Prepaid Cards Versatility and Preference

David Shipper (DS):
Hello and welcome to this Discover Card and Aite-Novarica Group webinar, Prepaid Cards: A Versatile Product With Mass Appeal. I'm David Shipper, a Strategic Advisor at Aite-Novarica Group. And for the next 20 minutes or so, our panel will share insights and findings from a recent quantitative and qualitative study commissioned by Discover® Global Network to understand what consumers want from a prepaid card, as well as the unique needs of prepaid program managers.

I'm joined today with my Aite-Novarica Group colleagues, Francisco Alvarez, Advisor, and Judy Fishman, Senior Analyst, Research Design & Data. And for those of you who are not familiar with Aite-Novarica Group, we're a research and advising firm based in Boston, Massachusetts. We publish syndicated research reports on the most important financial services topics, conduct primary research and offer strategic consulting and advising services to our clients.
Now I'll turn it over to Miladys Felix of Discover Global Network, to kick things off before we dive into the research. Miladys.

Miladys Felix (MF):
Thank you, David. Hello, I am Miladys Felix, and I am a Senior Sales Executive for Discover Global Network. I am responsible for securing and managing partnerships that utilize our network's capabilities. I have over 20 years of product management and financial services experience working across multiple payment networks and running large partnerships in the consumer, healthcare and payroll space.

Our network solutions enable the optimal customer experience across several lines of business by taking a collaborative approach to payment program design and delivery. We enable a complete suite of innovative consumer and commercial payment programs that leverage Discover Global Network. Our partners gain access to B2C and B2B payment capabilities that support a full range of payment types. These include white label credit programs, commercial payments, Discover Deliver and prepaid programs, which we'll be discussing on this webinar. To all of our partnership, we bring innovation, flexibility and simplicity. And I'm excited to chat with Aite-Novarica about how important these characteristics and capabilities are for prepaid programs.

Let me share a little bit about Discover Global Network. Discover Global Network—comprised of Discover Network, PULSE® and Diners Club International®—has focused on creating a payments ecosystem built around a few key premises. That first premise is global acceptance and scale. We build a network on partnerships. With each new partnership established, the network grows stronger. We now have alliances with over 20 payment networks around the world to expand our acceptance into over 200 countries and territories.

The second premise is future-ready solutions. Discover started as a proprietary domestic network, directly acquiring merchants, and we've worked really hard to evolve that model to now include acquirers, payment enablers and developers. We continue to focus on innovating through creating and offering solutions that evolve with our partners and the industry.

And lastly, our collaborative approach. The payment industry continues to demand creativity, flexibility and expertise. Our partnerships are approached with that in mind. I love data, so I look forward to discussing how prepaid contributes to this vast payments network. Francisco, Judy and David, thank you so much for stepping up to help us with this comprehensive study and this webinar. I'll pass it over to you to dive into some of the results and the insights.

DS:
Thank you, Miladys. So, let's get started and look at the consumer quantitative study findings. Judy.

Judy Fishman (JF):
Thank you, David. Aite-Novarica Group conducted the study by contacting consumers who periodically participate in market research studies through an online panel. A broad group of consumers similar to the U.S. population in terms of age, gender, income, region and race were asked questions to determine that they have used prepaid cards in the past 12 months, so they are in the target market for our study. About 2,000 target market consumers were identified and answered survey questions on the topic of prepaid cards. A couple of technical notes about the statistics related to the analysis, and now Francisco will review what we found.

Francisco Alvarez (FA):
For decades, prepaid cards and programs have played an essential role in expanding financial inclusion and financial access in the U.S. While many consumers and providers still equate prepaid cards as a vehicle used to expand financial access to historically unbanked or underbanked populations, in reality, the definition and scope of prepaid in America is far greater and rapidly expanding.

The team at Aite-Novarica Group estimates that across all prepaid card program types, we estimate that 75% of Americans have used, purchased or received any type of prepaid card in the past 12 months. And while some types of prepaid card programs such as gift cards are far more consumer facing and, quite frankly, household names to anyone over the age of 18, prepaid technology is highly versatile and can be used to facilitate and solve a variety of payment needs across any and all industries.

As part of our survey, we also asked consumers that have used, received or purchased a prepaid card during the survey period to rate a series of features and aspects that are most valuable to them. Across all the features that we asked about, we found that most consumers are looking for a few key components. Firstly, consumers are looking for card brands that are accepted at the places they most shop at, with 67% of them noting that this is a very important aspect when they select or receive a prepaid card. Another 61% of consumers also view the ability to use and spend their money right away as very important, while an additional 55% view safety and strong fraud protection features as very important as well.

It is crucial that providers of prepaid cards, regardless of the specific types of programs they're deploying in market, understand what is important to their customers and their cardholders. While not every consumer is the same and what's important to one person may not be as relevant to another, it's nonetheless valuable for program managers and issuers to understand the capabilities and features their customer demographics are asking for and also partner with providers that can meet and exceed those expectations.

So, today's prepaid card programs can be delivered in more ways than ever before. While some programs are virtual-first or virtual-only, even in our highly digitalized world of today, physical cards are still very much relevant. Across our entire survey, we found that 61% of consumers said that they prefer to receive some type of physical card as the primary way they receive prepaid funds. This type of question, like I mentioned, everything else in life as well, it's highly influenced by the underlying socioeconomic demographic factors of our population.

Well, among consumers who primarily prefer to receive a prepaid card in the mail, individuals 55 or older are twice as likely to prefer this method of prepaid card delivery compared to consumers between 18 to 24 years old. The younger demographic, on the other hand, prefer to receive prepaid cards via in-person experiences at almost twice the rate of consumers over the age of 55.

And then on the other hand of the digital physical divide that we live in today, 22% of consumers between 35 to 44 years old prefer to receive a prepaid card via a digital wallet such as an Apple Pay or a Google Pay. And this is 10 times the rate than what seniors 65 and older reported. But it's still relatively consistent with the preferences of consumers that are 18 to 34.

And then when we highlight this same question among income lines, we could see that consumers' household incomes also influence the way they want their prepaid cards delivered. Consumers in households that make more than a hundred thousand dollars a year in annual income are more than three times more likely to prefer to receive a prepaid card via digital wallet than consumers in households with less than $25,000 in annual income. And they're also almost twice as likely to prefer to receive prepaid cards via digital channel, such as email or text. And while preferences for physical cards appear consistent and still remain primary to many consumers across the U.S., we interpret these results as an indication that a preference for virtual first prepaid programs is growing in popularity, especially among younger and wealthier Americans. And we expect this trend to really transcend outside of that demographic and expand to other groups as well.

And then among a series of other questions, we also asked consumers personalized questions related to their individual experiences related to the cards that they reported owning. So, for example, if a survey respondent noted that they've used a gift card during the survey, those respondents were waterfalled into an additional series of gift card-specific questions that captured trends and perceptions in that specific segment of the prepaid-card market. While for the sake of time, we can't share every question we asked each specific card segment. And if you know the prepaid-card market, there's really a lot of market segments out there. We did find a couple of questions interesting to share with the audience here.

So, our survey actually found that consumers overwhelmingly prefer open-loop gift cards than any other type of gift card. If you really think about it, one of the primary reasons consumers gift closed loop, merchant specific gift cards to friends, family and colleagues is because they want their gift to feel personalized. Maybe their neighbor really enjoys visiting a specific restaurant, and to celebrate their birthday, you buy them a gift card to that specific restaurant. But to our surprise as well, we actually found that more often than not, this concept of gift card personalization does not override the fact that most consumers prefer cards that can be used almost anywhere else, opting for gift cards on networks such as Discover.

And to summarize our quantitative study, while America is a highly diverse country with consumers with varying preferences and interests, we have two key takeaways that we can share with the rest of the audience. Firstly, it is absolutely crucial for issuers, program managers and their partners to understand who their customer base is, what the features and capabilities those customers prefer, and how they receive those services, placing special emphasis on finding creative ways to gather data, trends and insights into that customer base and their preferences.

And secondly, consumers like choice. The strongest prepaid card programs are those that can be delivered through any and every channel, virtual and physical, embedding consumer choice from even before a card is issued all the way to account closure. And while card programs should also meet those basic requirements we outlined a few slides ago, each individual prepaid card program and experience should be personalized and customizable for what you and your customers are asking for.

MF:
Thank you, Francisco. If I may, these varying preferences are leading to a wide range of prepaid use cases in the market today. That's why we feel it is important that partners work together to evaluate the many product features and attributes to determine what is best for the program and consumer. Discover Global Network is positioned well as a one-stop shop to bring the right people and tools to help build a payments program to meet those varying preferences.

Some examples of our successful programs include a RAN program that allowed a convenience store to offer their consumer a restricted-use gift card program that would run on our network, but will minimize the system upgrade cost that they would need to invest to run that on a closed-loop network. Another example is an expense management program designed for contractors and small- to medium-size businesses to facilitate the payments and provided controls on purchases. And lastly, we launched a Discover disbursement program that expedited the delivery of POS financing funds to a specific group of retailers. I'd like to hand it over back to you.

DS:
Thank you both. Aite-Novarica Group also interviewed program managers in the U.S. and asked them a series of questions related to the prepaid card industry. Five prepaid product use cases were mentioned the most during the program manager conversations. Gift cards as a budgeting tool, so consumers purchasing gift cards to a specific merchant to help them control how much they can spend. BNPL. Prepaid cards are commonly used to process BNPL payments to the merchant, and this is transparent to the consumer. Earned wage access, gig economy workers, rideshare drivers, they're moving to daily payments via a prepaid card. Prepaid cards are also used with cryptocurrency, to provide spending power to cryptocurrency assets. And finally, limited use corporate-funded prepaid cards. Your prepaid cards are powering use cases in grocery and food delivery, where the driver receives a card that can only be used at a specific restaurant or a set of restaurants or for a specific amount of the purchase.

MF:
David, thank you for sharing those trends with us. We see these use cases very commonly used by our program partners as well. There are many benefits across all of these programs and all the parties involved. For example, payroll prepaid programs provide time and cost-efficient solutions for companies to deliver payments to their employees, while the employees appreciate the reliable and accurate payments methods. The payments ecosystem is even more diverse than this, but each player can be impacted positively as a result of a prepaid program.

DS:
Interesting. Thank you, Miladys. And that definitely backs up what we’re hearing. Program managers also highlighted multiple must-haves when looking for a partner. Card program managers, banks, fintechs, they do not want to share the front of the card. They want to put the card network logo, card number and other information on the back of the card.

Flexibility is also key. So, especially for program managers because their clients are often demanding. And more startups want to be nimble and fast and try new things.

And then timely response from partners. And this goes without saying, but when a problem happens, program managers want to know that they can call someone and their problems will be handled quickly. At the end of the day, the program manager also has clients who demand great service.

And innovation and flexibility are also very important to program managers. And here's a few items that help with that. RAN, or restricted authorization network, new use cases, like those mentioned for delivery drivers making purchases, require control. And a restricted authorization network can help to set defaults for where the card can be used.

MF:
David, I'd like to share an interesting data point with the audience. Some may not know that Discover was one of the first networks to introduce restricted authorization network or RAN over an open-loop network when launching mall cards back in 2004. RAN works well to focus consumer spend at particular merchants or locations within a region by automating the accurate affiliation of merchant locations to aid development of custom programs. We strive to add value to master brands with a complex portfolio of sub-branded stores or outlets.

DS:
Thank you, Miladys. Digital card issuance was also brought up as an important innovation. Physical cards take time to arrive, but digital cards are immediate. Digital issuance is a must-have for card programs, especially brand-new programs, and provides a great customer experience. And you couple that with push provisioning of a digital card token to make sure that the card can easily and seamlessly be added to an Apple Pay or another mobile wallet to be used right away.

And finally, token management. Tokens added to the mobile wallet or merchant card on file can be changed with little or no cardholder involvement. This means that if a merchant's compromised and the card token is stolen, then the token can be stopped or replaced without impacting the physical card or other tokens.

MF:
Thank you, David. Very interesting. The digital payments experience through tokenization is a key consideration I recommend to anyone exploring a payment solution. Discover Network is connected into the major pay wallets. We can provide issuers, merchants and consumers an enhanced digital experience through our tokenization platform called Discover Digital Exchange.

Discover Digital Exchange empowers digital payments between consumers, issuers, merchants through the tokenization of the card credential. This allows the information to be stored securely and conveniently in a device for transacting. We work with our partners on certification for those that need to be certified, so that they can take advantage of this new technology, especially as we continue to evolve and enhance our platform. I'm going to hand it back to Francisco.

FA:
Thank you, Miladys. And to highlight some of the key findings from our consumer survey with Discover, we talked about the wide variety of use cases for prepaid and prepaid technology in today's digital-first economy. We also talked about the three basic tenets of any prepaid card program. One, consumers want prepaid cards that are accepted at the merchants they shop at. They also want immediate and reliable access to their funds. And they also want to feel protected.

And with about 75% of American adults using, purchasing or receiving prepaid cards in the past 12 months, it's imperative that modern prepaid card programs not only exceed those customer expectations, but program managers partner with providers like Discover, that track, measure and understand the diversity of consumers that rely and trust you with their prepaid card needs.

DS:
Thank you, Francisco. So, prepaid program managers know the prepaid business. They have a deep understanding of emerging prepaid card trends and what it takes to run a program. These emerging use cases and the features on this screen, along with preferences like owning the front of the card or working with flexible and responsive partners, were mentioned during multiple interviews. And that indicates how the prepaid card is changing and innovating. It's clearly an exciting time, but also a demanding time for the prepaid-card industry. And now I'll hand it back to Miladys to close us out. Miladys.

MF:
Thank you, David. So much good information here. And there are three statistics that really resonated with me around consumer preferences, and I want to share those with you. First it was the fact that consumers are looking for card brands that are accepted at places they most shop at, with 67% of consumers noting that it is a very important aspect in their selection or receipt of a prepaid card, that that wide acceptance be in place. The other statistic that resonated with me was around consumers' preference for a physical card: 61 of the consumers, as you noted, said they prefer to receive some type of physical card as a primary way of receiving a prepaid card. And the third and last was around consumers’ interest in safety and fraud protection, with 55% of consumers viewing safety and strong fraud protection features as a very important aspect of a prepaid-card program as well.

We at Discover have a number of capabilities to address those consumer demands that resonated with me. First is our merchant acceptance. With acceptance at 99% of places that take cards in the U.S., Discover Global Network enables cardholders to use their cards where they shop.
Secondly is our flexibility around card design, features and program options. For those that prefer a physical card, we understand the importance of card design, and offer one of the most flexible brand guidelines in the industry, allowing our partners, issuers and program managers to decide which features and options they want to include with their card program. Also, our Discover Digital Exchange tokenization platform, DDX, tokenizes and provides Discover prepaid cards into major digital wallets, replacing a cardholder's primary account number with a unique payment token to combat fraud and increase authorizations.

In addition to these capabilities, we also offer our partnerships simple and fast onboarding for their new programs. We offer one of the most simple and most streamlined onboarding processes of any card network. We also offer transparent economics and simplified interchange and fee schedule. This allows our issuers and program managers to more easily understand their program economics.
And lastly, we also have a number of capabilities to help support varying program types and use cases. First is our enhanced merchant data, that enables our partners to restrict card usage and offer a RAN program. And then lastly, Discover Deliver, which is our push payments capability. That enables Discover debit and prepaid card holders in the US to send and receive funds more securely, seamlessly, in real time.

And I just want to wrap up by saying it has been an absolute pleasure discussing prepaid with all of you today. Thank you for the Aite-Novarica partnership and all the work that you've done to make this research happen.

DS:
Same to you, Miladys. Thank you. It was great to share the results of this study.