The Stored Value Storm 25 Years in the Making

In May 2000, Sujit "Bob" Chakravorti, PhD, an economist in the Emerging Payments Department at the Federal Reserve Bank of Chicago, published a paper titled “Why Has Stored Value Not Caught On?” 25 years later, Chakravorti’s question remains salient.

Stored value, defined as funds that are preloaded for future use at a merchant, is just starting to be discussed as an innovation opportunity in loyalty and payments and is nowhere near the scale of debit and credit cards. Meanwhile, new payment solutions such as BNPL have become seemingly ubiquitous, especially at large merchants, despite being fairly new entrants to the financial services ecosystem.

This may sound surprising. After all, Starbucks’ stored value program is widely cited as an excellent example of one that almost makes the coffee brand operate like a “bank” with $1.77b in unredeemed balances in 2024. Additionally, these balances can be used as an “interest free loan” for merchants and a portion can be recognized as revenue - such as the 40% of stored value cards that are lost and never used by 18-29 year olds.

Another example is Target. Accrue’s CEO Michael Hershfield recently had an insightful post about Target’s RedCard program which generated “17.7% of their $25.2B in sales” in their latest quarter. He also notes that members of the program spend 5x more than the average Target customer, which has huge correlations with ticket size and customer lifetime value.

However, Starbucks and Target are outliers. It’s hard to come up with other instances of merchants that leverage stored value to its fullest potential. This is especially true of verticals where stored value seems extra-logical. In travel, for example, where 66% of consumers save up towards making a future purchase, wouldn’t it make perfect sense for airlines, vacation rentals, etc. to capture future spend with their brand?

That brings us to the question Chakravorti asked 25 years ago: why has stored value not caught on?

It’s worth looking at the contentions he posited in his original paper and seeing if any remain true today, and if so, how stored value solutions can overcome long-term challenges.

Contention 1: Lack of comparative advantage over other payment instruments

Verdict: Partially true

Traditional stored value products such as gift cards don’t really have an advantage over other payment instruments for the consumer. They’re used in lieu of giving cash as a gift and to either force the receiver of a gift card to use funds in a specific manner or indicate that the gift giver has a semblance of the receiver’s personality. In other words, there’s typically no loyalty component or monetary benefit of using a gift card. Some airlines do offer stored value products that are not gift cards, such as United Airlines’ Travel Bank. However, like gift cards, there’s no real loyalty or monetary play here. Some financially savvy customers may store funds in Travel Bank to take advantage of credits offered on United Airlines “spend” by their credit card, but the use cases are limited.

That being said, stored value products do have comparative advantages over other payment instruments - they’re just underutilized today.

On the merchant side, stored value can result in cheaper transaction processing fees than expensive credit card (~2.4%) and BNPL (~5%)  fees. More importantly, stored value creates a relationship between the merchant and customer and generates a strong likelihood of the customer making a subsequent purchase at the merchant. In competitive verticals like airlines where the majority of consumers view the product (in this case a flight) as a commodity, stored value can change a customer’s purchase lifecycle from: A) choosing a place to fly to and then an airline to fly with to B) an airline to fly with and then choosing a place to fly to.

On the consumer side, stored value can give customers an incentivized way to save up for big purchases over time and avoid debt - but this only works if there’s a rewards component to the stored value product.

The rewards component is powerful for consumers. The key architect behind Qatar Airways' Qsuites program, Oliver Ranson, recently noted in an Airline Revenue Economics article titled Loyalty, Payments & Behavioural Economics that rewarding customers for using stored value taps into two behavioral economics phenomena: loss aversion and hedonic preferences. The former argues that customers who store value over time don’t want to miss out on the rewards they’ve earned so far should they not make a purchase, and the latter simply states that customers will feel emotional gratification when they receive rewards for performing actions (i.e. storing value) over time.

Overall, traditional stored value products like gift cards still don’t have a comparative advantage against card products and BNPL - but entrants that combine stored value with rewards have a huge opportunity and advantage versus their debt-based or non-loyalty-based counterparts.

Contention 2: Consumers and merchants need to adopt stored value simultaneously or it won’t gain traction

Verdict: True

Chakravorti used the example of BankAmericard’s launch of 1958, the first consumer credit card in the US, as an example of simultaneous adoption. He notes that Bank of America, where the concept of BankAmericard sprouted, aggressively encouraged merchants in the Fresno, California area to accept the card or risk losing customers to merchants who did. In parallel, Bank of America sent out 60,000 already-active credit cards to its customer base in Fresno. Though the test led to fraud losses, huge advertising costs, and the dismissal of the Bank of America staff behind the launch, the test was actually a success. Customers and merchants adopted the card, and BofA’s credit card profits grew from $179k in 1961 to $12.7m by 1968.

The BankAmericard example illustrates the spark that’s needed for stored value adoption.

BNPL more recently had its “BankAmericard moment” during the ecommerce boom of the peak pandemic era of 2020-2022 and its inertia continues to this day.

Stored value needs a similar moment. Some potential inflection points include:

• A swift increase in credit card or BNPL losses (a bleak tailwind)
• A large innovative merchant such as JetBlue or Expedia Group pouring marketing dollars into stored value to encourage rapid adoption
• A stored value offer or product goes viral and puts a previously unknown merchant into the spotlight

There are other black swans, but by nature, we won’t know them until they’ve occurred.

From a technology perspective, stored value products that are easy to integrate for merchants and intuitive and simple to use for consumers are best poised to succeed at the inflection point.

Contention 3: Stored value is not inoculated against fraud risk

Verdict: Partially true

The digital wallet and payments ecosystem has evolved significantly since Chakravorti’s 2000 research was published. Fraudsters, however, evolved along with it.

Chakravorti was rightfully concerned at the time about stored value being especially prone to the physical theft and use of stored value cards by bad actors, but that risk is minimal today for digital-only stored value products.

Today, new flavors of fraud exist. Digital account takeover, identity theft, and social engineering can still result in customer frustration and damage to a merchant’s reputation. However, the likelihood of stored value fraud is less probable than lending and other card products due to the fact that stored value is typically closed loop. Fraudsters are less incentivized to go after stored value accounts due to limitations on how funds can be used and won’t have the same purchasing power as taking over a credit card account or having direct access to a user’s deposit account.

Moreover, stored value service providers can offer built-in fraud prevention tools - especially when partnered with a bank for KYC and AML capabilities.

Conclusion

We’re at the precipice of a stored value storm 25 years in the making.

Stored value has faced challenges over decades from rival payment methods and the lack of an inflection point in adoption. While stored value leaders like Starbucks and Target have reaped the rewards of stored value, there’s a ton of upside potential for existing and new merchants to build out their own ecosystems by partnering with fintechs. Loyalty and retention, lower payment processing costs, and reforging the relationship between merchant and customer are the opportunities at hand.

Our view at Obsidian is that this storm won’t blow over. It’s going to surge.