Prepaid cards are the “apps” of the card world. Join George and Fiserv’s Head of Prepaid Dom Morea as they introduce prepaid’s twin modalities – open loop and closed loop – and then dive into how the gift card industry has morphed into a far broader set of uses cases. And plan to return for the next episode as they discuss open loop’s evolution.
Card payments have four modalities:
- Charge Cards. There are charge cards that are a form of very short term credit, you pay off in full the monthly statement
- Credit Cards add the option of revolving all or a portion of the debt obligation and, if you do, you pay interest on those charges
Both of these are products that we buy as consumers or businesses. And we’re paying with money we don’t have at the moment of the transaction. They are “pay after” products.
- Debit Cards. Debit Cards, on the other hand, are a feature of a specific checking account. It draws on funds that are available right now. It’s a “pay now” method. As soon as the issuer authorizes the transaction, a hold for that amount is placed on funds in your account.
- Prepaid Card. The final modality operates in “pay before” mode. That’s the prepaid model where funds have been placed in an account to be spent at a later date. Like debit, prepaid draws on funds that are already in place. In most cases, the prepaid funds owned by an accountholder are pooled in a single bank account.
Prepaid is used in two different manners
- Open loop prepaid cards are network branded (think Visa and Mastercard). They can be used anywhere the network’s cards are accepted.
- The second approach is closed loop. This is the domain of the gift card where a merchant has pre-sold an obligation to provide goods or services up to the value in the prepaid account.
Prepaid Use Cases Abound
Prepaid is big business. Go into any chain drugstore and you’ll see a rack with both open and closed loop prepaid cards for sale. For years, the physical footprint of that “prepaid mall” has been the most profitable square footage in the store.
The prepaid world has some very interesting dynamics. Unlike credit card products that may be issued to millions of cardholders and used for all kinds of purchases, a prepaid program may only serve a few thousand and may be locked down for special purposes.
The Apps of Cards
That’s why we think of prepaid as the “apps” of the card world. Prepaid lends itself to some very specific use cases and program types.
In this first of two interviews with Dom Morea, Fiserv’s Head of Prepaid, we cover closed loop prepaid and some of the new and growing use cases Fiserv has supported, often driven by COVID-19.
Here’s Dom discussing B2B use cases for closed loop prepaid programs:
Read the Transcript
George Peabody:
Welcome to Payments On Fire, a podcast from Glenn Beck partners about the payments industry, how it works, and trends in this evolution. I’m George Peabody, partner at Glenbrook and host of Payments On Fire. So, we’re talking about cards today and to tee it up, I just want to point out perhaps it’s the obvious to some of you, but card payments, well, cards have a few different modalities. There’s the charge card, which is a form of very short term credit that you pay off full when you get that monthly statement. Of course, the credit cards, which is out of the option of revolving a portion of the debt obligation. And you get to also of course pay interest in that case and perhaps some other charges. And both of those, I really categorize as products, where we buy them as consumers of businesses and we’re paying with money we don’t have at the moment of the transaction there. These are pay after products.
On the other hand, there’s a debit card, which is a feature of a checking account really, it’s not… It just comes with the transaction account. It draws on funds that are already in place. It’s a pay now method that as soon as the issuer authorizes the transaction to hold is placed on those funds to cover the transaction cost and the account holders accountant.
The last one is the subject of today’s episode. The final modality is pay before mode. This is the domain of prepaid, where funds have been placed in an account to be spent at a later time. And prepaid comes to market in two different forms, what we call the Open-loop prepaid card, which has generally got a… Is network branded. In other words, it’s a Visa or MasterCard Discover Logo, American Express Logo on the front of it. And they could be used once they’re loaded. Once the funds are in the accounts associated, that could be used anywhere that those network cards are accepted.
The other is what we call Closed-loop. And this is the domain of gift cards, where a merchant is pre-sold an obligation to provide goods or services up to the value on that prepaid account. So, great example, go into any chain drugstore and you’re going to see a rack with lots of cards at the end of one of their rows, which by the way is the most profitable square footage for that chain store on a square foot basis. Because the prepaid cards there, well, they generate a lot of revenue. The prepaid world has got some interesting dynamics associated with it as well. Unlike credit cards, which are issued in the millions and millions to account holders, these credit card products, prepaid tends to run on a more focused application area, more… A merchant may just issue a few thousand of them. Of course not the ones we’re seeing the end caps in Walgreens or CVS, but there are some very small programs that are… Entirely leverage this prepaid modality.
And for years, I’ve thought of prepaid as the apps of the card world, because they can be really focused with particular applications. So we’re really fortunate today because joining me on the podcast, to dive into prepaid and what’s happening today with this important way of managing money is Tom Morea, who is head of prepaid at Fiserv. Dom has had a multi-decade career in payments with many years at First Data, now Fiserv. So he’s the right person to speak to us. Dom welcome, really glad you’re here.
Dom Morea:
George thank you, and thanks for having me, really appreciate it.
George Peabody:
I wasn’t kidding that you know about what’s going on at prepaid in the profound way. You’ve got an enormous prepaid operation at Fiserv. Now, I was looking at some stats you’ve got on your website about running 12 billion transactions a year and a half a billion physical cards going out a yearly that’s a lot of activity.
Dom Morea:
It is.
George Peabody:
So let’s start with some of the basics of your world. How does that break out across open and closed-loop? What are people buying these days?
Dom Morea:
We have a very long-standing tradition history in this space, in gift cards, for gosh, over well, over 20 years, we like to say that we were around at the invention of the gift card with Blockbuster, as a brand that I think began this industry in the use case. And certainly in the open-loop side of the market, we’ve been very active for probably 15 plus years. And I think for us, we have an equal degree of focus on both of those businesses. They behaved differently. Just thinking about the… Someone stats you mentioned, the gift card industry is very broad and large scale due to the nature of that business. You mentioned the end caps and the physical part of it, and we’ll, I’m sure we’ll talk about digital, but that is where you see just very seasonal, large scale volume associated with gift card purchasing and gift giving and gift receiving.
Dom Morea:
And by the way, it’s not just about that use case anymore. To your point about apps and the nature of that this form of currency is changing, in the open-loop side it is… It tends to be more directed and more focused in our business because we’ve kind of been born out of Hey card and some of the concepts around using open-loop to facilitate payment, replacing cheques, getting a lot of friction out of that part of the world. So the patterns and the nature of those businesses are quite different, we continue to see them being very resilient also. We take the last year and what we’ve all been through, we’ve certainly seen the pandemic driving a heavier reliance in demand on digital. As gift givers, for example, we’re no longer comfortable and able to go to that physical end cap, but still wanted to send a gift to their friend or a loved one.
Dom Morea:
We saw, for example, in open-loop definitely an increase in the need to use that form of tender for loyalty and award and promotion type capabilities, where the ability to reward someone in person is no longer really the preferred or really the feasible way to do it. So we’ve seen those patterns shift in many ways for the industry overall, and with commerce has changed, with this necessity driven by the pandemic driving more toward digital. But we found that there still continues to be a demand. It’s not like physical cards will go away anytime soon in either of these sectors in the market that we plan. We tend to think that in a post pandemic world, it’s likely the pie will only continue to get bigger. The total pie will get bigger and not be in a place where let’s say, digital is just pulling from physical entirely.
George Peabody:
Clearly that the pandemic’s been a forcing function over to digital channels. We’ve spoken with-
Dom Morea:
Without a doubt.
George Peabody:
We’ve spoken with a lot of providers in this space who are basically saying, “Hey, we’ve seen in one year what we had forecast as growth for us in the three or four times level.”
Dom Morea:
Yeah. And in our experience, it hasn’t been just more of the same. It’s been more [inaudible 00:07:43], as for example, merchants or clients of ours, the open work space have really had new needs, different sort of as you said, a forcing function of ways of either recognizing, rewarding, gifting, incenting their constituents. So it’s been a pretty exciting time, but I think overall what it says, is that these particular area of payments is even more resilient than we even thought it was pre pandemic.
George Peabody:
Really interesting. You’ve just piqued my curiosity here. So you said you’ve got big merchant customers who are interested in open-loop applications?
Dom Morea:
Yeah.
George Peabody:
What are the areas where I would think of merchant as a big employer, would be interested in open-loop of course is to replace cheques with a card for their employees, for their hourly employees? Is that the kind of use case you’re talking about or?
Dom Morea:
It is, it is definitely. We’ve seen, for example, with the emergence of the gig economy. Increasing need to and a desire to use open-loop as the preferred means of dispersing [inaudible 00:09:02], to do it quickly, to do it digitally. I think we also see in those areas, just the instant on demand nature of the world that we all live in changing that particular service where, I work today, I want to get paid today. I don’t want to wait the week or the two week pay cycle. So, that whole notion around early wage access has been an element of that. But I think beyond that, but just the desire to use open-loop as a way to disperse funds. We’ve seen that in both the private and the public sector.
Dom Morea:
Where increasingly the ability to use a card rather than use a cheque, which comes with its own set of friction, and logistics, and [inaudible 00:09:52] costs and cashing that cheque. Can get replaced with a card that has very distinct advantages. It’s always on, it’s always with me, I can use it for a variety of in-person spending if I do need to. Add that point of purchase need or using online. So we absolutely see that part of our business and our clients continuing to evolve and grow.
George Peabody:
Wow. So let’s step back for a second and talk a little bit about the closed-loop side, and what you’ve seen in the last year, specifically in closed-loop and you’ve already said of course a lot of folks are skipping the physical world and going to digital delivery. But that’s kind of… That alone has got to have a very different marketing requirement for the merchants. How you go about buying a digital card is very different than how you go about buying a physical one. What have you done to help your closed-loop customers take advantage of the digital channel?
Dom Morea:
Yeah. So in a lot of ways I think, few different things, key things going on here. Firstly, we are very involved in our technology with helping our clients distribute… Sell and distribute their gift cards. So in our parlance, and in our industry parlance there’s first-party distribution of gift cards, and then there’s what we call third-party distribution. Third party distribution would be along the lines of what you described George with end caps. Where Blackhawk and income play an important role together with merchants who are distributing other merchants good parts. First-party is where that merchant, they themselves are selling their own gift card. And we’re very active in both elements of the business. But I think with regard to helping clients digitally distribute their cards, we’re very active there.
Dom Morea:
And I think, increasingly our clients are looking for more and different ways to connect with purchasers. To connect with the end consumer, that segment of one who is really looking to buy a gift card. In some cases it’s discounted card because it might be a budgeting thing for them, which is really attractive. But also in more of a B2B setting where you’ve got entities who are bulk buyers of a client’s cards for use in loyalty programs for redemption and those kinds of things. So for us, it’s really about making sure that our technology is easily consumable so that it can be integrated easily, and by doing so we can help our clients really open up their content to the widest array of buyers.
George Peabody:
You’ve API enabled all of this then.
Dom Morea:
Exactly. Yeah, that’s exactly right. But I would also say there’s another important element to it, which is ensuring that that gift card, that app, as you said, is seamlessly integrated into a checkout experience. And a lot of this gets into the phygital world of ordering ahead and that sort of really neat intersection that we’ve seen in the gift card industry between loyalty and mobility and prepaid. Starbucks were a great example, is probably a wrong and overused example of how gift card was used very effectively to get digital, have the ability to store value and reload value in a mobile app and connected with loyalty. We’ve seen many clients, not just in QSR, although principally, quick service restaurant, that has become very popular, almost essential for a lot of those players to compete.
Dom Morea:
We’ve certainly seen retailers think about closed-loop in ways that they can tap into the same opportunities, the same advantages, it’s incredibly sticky. And the ability to maybe start my shopping journey on a mobile app, maybe I finish it in the store, or maybe I began in the store and I finish it digitally while I’m on the go. The ability to have that connection with the prepaid account in closed-loop, has been really, really exciting. And I think we’ll continue to be that way for some time.
George Peabody:
So have you built tools to be able to sweep the value that’s delivered? I get an email say I have a gift card, to be able to sweep it into say Apple Pay or Google Pay. So it’s able to stick that into a wallet if you will, a digital wallet.
Dom Morea:
Yeah, we have. Both on the open-loop side actually where our money network is one of the key open-loop products that can go to market with our money network card holders can actually push that into the app so they can have that access to the money network card inside of Apple Pay and Google Pay. So, that is in place. And I think increasingly as the retail world navigates the pays and how they want to incorporate that in conjunction with their own app and their wallet and shopping experience, will certainly be in a position there as well. One of the things that we do, which is key for our clients is to make sure that the card is available in as many places as they want their cardholders to have access to it.
Dom Morea:
And I think the other thing to point out is, well, gift cards as I said earlier, they’re not just about gift giving and gift receiving anymore. That use case of having a prepaid account connected to my mobile interaction, my omnichannel interaction with that brand means the lifecycle of that closed-loop card is much, much longer now. I myself, I’ve had a Starbucks app and a card for many, many, many years. That is quite different than, “Hey, I made a physical card, it got taken off the J-Hook and I gave it to George, George used the value on the card, you redeemed it, and that card is no longer useful. It got thrown away. Now, these cards and these accounts have a much, much longer life cycle. And so with them, we’re adding different features and capabilities to make those things more accessible and more usable.
George Peabody:
So it’s the way you put it makes me think about reloading a closed-loop card? Is that a possibility now?
Dom Morea:
Oh yeah. Oh yeah, for sure. And we’ve got many clients who have been doing that for years. From our point of view, and that requires a lot of know-how because security and fraud management is a key part of how that gets done.
George Peabody:
Yeah. Obviously the Starbucks is a perfect example of that, but yeah, and I gathered that you’ve got to be able to package your services as a such way that it could either be packaged in the merchants own app, so they get control of the entire user experience and really link the payment with rewards, loyalty points, that kind of thing, as well as be able to sweep it in as a prepaid instrument that sits inside of Apple Pay for example.
Dom Morea:
That’s true. That’s true. As is always the case with us as your advisors, it’s about the providing the technology and the power behind these tender types, whether they’re open workloads. And we are for our part, we’re invisible in these experiences, but very much providing the technology that ensures that cards can be made safely and distributed and work so that they’re processed seamlessly and securely. And the same is true in digital distribution for us, we are powering the e-commerce storefront in many cases and the checkout capabilities. So if you’re buying that gift card as an individual consumer, or as a B2B purchaser in bulk, we’re providing those capabilities to ensure that those transactions are safe and work at large scale.
George Peabody:
That B2B distribution, I can imagine it gets pretty complex in terms of management of numbers and accounts and-
Dom Morea:
Yeah. Well, yeah it is. And I would say that it’s a really exciting space too. We’ve been talking about use cases. And I think that B2B is a really vibrant channel as far as sales opportunities. We see this across many of our clients, and we help them in those cases to gain access to an ecosystem there of buyers. You got to be able to do that in such a way that you’ve also vetted those buyers upfront and you know who you’re dealing with on the other side of the internet, for example. And so it is a very exciting part of our business. And from a digital perspective, the ability to be able to supply that content, think about the gift card is content in this case.
Dom Morea:
Use cases are really almost limitless. Whether it is a recognition or redemption for loyalty points that I’ve earned, and I can use those points to buy a gift card, on the other side of that business to business kind of model. The same is true in healthcare or in HR or employment services where, as a good duty, I’m a good employee and maybe I get a reward from my employer, that could come in the form of a gift card. Or if I have exhibited really good healthy choices in my life, maybe I’m now awarded with gift cards. So there’s just a really wide array of use cases in these areas that continue to grow. We got nothing, but I think very positive outlooks in those areas [crosstalk 00:20:34].
George Peabody:
Dom, any use cases that have sprung up over the last year that have surprised you?
Dom Morea:
Yeah. They’re many, I’ll give you one just as a for example of unexpected things, obviously COVID has caused so much heartache. And so much tension and hardship on people’s personal lives and business. But I think George, you mentioned, it’s also, necessity is the mother of invention. We’ve got a very large client in the UK, in the closed-loop side that is involved in some programs to ensure that kids get lunch money. And if you bear with me for a second, I promise I’ll get there for you. But this client said, “Look, based on the fact that kids can’t get lunch at school any longer due to COVID, we need to be able to give them the ability to buy that school lunch, or have food to the extent that they are… They may be challenged that way.”
Dom Morea:
So our client is basically distributing the gift card, a branded gift card to kids that are part of this program. So to the extent that they had no other way to get food, now they can use that gift card almost as a voucher, to be able to get lunch every day and that meal every day. That is just a really unexpected thing. And in a lot of ways, it’s incredibly humbling because we’re seeing our technology power of things that have very little to do with gift giving and gift receiving, in that case. Like now, you’ve got a bunch of kids who, in the UK who are food insecure that are receiving this particular client’s gift card and using it to buy food that they… Obviously they needed.
George Peabody:
Well, that’s definitely a story for these times, isn’t it?
Dom Morea:
It is. It is and you know we recently merged into Fiserv. And one of the really cool things about Fiserv had been and still is, is there’s very much for us, an aspiration that we move money in a way that moves the world. And I think that would be an example of that. It’s a very unexpected way in which this closed-loop tender type is being used. And obviously, there’s a tremendous amount of Goodwill and brand equity that, that client is now building as a result of this. Where that goes from there, and whether that translates into really positive things about their gift card becoming more preferred than others. I think there are lots of green shoots of opportunity and advantages that the gift card in this case, that use case can generate unexpectedly.
George Peabody:
Yeah. Well, and everybody, and they should be applauded for having done the work.
Dom Morea:
Yeah, most definitely.
George Peabody:
That’s pretty great. So, that’s closed-loop.
