U.S. Travelers Need Chip & Pin Prepaid Travel Cards

imageLast summer, I had the opportunity to spend a week in an apartment in Paris’s 6th. The wonderful 1920s building overlooked a transportation solution even older: bicycles.

But Paris’s popular Velib bike-sharing program has a modern twist, an automated rental system run entirely by unmanned kiosks that accept only debit and credit cards.

Subscribers (29 Euros annually, 5 Euros weekly) can ride the bikes free for the first half hour, then the price rises steeply to 3 Euros per hour and higher. But with stations every 300 meters, you can tool around the city very cost effectively. That is, if you are not American. 

imageWhy? Our old-school mag-stripe cards are no longer in step with the international gold standard of security, the imbedded computer chip unlocked by PIN entry, i.e., chip & pin or EMV. 

At most European merchants, it’s not a problem. They are plenty willing to take the old-school mag stripe card in order to make the sale. Last year, we never had any trouble using plastic from our friends at Wells Fargo and Bank of America. But in certain situations, such as unattended ticket machines, U.S. cardholders can be out of luck.  

The Paris bikes are one very visible place where mag strip cards are not honored (see note 1). That explains the perplexed tourists I watched last summer struggling at the Velib kiosks trying repeatedly to get the machine to release a bike.

Financial institution opportunity: Here’s a great way to pick up market share among well-heeled international travelers. Offer a chip & pin prepaid card. It’s a modern-day travelers check, something every traveler will tuck in their wallets and purses, then forget about when they get home (note 2). And it’s perfect for Internet distribution, especially if you issue cards nationwide.

Besides card fees, interchange, and travelers-check-like float, first movers could gain real market share with a great demographic.

According to Payments News, Gemalto is offering a chip-and-pin solution for U.S. card issuers. A few weeks ago, United Nations Federal Credit Union became the first U.S. financial institution to announce deployment of the Gemalto card (press release). The CU says it will be available in the second half of 2010. But, you’ll have to be on staff at the UN to get it.

Notes:
1. Apparently, there is an exception. American Express cards, with or without a chip, can be used at Velib machines. I wish I’d known that when I was in Paris.  
2. Closer to home, Canada is also in the process of converting to the new standard.
3. Photo credit: Clive Andrews. This was the typical tourist look at the Velib kiosk queue, utter confusion.

Watch the First Mobile Payment Made via Starbucks Card iPhone App at Downtown Seattle Location

imageJohn Cook, a Seattle tech blogger at TechFlash, was apparently the first customer to use the new Starbucks Mobile Card iPhone app to purchase coffee at the Seattle Columbia Center Starbucks. The video was posted at 3 PM yesterday. For more info on the app, see yesterday’s post.

He had a little trouble getting the point-of-sale scanner to read his iPhone-app-generated barcode, but after an extra few seconds (25 seconds actually) of wiggling the phone, the transaction worked (the transaction begins at about the 1:19 mark). Hopefully, with a little practice, users will know where to place their phones in front of the scanner for easy reading. He also demonstrates a card reload after the purchase (at 3:05 mark).

Notes:
1. The myStarbucks app has moved up to number 6 in the iTunes app store, while the mobile card is at number 29 (as of 4:30 PM Pacific).
2. The mobile payments capability is live at all 16 test locations as of yesterday.

Starbucks Launches First Dedicated iPhone App for Stored-Value Cards

image This is a huge day, and one that I hadn’t expected for at least another couple years. The convergence of mobile payments and caffeine. What more could a mobile banking geek and coffee connoisseur want? 

Starbucks pioneered stored-value cards and launched its first card in 2001. Today, it became the first company (note 1) to create an iPhone app exclusively for a payments card. Apparently, Finovate alum mFoundry helped build the app (cnet story, thanks Brandon).

Users were offered $5 extra credit on their first Starbucks card reload of $25 or more made from the new app. Registered cardholders received an email notification earlier today urging them to “turn your iPhone into a Starbucks card.” (see screenshot below).

Note, the Starbucks Card Mobile app (app store link) is in addition to the regular myStarbucks app which has a store locator, coffee/drink info and a favorites-sharing function (app store link). That app also launched today (notes 2, 3). 

The app is gorgeous and shows how important design can be in creating a trustworthy and easy-to-use payment product (note 4). For example:

Home screen (left screenshot):

  • The card balance is immediately and prominently displayed

Reload screen (middle screenshot)

  • Uses big, easy-to-read buttonsremember, this is a small screen, with a giant green, full-width Continue button  
  • Current balance repeats at the top

Mobile payment screen (right screenshot)

  • The bar code for mobile point-of-sale payments (test only, see below) is rendered over a background image of the card, complete with card number, a nice touch to reassure users and Starbucks baristas that this is the real thing.

Analysis
Of course, the mobile commerce and banking community will be abuzz about the mobile payments test. At 16 Starbucks locations (8 in Seattle and 8 in Silicon Valley), iPhone users will be able to pay at the counter using a barcode generated on screen (right screenshot). Luckily, several Starbucks are within a couple miles of my home so I’ll be able to report back with results as soon as the test locations are live.

But I think the stored value card management functions are more interesting for the present. Just think if you had an application that looked like this for your debit or credit card. Think of the brand-value uptick, PR notice, and word-of-mouth buzz. 

Starbucks Card Mobile screenshots (23 Sep 2009)

image    image   image     

Email announcing the new mobile card app (sent to a registered Starbucks cardholder in the mobile payments test market, 23 Sep 2009, 12:43 PM Pacific)

image

 

Notes:
1. Starbucks is the first company in the U.S. to have a dedicated app for a payments card. Although unaware of any elsewhere in the world, I would expect that card apps exist, at least in Asian markets.
2. The main Starbucks app is currently the 33rd most popular free app in the store and number 1 in Lifestyle; Starbucks Card Mobile is number 46 overall and 3 in Lifestyle (6 PM Pacific).
Update (9 PM Pacific): myStarbucks has moved to number 19 and Starbucks Card Mobile to 38.
3. The Starbucks apps are huge, 6.3 MB for the regular and 3.7 MB for the card, so makes sure you have good reception or are connected via WiFi.
4. However, I have been unable to log in to my actual Starbucks account as of 7 PM Pacific, owing perhaps to overloaded servers.
5. For more info on financial institution opportunities, see our Online Banking Report: Mobile Banking via iPhone.

Why Are Only 1% of Prepaid Gift Cards Sold by Banks?

One of the biggest changes in the payments landscape during the past decade is the use of prepaid gift cards, especially during the coming holiday period. According to the National Retail Federation, $28 billion changed hands via prepaid gift cards during the holidays last year, almost $300 per U.S. household.

Assuming a $50 average load per card, the $28 billion holiday spending translates into more than 500 million individual cards. At a conservative $2 per card in revenues, that's $1 billion at stake during the holiday period alone.

It seems that banks and credit unions would be ideally suited to cash in on this interest. Yet, a recent Marketing Workshop survey revealed that only 1% of gift card purchases during the past year were at banks. Granted, it's difficult to compete with card sales at the end-retailer, but nearly a third of buyers used other channels, a significant revenue opportunity.

Here's a card-purchase breakdown from the last holiday period, according to the National Federation of Retailers (research conducted by BIGresearch, 10 Jan 2007).

  • 75%bought at the store where cards will ultimately be used
  • 17%other brick-and-mortar locations
  • 13%purchased online, retailer-direct
  • 4%third-party website

The directories at Visa and MasterCard (see list below) list only 19 financial institutions offering prepaid cards online. An additional 30 financial institutions sell cards thorough Visa's online site here.

Why such low FI sales?
Back to the original question, why aren't banks more heavily invested in gift card sales (see list of sellers below)? Part of the explanation has to do with the general unwillingness to take on the added fraud exposure, especially from online sales. However, financial institutions can mitigate much of that by offering the cards to established customers only.

Another reason is the lack of merchandising expertise. Bank branches and websites are generally not set up to merchandise spur-of-the-moment products. That weakness can be overcome online with tight integration into the online banking area. If banks had a "gift card" tab available in online banking, I believe it would become the primary option for many customers in the market for a gift card.  

Financial institution opportunities
Even though brick-and-mortar sales dominate with an 85% share of transactions, physical  locations by no means have a lock on the business. I recently purchased several store cards at a third-party location (Safeway). While it was convenient and free, I wasn't at all sure that the Safeway clerk actually activated the cards, a significant drawback in the buying experience. 

It's tempting to think banks could recreate the success of other retailers by selling cards in branch. But without the retail POS systems needed by card wholesalers to plug the bank into their card-selling networks, it can be costly to equip bank branches with a card-selling system. Add to that the expense of training tellers, educating customers, and potentially backing up the teller queue on Christmas eve.  

So the better opportunity for most financial institutions is online sales. You already have the traffic; the technology expense can be centralized in one fulfillment location (or outsourced); and it's easier to educate customers online. Online Resources is one established bank-tech vendor with a turnkey, multi-card solution, CardHQ, introduced last year.

Banks and credit unions could become players in this market if they did some or all of the following:

  1. Expand from Visa/MC/AmEx used by 12% of buyers, to store cards, used by 90% of the market (see list of card types below).  
  2. Provide written activation guarantees with each card.
  3. Allow users to check balances online or through text messaging.  
  4. Keep prices competitive. Safeway charged ZERO for the Nordstrom card I purchased there, apparently content with the commissions received from the retailer. Because of the activation guarantee, banks could charge a few dollars per card, especially if the card is packaged in an attractive envelope or box that reinforces the guarantee and the bank's brand (see #5).
  5. Use online banking to promote the cards. 
  6. Offer a variety of packaging alternatives and/or personalization to improve the cards appeal as a gift. Starbucks, the granddaddy of prepaid cards, is offering a $25 package in its stores that includes a personalized $20 card and a gift box. The package is bought in-store, but the personalization is fulfilled online.  

Card types
Here's the list of most common card types purchased (offline and online):

  • 38%—department store 
  • 27%—restaurant
  • 18%book store 
  • 16%—electronics store
  • 15%—discount store
  • 12%Visa/MC/AmEx
  • 11%coffee shop
  • 11%home improvement 
  • 9%clothing  
  • 7%grocery store
  • 6%gas station
  • 5%salon/spa
  • 5%sporting goods
  • 4%home decor/housewares
  • 3%craft store
  • 3%online merchant
  • 2%office supply
  • 2%catalog
  • 2%shoe store
  • 10%other 

Source: National Federation of Retailers, research conducted by BIGresearch, 10 Jan 2007

Companies Offering MasterCard or Visa Gift Cards Online

MasterCard

BankFirst
Western Union Prepaid Card

H&R Block Bank
H&R Block Emerald Prepaid MasterCard

HSBC
HSBC Prepaid MasterCard GiftCard

Keybank
Best Present Holiday Bonus & Incentive Card

MetaBank
AccountNow Vantage Debit MasterCard

NetSpend
All-Access MasterCard Prepaid Card

Washington Mutual
Washington Mutual Prepaid MasterCard Gift Card

Visa

BCU (customers only)
Available to BCU members only
Financial Institution

Comerica (customers only)
Phone: (800) 955-4212
Available to Comerica customers only
Financial Institution

DeluxeCard
Phone: (866) 874-9029
Retailer/Other

Desert Schools FCU (customers only)
Phone: (800) 456-9171
Available to Desert Schools FCU members only
Financial Institution

First National Bank of Omaha
Financial Institution

GiftCards.com
Phone: (877) 944-3822
Retailer/Other

iCARD
Phone: (636) 536-6897
Retailer/Other

IDT Gift2go
Phone: (800) 995-3065
Retailer/Other

M&I Bank
Financial Institution

National City
Phone: 877-990-GIFT (4438)
Financial Institution

Navy Federal Credit Union (customers only)
Available to Navy Federal Credit Union members only 
Financial Institution

PNC Bank (customers only)
Available to PNC Bank customers only
Financial Institution

SunTrust
Phone: (800) 318-0210
Financial Institution

U.S. Bank
Financial Institution

Wells Fargo (customers only)
Financial Institution

West Suburban Bank
Financial Institution

Source: Visa, 3 Nov 2007.


Holiday Gift Ideas From My Bank?

Link to ING Direct store Who'd have guessed banks would become a popular source of holiday gifts, other than good old-fashioned greenbacks of course?

Now that niche audiences can be targeted with online promotions during the holidays, many financial institutions are marketing financial products packaged as gifts. Prepaid Visa/MasterCards are the hottest item, but there's also potential in other areas. 

Gift cards
The second most popular gift item this year, after apparel, is expected to be prepaid cash cards. While the majority of the $20+ billion purchased will be direct from retailers, hundreds of banks and credit unions, such as Boeing Employees Credit Union (BECU) have joined the fray (see email below). If marketed right, financial institutions could gain a significant share of total sales. See our previous post here about integrating gift cards into online banking for more information.

Boeing Employees Credit Union gift card email BECU CLICK TO ENLARGE

Credit reports
Equifax
is taking advantage of the giving season to market credit reports and/or FICO score gift certificates. The cost is $20 for a three-bureau credit report, $15 for the FICO score and explanation, or $30 for both (see email below). An even better gift would be a year of credit monitoring.

Equifax email for credit report gifts CLICK TO ENLARGE

Investment accounts
For years, ShareBuilder has marketed "the gift of stock" during the holidays. This year, many of its partners, such as National City Bank, are offering a $50 gift card as a bonus for new accounts (see screenshot below). That way grandma and grandpa can give junior something that's good for him, an investment account for the future AND something he'll actually like, $50 to spend at the mall.

National City Sharebuilder landing page CLICK TO ENLARGE

Piggy bank 2.0
The Savings Machine from ING Direct For the younger set, ING Direct has for a year been selling The Savings Machine, a toy bank/calculator/ATM machine. And judging from the note on its website,* it's proving to be a popular Deal of the Month with a lower $17.95 price tag which includes free shipping (see inset). Several years ago, ING Direct reported nearly a million dollars in sales from its online merchandise store <shop.ingdirect.com>, an inexpensive way to get its name on the street.

*Note by the "Savings Machine" product page today: All orders placed from 4 Dec to 11 Dec will be shipped out the week of 11 Dec due to the large amount of backorders.

Surcharge-Free ATM Finder

Westsuburbanbank_atmfinder_small_2Illinois-based West Suburban Bank <westsuburbanbank.com>, which offers an array of prepaid card services through its subsidiary, Prepaid Solutions USA <prepaidsolutions.com> is promoting payroll cards to employers.

Westsuburbanbank_atmfinderThe powercash card website, powered by FundXpress <portal.fxfn.com/c2wsbli>, includes a surcharge-free ATM finder that points to nearby machines within Allpoint's 32,000 ATM network <allpointnetwork.com> (click on inset for closeup).

Analysis
The surcharge-free ATM is an important benefit for payroll card clients, because it allows them to point their employees to ATMs where they can withdraw their paychecks without an additional charge.

JB

Money Laundering Creates Problems for Stored-value Cards

 

The U.S. Treasury’s U.S. Money Laundering Threat Assessment, published last December, says that many types of stored-value cards have the potential to become major avenues for money laundering, suggesting—although not saying explicitly—that stringent anti-money laundering regulations are in the offing for the card products.

Industry groups are preparing what amount to pre-emptive negotiations to keep the issue off the floor of Congress, hopefully minimizing potential regulations that could, in the view of many in the industry, cripple the business case for what bankers and other payments executives consider several promising new revenue streams. But prepaid-card executives are declining to speak publicly about the issue, hoping to keep public discussion about stored-valued cards “positive.”

Continue reading “Money Laundering Creates Problems for Stored-value Cards”

Mobile Payments: Japan Leads the Pack

The potential of cellphone-based mobile payments to eventually squeeze banks out of their central role in payments can already be seen in East Asia, says Andrei Hagiu, a principal at Market Platform Dynamics, and by ignoring it, American banks have nothing to lose but their business.

Octopus_cardHong Kong’s Octopus prepaid debit card (see inset) is one example: Issued by Hong Kong’s subway system and several other transportation companies—with no bank involved—Octopus cards drive about $2.2 billion in annual payments volume.

Continue reading “Mobile Payments: Japan Leads the Pack”

Low Value Payments & Stored Value Cards

In the coming year, low-value payments and prepaid cards will be increasingly mentioned in the same breath, especially in conjunction with off-line, contactless methods, says Gwenn Bezard, partner in Aite Group.

Pilots, and even some deployments of contactless payment cards, will be making a significant appearance, if only because banks are pushing them. The main sticking point from the merchant perspective, Bezard says, will be the cost of interchange, but he expects some banks to offer breaks on fees, if only to give the venue a running start. He is optimistic that big merchants will follow Starbucks’ model and offer rechargeable, merchant-specific stored-value cards as a means of gaining market share and promoting customer loyalty.

Continue reading “Low Value Payments & Stored Value Cards”