The closed-loop prepaid cards market is skyrocketing as organizations leverage prepaid programs to drive loyalty and engagement. While gift cards still anchor the prepaid space, the rising trend of self-use in stored-value accounts is propelling the closed-loop prepaid market to new heights.
In his latest report, 21st Annual U.S. Closed-Loop Prepaid Card Market Forecast, 2024-2028, Jordan Hirschfield, Director of Prepaid at Javelin Strategy & Research, delved into the ways companies leverage prepaid programs, the emerging segments in the space, and the forecast for the closed-loop prepaid market.
Pushing Prepaid
Starbucks has long been considered the gold standard for prepaid loyalty programs. Once a consumer funds their Starbucks account, they have effectively bought a gift card for self-use. As they spend their funds, they earn stars, which creates a powerful opportunity to drive loyalty. However, it’s just one of the benefits that prepaid cards provide.
If a user loads $25 into their Starbucks account and then makes five $5 transactions, Starbucks only pays one transaction fee. Comparatively, if the consumer makes those same transactions outside of the stored-value account, Starbucks will pay five transaction fees.
“It’s a money saver for them, and there’s another big benefit,” Hirschfield said. “Even though Starbucks doesn’t get to use the money they’re holding for customers in prepaid accounts, they can earn interest on it. These are the reasons why more companies are pushing prepaid programs, and it’s why the retail gift card market is going to continue to grow.”
The consumer price index measures the change over time of the prices consumers pay, and a CPI above 4% is generally considered to be strong growth. The CPI for retail gift cards is 9%, and self-use in loyalty plans is a large motivator behind that increase.
Card loads are a better yardstick for assessing the prepaid market because the use of prepaid cards can be fragmented over time. Hirschfield estimated that the card load value of the overall retail prepaid market will be roughly $455 billion in the next four years, up from $333 billion last year.
Leaps and Bounds
One of the segments driving that growth is digital gaming and gambling, which has exploded onto the scene in recent years. That is mainly due to the continued legalization of sports gambling in the U.S., which was nearly a non-existent market six years ago.
“Digital gaming and gambling have soared to approximately $219 billion in card load this year,” Hirschfield said. ““Much like the Starbucks model, users load their accounts with a designated amount of money and then draw from that as they place wagers. The growth rate in this segment is approximately 17%, which is incredible.”
The market will continue to grow by leaps and bounds as more states understand the opportunity to earn increased tax revenue through gambling. Missouri just legalized sports gambling in the most recent election, and more states are likely to follow suit.
Many U.S. states have already loosened restrictions on mobile games and websites that offer daily fantasy sports, which are essentially gambling. A separate portion of the gambling market is state lotteries. Many states have lottery apps, where consumers can buy lottery tickets for number draw games, but a growing number of those apps offer digital-only games as well.
Attractive Incentives
The incentives market might not be growing as fast as the digital gaming and gambling segment, but it is still on the rise. The space includes all consumer incentives, not just those that are given to drive sales. For instance, an organization that gives consumers incentives to give blood or plasma would be included in the space.
The market also includes employer incentives, which could be given to an employee for a job well done or as a sales motivator.
“Employer incentives are a growing market, and it’s an attractive segment for gift card providers and program managers,” Hirschfield said. “You’re going from many people purchasing individual cards to one entity purchasing many cards. The incentive market is smaller than retail, with the combined card load of employee and consumer incentives expected to increase from $35 billion to roughly $47 billion in the next four years.”
The demand for digital prepaid cards in the employer incentive segment is likely to increase as work environments continue to be remote. It isn’t feasible for companies with global scale to send physical gift cards to incentivize their employees.
A Proof Point
Campus cards have also been a growing use case for prepaid accounts, and they have included more aspects of the university experience. The cards can be used for dining plans, for vending machines, and other on-campus purchases.
Though the current crop of college students are a smaller population, the youngest generation, Gen Alpha, is expected to be the largest generation of all time. Those children will eventually make their way to college campuses in the coming years.
“Student populations offer an increasing growth opportunity,” Hirschfield said. “Many schools require students to have plans, at least in their first year. The technology there is an interesting play because it can be a proof point for other industries. It includes everything from access control to physical payments, and it ties it all together.”
The True Engine
Due to the emerging use cases, closed-loop prepaid cards are expected to continue their momentum. Another important trend is the rise of digital gift cards—digital cards are expected to reach a 50/50 market share split with physical gift cards by the end of the decade.
“The gifting aspect of prepaid cards isn’t going to decline because it’s the top choice for recipients, even over cash and physical gifts,” Hirschfield said. “However, the self-use opportunity is what is fueling the market. Loyalty programs in places like coffee shops and quick-serve restaurants are driving it, and then there’s the digital gaming and gambling segment. Self-use is the true engine behind the exponential growth in the closed-loop prepaid market.”
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