Regulatory changes affecting the prepaid industry slowed both domestically and globally, with two major exceptions. In most of the country, efforts to tamp down card scams took a backseat, but Maryland passed a packaging law that could have broader ramifications for other states as well. Meanwhile, more states have legalized mobile sports betting and lotteries, opening new markets within the prepaid and stored-value ecosystem.

A report from Javelin Strategy & Research, 2024 Prepaid Regulatory Outlook: Playing by the Rules, examines the impact of these changes on the gift card and related industries. More importantly, it delves into their implications for the future of prepaid.

Seeking a Tamper-Proof Package

This year, international, federal, and state authorities took limited action, leaving many prepaid markets largely unchanged. Although proposals to clamp down on scams and fraud were discussed at various levels—from city halls to Congress—only Maryland put pen to paper and passed legislation to curb illegal activities.

Maryland’s actions targeted the growing scourge of gift card draining. These scams can be as simple as persuading individuals to purchase a prepaid card and then relinquish access to criminals, to more complex operations. In some cases, criminal networks have replaced large quantities of gift cards with tampered versions, allowing them to claim funds unsuspectingly purchased by consumers. In response, the U.S. Department of Homeland Security launched a large-scale effort with local law enforcement, called Operation Red Hook, to identify these criminals and ensuring the safety of retail gift cards.

In response to these draining operations, Maryland passed The Gift Card Scams Prevention Act of 2024 in July. The bill mandates secure packaging, requires merchants selling gift cards to register with the state, and includes mandatory employee training. The industry has plenty of time to prepare, as the law does not take full effect until next October.

“Even though it’s only one state doing it, it’s the type of thing that you can’t avoid,” said Jordan Hirschfield, Director of Prepaid at Javelin Strategy & Research, and author of the report. “As a provider in the space, you can’t avoid making these changes almost universally, because you don’t want to have one process for Maryland and another for everywhere else. It’s not the type of product that you can segregate by a specific geographic location.”

The Extant Environment

The rules require that gift card packaging be designed to conceal any numbers or data necessary to drain the card. Industry players such as PLI claim to already produce secure packaging, using specialized materials, security measures, and tamper-evident adhesives to thwart criminals and give consumers better indicators of potential tampering.

Other states may consider similar legislation, although this may prove unnecessary if existing measures are effective. 

“States like New York and California have been more proactive on protecting consumers versus having a more business-focused legislative agenda,” Hirschfield said. “But in my conversations with people in the industry, they all say they probably didn’t need the legislation anyway. They’re all seeing the trends of the tampering, and they want to be proactive about it in the industry.”

Sports Gambling on the Rise

A significant opportunity for prepaid cards has emerged from the expansion of legalized sports betting and lottery play. Since the 2018 Supreme Court ruling lifted restrictions on state-authorized wagering, the market has experienced astronomical growth.

Mobile sports betting is now legal in more than 30 states, with Missouri joining the list after the recent election. In Q2 2024 alone, revenue from online sports gambling and iGaming surpassed $5 billion.

Participating players are required to deposit funds into stored-value accounts, which game sponsors hold as liabilities on their balance sheets. As with gift cards, operators frequently use loyalty programs and incentives to garner engagement, attract new customers, and discourage switching.

“It’s similar to a toll tag, where you deposit money into a prepaid stored value account,” said Hirschfield. “You prepay a sum of money to the provider, and to them, that money is a liability, just like a gift card.”

As additional legal options emerge and more competitors gain licenses, the market may begin to stabilize. But there is also potential for new offerings to support gaming, such as gift cards, expanded loyalty benefits, and other incentives typically seen in the retail gift card sector.

“From a gift-carding perspective, it’s a new industry for them to tap into,” said Hirschfield. “From the payment processing space, in the tech and infrastructure practices, there is a whole new set of companies that could be involved in that area of payment acceptance.”