What is prepaid card breakage, and as a manager of corporate or consumer incentive programs, why you should care.

Incentive / Promotional Prepaid Cards

Promotional one-time use prepaid cards can be an effective way for companies to reward, recognize, or incentivize a broad spectrum of audiences. Incentive programs range from employee recognition to consumer promotions. The primary objective of these incentive programs is to influence behavior of the end recipient.

What is Prepaid Card Breakage?

Within the context of prepaid incentive cards, breakage is the money loaded onto a card but not used by the card recipient by the time the card expires. The card can no longer be used for purchases at expiration even through the funds are still in the account. In the incentives industry, vendors will often take this unspent breakage as fee revenue. Breakage varies by program, but typically range between 8% to as high as 30%.

As a Manager of Corporate / Consumer Incentive Programs, Why Should You Care?

There are several ways to view breakage in the context of an incentive card program.

Business Philosophy – Misalignment with Incentive Program Objectives

The primary objective of any incentive program is to drive, incent, and reward certain behaviors. So when an incentive vendor relies on breakage as the primary source of program revenue, think about the paradigm that it sets. The vendor is financially incentivized to minimize the use of the reward that they received for the desired performance behavior. With incentive prepaid cards, spend is a measure of engagement with the program. So in other word – these vendors are better off if the incentive program drive less engagement – think about that. Whether consciously or sub-consciously, the vendor will manage the program towards less engagement because they are financially incentivized to do so.

Financial Impact – Price Transparency

Often, a vendor will bid on an incentive program with a low upfront per card fee, knowing that they will be able to take breakage as revenue.  Clients who do not know / understand breakage often do not know the economic model with which incentive services vendors operate. Incentive services companies are not charities – they do not work for free. So the question is whether the incentive program administrators are asking the right questions, and whether the incentive vendor is being transparent.

As an illustrative / simplified example, table 1 below outlines a typical scenario for an incentive / consumer promotion program (10K cards @ $100 each equating to $1MM in prepaid card funding). In this illustrative example, vendors may offer a low $1.95 per card fee but pocket the 15% in unspent funds as revenue when cards expire. Effectively, a corporate client is paying 69% higher all-in net effective card fees. Yes, the vendor is “making a bet” and the breakage rate of unspent funds is not guaranteed. Vendors are taking a risk, and arguably have a right to be compensated for that risk, but 69% higher?

Transparency is the Key

There can be legitimate benefits to operating under a breakage model (lower upfront cost, fixed budgets / costs, etc.). However,  transparency is the key – so before accepting an incentives services vendor’s offer of a $1.95 card, ask these questions:

  1. How does the vendor treat unspent funds / breakage? What is the real net effective cost?
  2. If you are designing your incentive program to maximize engagement, does it make any sense to design a program where the vendor is financially incentivized to drive down engagement?

Written by: Thomas Chiang, President | Card Services & Technology Solutions