Mercator Blog

The United Kingdom Open-Loop Market Is Poised for Success
Date: January 9, 2018
Research Team

 The United Kingdom is one of the more advanced markets in Europe with respect to cashless payments, be it credit, debit, or prepaid in one of their many forms. The focus of this Mercator Advisory Group research report is prepaid cards and their many uses. The report highlights some of the unique market characteristics and dynamics shaping the evolution of the U.K. prepaid market.

Prepaid cards in the U.K. exist in both open- and closed-loop programs. No published statistics are readily available on open-loop prepaid card programs, but information on closed-loop programs provided by the UK Gift Card & Voucher Association (UKGCVA), the industry’s trade association, indicates that the open-loop market is growing. U.K. residents became familiar with one of the first prepaid cards, the Oyster card, a closed-loop prepaid transit debit card issued by the Transport for London (TfL) starting in 2003. Despite the fact that all payment cards can now be used in the TfL system, the Oyster card was one of the first prepaid cards introduced to the public and remains popular today.

Most retail gift card programs are closed-loop prepaid cards that expire two years from date of purchase or latest use. The two years is meant to protect the consumer from quick expiration and account for breakage. In the retail and payments industry, the term ‘breakage’ refers the portion of funds left on a partially used gift card. As discussed later in this report, International Financial Reporting Standard 15 (IFRS 15) regarding issuers’ accounting for breakage will change in 2018, a change that may have major financial implications for issuers. 

The European prepaid card model has a variety of participants, each with different roles and responsibilities. This model allows development of niche prepaid card propositions by small market players that do not provide all possible prepaid functions and are not required to be licensed. The result has been numerous small prepaid programs in the U.K. and the emergence of specialty providers in the prepaid card ecosystem.

Expect continual regulatory changes that will affect the prepaid card industry now and into the future. European Union regulations such as the revised Payment Service Directive (PSD2) and Interchange Fee Regulation (IFR) affect the business model itself. There is also regulation aimed at preventing the use of anonymous prepaid cards. 

More information on this can be found in United Kingdom Prepaid Market Dynamics, 2017.