Finding the Value in Stored Value Cards

In a new report, " ," Celent analyses the burgeoning market for stored value technology and outlines opportunities and challenges for banks. The report discusses the benefits of stored value cards, the regulatory obstacles facing banks and examines the case of gift and payroll cards.

"Stored value cards are becoming a convenient replacement for money and are the answer to many companies' desire to transform the payment system from a predominantly paper-based one to an electronic based-one. As such, they are becoming a new industry that will soon have a significant presence in consumers' wallets and in the world of payments," commented Ariana-Michele Moore, author of the report.

As a result, these cards have landed themselves in the middle of hot debates on regulatory issues related to terrorist financing, identitiy theft and ID verification. In 2004, 33 states introduced a total of 100 bills regarding the stored value market. Other challenges include costs, competition from market alternatives and the difficulty of establishing a return on investment. Although today痴 stored value card environment is full of unanswered questions, it hasn稚 stopped many banks from considering adding the cards to their portfolios. The interest remains strong.

The number of stored value cards in the market has grown significantly spurred by the many benefits associated with stored value technology. Issuers can package these cards in various ways to address different target areas, including segments of the consumer payment market. Gift cards, claim cards, payroll cards and restaurant cards are among the many stored value cards being marketed today.

Among the key findings of this report:

• Stored value cards present many opportunities
. Stored value cards are very flexible for both issuers and cardholders. Issuers can construct marketing plans and pitches to target the cards to capture cash-based consumer payments.

• Apples to oranges
. Although at times closed-loop and open-loop stored value cards are market alternatives, they are two distinct products. One represents a proprietary agreement, the other a new form of payment. Each product has a place in many markets. However, open-loop cards will, by definition, be the leading stored value card for the payments market.

• Fundamentally the same, but universally different
. Although open-loop stored value products share the same underlying technology and platform, the end products can be drastically different. Target markets, costs, market alternatives, fee structures, and regulatory burdens can vary significantly.

• Regulatory concerns are great
. Given the recent proliferation of stored value cards and their emergence as a new payment vehicle, the regulatory environment is full of ambiguity and uncertainty. This has created a very risky environment in which to operate.

• Gift cards
. Bank issued gift cards are risky propositions for banks, given market alternatives, price elasticity, and distribution hurdles.

• Payroll cards
. Payroll cards solve a problem for many US households and have quantifiable benefits. They may also act as acquisition channels for hard-to-reach consumer segments. In addition, payroll cards can help corporations meet their direct deposit objectives.

A table of contents for this 45-page report is available online.

of Celent's Retail Banking research service can download the report electronically by clicking on the icon to the left. Non-members should contact info@celent.com for more information.