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Fed report gives the prepaid market a large downsizing 3/31 AB Though some researchers have estimated that purchases made with prepaid debit cards are worth hundreds of billions of dollars a year, research from the Fed says the market may be much smaller. According to a report from the Fed, spending on prepaid cards was just under $50b in 2006. The authors said that the significant gap between their findings & earlier estimates could have resulted from some transactions being double-counted in the more bullish reports, or from ignoring the difference between when money is loaded on the cards & when it is actually spent. Observers said the Fed’s assessment could lead some prepaid debit card companies to rein in their expectations of the market & perhaps reconsider whether they want to be in certain segments of it. The lower forecast could come as a relief to some prepaid companies that may have been puzzled that their sales results did not seem to reflect the booming market the earlier reports described. The study was conducted by Dove as an update to the Fed’s larger 2007 payments study. It focused on 2006 transactions using closed-loop cards, which can be used only at a single retailer, & open-loop cards, that can be used at a wide variety of locations. There were 3.1b closed-loop transactions in 2006, worth $36.6b, & 321.8m open-loop purchases, worth $13.3b. It cited previous reports that had found much higher totals. Aite estimated in 7/07 that in 2006 there were 3.6b prepaid transactions, worth $95.4b. In September, Mercator estimated that $197.9b was loaded on to prepaid cards in 2006. In August, Pelorus predicted that 2007’s open-loop spending would be $106b. Edward Bachelder, Dove, said his numbers show that the prepaid card market may not be the huge growth opportunity that some boosters have claimed, notably the companies that issue & process prepaid transactions. The lower figures could have ripple effects in other fields as well, such as private-equity companies & venture capitalists, which may be thinking of investing in prepaid companies. ‘It’s a big bucket of water we’ve dumped on them, & there are going to be a lot of furious people,’ Bachelder said. Tony Hayes, Oliver Wyman, said the Fed report has debunked the ‘rosy estimates’ from analysts & processors & could prompt banks to reconsider their strategies for the market. The smaller estimate is ‘going to force banks to ask the hard question, Do I want to be in this business? In order to answer that question, you have to ask what this business is.’ The prepaid market has several varieties, all with their own characteristics. ‘There is no prepaid card market. There are many sub-prepaid card markets.’ Some, such as payroll, may be good markets for banks, while others, such as gift cards, may not. ‘The reality is,’ the prepaid market ‘is far, far smaller than anybody believed.’ Some prepaid card companies may have cheered at earlier forecasts but privately wondered why their own results did not seem to measure up; to them the new estimate may provide some consolation, because they might conclude that ‘maybe everyone else is not doing so well either.’ Gwen Bezard, Aite, defended the firm’s findings but noted that the July report had reduced its 2006 estimate from a report issued in 2005. The Fed’s numbers ‘seem very low to me. I still feel pretty good about our numbers. That’s all I can say.’ Tim Sloane, Mercator, said his research includes categories he did not see in the Fed’s report, such as government benefit cards, phone cards & campus closed-loop payment systems. He said the Fed’s report excluded such transactions as ATM withdrawals from payroll cards. Some of the discrepancies involved definitions, Bachelder said. Government benefit cards were included in the Fed’s study on electronic payments, & ATM withdrawals are not payments but conversions of value from one form to another. Bachelder noted there are many participants in the payment chain, & not all of them actually process transactions; researchers who include data from every participant could end up counting some transactions twice. ‘We want to count the payment once & only once. There’s a lot of double counting.’ His report for the Fed noted that some other forecasts have measured the amount of money loaded on to prepaid cards, rather than the amount spent. Paul Tomasofsky, Network Branded Prepaid Card Association, said that the prepaid card market is still at an early stage of its development & that many companies are reluctant to disclose their volume, making accurate forecasting difficult. As a result, studies often rely on estimations, said Tomasofsky, who is president of 2 Sparrows Consulting LLC. Bachelder acknowledged that some of the largest providers of prepaid services decided not to participate in his study, & said that more than ½ of the closed-loop figures, & more than two-thirds of the open-loop figures, is based on unconfirmed estimates. Bachelder said his firm contacted the providers repeatedly, & in some cases received guidance on adjusting the estimates. Prepaid card companies greeted the findings with sangfroid. Brett Rodewald, Comdata, said the Fed’s estimates & any others were of no concern. Comdata is one of the largest processors of gift cards, but he said gift cards are a small slice of retail spending. ‘The ultimate universe for that market is whatever the retail world is.’ Daniel Henry, NetSpend, a prepaid debit card company in Austin, said the study reinforced his belief that the prepaid market has ample room for growth. Referring to open-loop transaction volume, ‘I think it is going to be a lot easier for that $13b number to grow 5x,’ than for NetSpend to make similar gains in the more saturated credit card market. ‘I like being in a space that has plenty of room to grow.’