When you’re playing the credit card game and/or the manufactured spending game, it’s a zero-sum affair. That is, if you’re winning then somebody else is losing. Obviously, if you’re doing a good job then banks will get the short end of the stick, but what about the retailers selling prepaid debit cards?
I haven’t been able to find much information on the economics of this industry from the retailer’s perspective, but I did find this link from Prineta, a payment services consulting firm. They write:
Our average merchant makes 10% a month off prepaid sales blended across all the products. So if you sell $1000 worth of cards you would see about $100 commission. Sell $5000 worth of prepaid and the commissions should be closer to $500 a month. Some of the busiest locations are making more than $8000 per year from prepaid. Not bad considering there is no set up cost. It’s like free money for a c[onvenience]-store.
Which sounds great for prepaid debit vendors until you dig into the numbers a bit. The highest commissions by far are on prepaid long distance, for which the merchant payout is in the 20-30% range. For plain-jane gift cards, the payout looks like this:
Sell a $250 Gift Card and make $1.60
Sell a $100 Gift Card and make $1.30
Sell a $50 Gift Card and make $1.00
Sell a $25 Gift Card and make $0.70
And the prepaid cards? Here’s what they say (GPR=general purpose reloadable):
- Visa GPR Debit Initial Purchase (card cost $3.00) 35.00% of card cost
- Visa GPR Debit Reload (card cost $2.95) 30.00% of card cost
A $3 fee seems low to me, but whatever. If I’m reading this correctly, retailers’ profit would about a third of whatever the card activation fee is. Given credit card processing fees and fraud risk, I’m grateful this game is still active.
Are any of you aware of any better information than this on prepaid economics?
I’m really fascinated in trying to figure out the costs and revenue of selling prepaid cards. Unfortunately the issue is that store cards skew the numbers, as you’ve shown above.
I think the payout for selling a prepaid card had to be greater than the CC processing fee. CVS is a good example of this… If VR represented a net loss of revenue for each sale it wouldn’t make much sense to Institute a 5k limit. A 1k, or no credit card policy seems like it would make more business sense given the fact that each CC sale represented a loss of $5 or more.
Doesn’t sound worthwhile for merchants on the prepaid cards, but maybe that is why we really have to search to find them
Without those, and especially VRs, our MS would be a lot more difficult.
I too wonder how large the per-card payout is relative to the cc processing fee.
The fact that multiple stores (most prominently Office Depot) dropped VRs makes me suspect that VRs may be a loss leader. It may also depend on processing fees negotiated for each merchant chain with the banks.
My guess on Office Depot was that they were a poorly run company that was in panic mode over VR and HIGC.
I have first hand knowledge that one of the nation’s largest supermarket chains makes about $1 net profit for every $500 Visa Gift Card they sell. I would imagine other chains are similar.
Interesting data point–is that even after taking into account credit card processing fees and fraud?
Don’t underestimate the amount of pure topline the three letter drugstore is getting from VRs and cashflow. As well as what’s likely a positive cash conversion cycle. Payment terms can be another significant piece to the economics of it, not to mention higher revenues put them in a better negotiation position in a bunch of places… There’s more to it than just the profit per $.