook: PrepaidA Trifecta of Strategic ConsiderationsThe coming year in prepaid will be shaped by three primary forces: the economy, technology, and regulations. Whilethese have been perennial forces in the prepaid market, at different times one or another took precedence. Theindustry is facing a year when the confluence of these factors will force players to think strategically and think ahead.All three of these factors will need to be addressed with flexibility and creativity, but no two plans will look alike.The Economy Is Shaping the SegmentsIn Mercator Advisory Group’s 11th Annual U.S. Prepaid Cards Market Forecast, released in November, patterns inprepaid loads emerged that show how the changing economy is shaping the future of prepaid. Assuming the slowand steady recovery in the economy continues, then needs-based government programs such as NutritionAssistance and Temporary Assistance for Needy Families will continue to shrink in 2015. On the other side of thescale, segments like Payroll and Incentives cards will grow as people move from benefits programs to jobs.Figure 1: Mercator Advisory Group’s Taxonomy of Prepaid Cards: 11 Categories, 26 Market Segments Cash Access– Travel– Money / Financial Services– Open Gift Open– Remittance / P2P Business Time and Expense Closed– Events and Meetings– Employee/Partner Incentives Mixed– Consumer Incentives Campus Digital Content In-Store Gift Cards– In-Store Gift Cards– Store Credits/Returns Government– Social Security– Nutritional Assistance– Temporary Assistance for NeedyFamilies (TANF)– Court-Ordered Payment– Transit– Tolls– State Unemployment Insurance Casualty Claims Payroll and Benefits– Payroll– Benefits– FSA / HSA Petroleum Utilities Telecom– Prepaid Mobile Minutes and Data– Prepaid Long DistanceSource: Mercator Advisory GroupThe changes will not be a one-to-one matching, however. A portion of former benefits recipients will move fromcards to bank accounts. Also, cards for incentives and other purposes compete with other types of rewards, suchas merchandise. 2014 Mercator Advisory Group, Inc.2

2015 Outlook: PrepaidAnother economic factor that is influencing the growth of prepaid is the budget consciousness of Americans. Aspeople look for better ways to manage their money more closely, they are adopting general purpose, reloadableprepaid cards as a spending tool to go along with their credit and debit cards. Depending on how successfulretailers are at marketing gift cards, Money/Financial Services cards may become the largest prepaid segment in2014.As economic confidence and the employment situation change, so too will the loads into different prepaidsegments. The way that cardholders access these loads will be influenced by changes in technology.Technology Brings New Challenges and New PossibilitiesWhen it comes to technology in the payments world, it is not just cutting-edge technology that matters. EMV chiptechnology, which has been around for some time, will become more widespread in the United States over thecourse of 2015. The conversion to EMV will be piecemeal, and many prepaid providers have said that they want toavoid adding EMV to their cards for a long as possible because of the added cost of a chip card. However, apresidential executive order that requires all government cards to use EMV chip and PIN technology may force thehand of some prepaid providers. This possibility is discussed in detail in the recent Mercator Advisory GroupViewpoint EMV Hazards for Prepaid.The other technology trend that will affect prepaid cards is the move to mobile payments. With MCX and Appleboth ramping up mobile payments tools in 2015, retailers, payments providers, and cardholders will all have moreinterest in how they can merge their accounts with their phones. Companies like Boost Mobile have alreadylaunched mobile wallets with a connected open-loop prepaid card, and vendors like Cachet Financial Solutions andPaydiant want to make it easier for companies and financial institutions to offer mobile wallets and mobilepayments. Both open-loop prepaid and closed-loop prepaid providers likely will see competitors adopting mobiletools, and so will need to integrate them into their strategies.The CFPB’s Holiday Party Will Bring a Hangover in the New YearJust in time for the holidays, the Consumer Financial Protection Bureau released proposed regulations that theBureau has been working on for months. Now the industry, its compliance teams, and other interested partieshave 90 days to read almost 900 pages of prolix regulations and explanations and try to develop commentaryaround them. Those 90 days just happen to include most of the year’s major holidays. On the bright side, theymight be a good excuse to get away from uncomfortable conversations with distant relatives.All the same, these regulations will force changes on the industry and individual programs. Mercator AdvisoryGroup explores the implications in more detail in a forthcoming research note devoted specifically to theregulations. In brief, though, the proposed changes in disclosure and reporting are likely to remain unchangedfrom the draft version and will require redesign and administrative work for program managers. 2014 Mercator Advisory Group, Inc.3

2015 Outlook: PrepaidThe problem is that first there will need to be a comment period, a review period for the comments, and then thefinal rule will need to be published. So, the industry will need to try to read the tea leaves on what the finalregulations will look like for the first half of the year. Program managers will need to develop strategies thatminimize the number of cards put into the distribution channel that will then need to be discarded, and they willneed to do this without reducing availability that would negatively impact sales. The general purpose reloadable(GPR) and government segments such as Court-Ordered Payments and Social Security may be required to makebigger changes than, say, the payroll segment, which already must comply with Regulation E. With any effort ofthis size, there will be unintended consequences and confusion. This will likely make the coming year feel like along hangover for the compliance teams and decision makers in the offices of many prepaid issuers, processors,and program managers. Depending on how quickly the regulations are finalized and how much change theydemand, the full effects may not become apparent until 2016.Conclusion: Get Your Team TogetherCompanies will need to anticipate changes in the directions of their portfolios, of the technological demands theyneed to meet, and the burden of new regulations. This will require that they gather a lot of data from theircustomers, their partners, and the news of the industry. Now is not the time to rest easy, even if a particularprogram is running well.The coming year will require prepaid providers to bring their teams together from compliance to technology, inorder to build a winning strategy. These teams will involve both internal employees and partners from across thevalue chain. 2015 will be a year in which everyone needs to make sure that they have the right people and theright partners so that they can execute the right plans.Copyright NoticeExternal publication terms for Mercator Advisory Group information and data: Any Mercator Advisory Groupinformation that is to be used in advertising, press releases, or promotional materials requires prior writtenapproval from the appropriate Mercator Advisory Group research director. A draft of the proposed documentshould accompany any such request. Mercator Advisory Group reserves the right to deny approval of externalusage for any reason.Copyright 2014, Mercator Advisory Group, Inc. Reproduction without written permission is completely forbidden. 2014 Mercator Advisory Group, Inc.4

2015 Outlook: PrepaidFor more information about this report, please contact:Ben Jackson, Director, Prepaid Advisory 706Mercator Advisory Group is the leading independent research and advisory services firm exclusively focused onthe payments and banking industries. We deliver a unique blend of services designed to help clients uncover themost lucrative opportunities to maximize revenue growth and contain costs.Advisory Services. Unparalleled independent and objective analysis in research documents and adviceprovided by our Banking Channels, Credit, Commercial and Enterprise Payments, Debit, EmergingTechnologies, International, and Prepaid practices.CustomerMonitor Survey Series. Eight annual Insight reports based on primary data from MercatorAdvisory Group’s bi-annual surveys of 3,000 U.S. adult consumers to determine their behavior, use,preferences, and adoption of current and emerging payment methods and banking channels to help ourclients identify and evaluate business opportunities and make critical business decisions.Consulting Services. Services enabling clients to gain actionable insights, implement more effectivestrategies, and accelerate go-to-market plans. Offerings include tailored project-based expertise,customized primary research, go-to-market collateral, market sizing, competitive intelligence, andpayments industry training.PaymentsJournal.com. The industry’s only free online payments and banking news information portaldelivering focused content, expert insights, and timely news.For additional copies of this report or any questions, contact Mercator Advisory Group at 781-419-1700. 2014 Mercator Advisory Group, Inc.5

prepaid cards as a spending tool to go along with their credit and debit cards. Depending on how successful retailers are at marketing gift cards, Money/Financial Services cards may become the largest prepaid segment in 2014. As economic confidence and the employment situation change, so too will th