Visa, MasterCard See Gold in Prepaid

The electronic payment processors, soaring as consumers increasingly turn to their cards for everyday purchases, see a growth opportunity in prepaid cards.
Publish date:

The deli patrons catch tossed burgers and drinks without a second to spare, as they move to the music in quick procession to the register and pay for it all with their


(V) - Get Report

debit cards.

The music screeches to a halt, however, when one unenlightened customer stops to pay in cash. People in line behind him bump into each other, trays clatter to the floor, as the man sheepishly looks over his shoulder.

"Life takes faster money," the commercial's voiceover says. "Life takes Visa."

The ad, which first aired in late 2006, lays bare Visa's strategy -- one shared by rival


(MA) - Get Report

-- of capitalizing on consumers' increasing reliance on plastic to pay for everyday purchases, rather than simply big-ticket items. Now, the two companies are looking to prepaid cards as another potential growth area, as they attempt to continue strong growth inside the U.S. and -- more important -- globally.

"The big vision is that ... people talk about prepaid in the same way they talk about credit and debit," says Elizabeth Buse, Visa's global head of product, in an interview with

. "If we're talking a few years from now, my vision would be we're not talking about prepaid as an innovation, we're talking about prepaid as the third mainstream consumer product."

As the economy worsens, MasterCard and Visa have so far remained relatively unscathed. While financial stocks have tumbled from the ongoing credit crisis and housing downturn, Visa's stock is up 50% since its first day of public trading in late March and trades at nearly double the IPO price. Two years in as a public company, MasterCard's stock is up more than seven times its IPO price.

Revenue and profit at both companies have been in the double digits and are expected to stay there over the next few years. The companies also do not extend credit to consumers, instead issuing their cards through bank partners and collecting a fee on each transaction. As U.S. consumers struggle to pay their bills, loan delinquencies and defaults have taken a bite out of earnings at other card-based companies such as

American Express

(AXP) - Get Report


Discover Financial Services

(DFS) - Get Report

, which do hold consumer debt.

Prepaid cards are often thought of as simply travel and gift cards, which include a set amount and expire once the amount is fully used. But their potential extends far beyond that, the companies say. Both Visa and MasterCard are tapping into traditionally cash- and check-based markets like employer payroll systems, federal and state government disbursements -- such as child care benefits and unemployment funds -- health care services and rebates.

"We think prepaid products are uniquely good for those segments and we believe we are uniquely well-positioned to penetrate those segments because we start with such a strong leadership position in debit and debit processing," Buse says. Like charge cards and debit cards, Visa and MasterCard receive a fee per transaction for every prepaid transaction.

Opportunities Abroad and Overseas

The latest trend is "reloadable" prepaid cards, in which customers can replenish card funds instead of having a set amount.

JPMorgan Chase

(JPM) - Get Report

plays a significant role in the state disbursement industry, among others.

U.S. Bancorp

(USB) - Get Report

has taken an interest in general, reloadable cards, which could be attractive to a huge, largely untapped market: Low-income or immigrant customers and others, such as teenagers, who do not have traditional checking or savings accounts. Such spenders typically turn to check-cashing services, payday lenders, money orders and tax refund anticipation loans in order to get cash -- often at high fees, according to Celent.

"There is an old saying, 'It's expensive to be poor,' and it really is," says Red Gillen, an industry analyst at Celent. "You pay to cash your check. You pay for money orders. For a lot of the unbanked, you pay to send funds. And then throw in indirect costs, such as travel to go to a check cashing agent. It's a very expensive way to live. And so the cards have a way to reduce costs and ease up these peoples' lives."

Buse says banks are eager to get access to customers who have been reluctant to set up accounts. And the market is significant. According to a December report by Celent, the so-called unbanked population in the U.S. alone is roughly 36 million, representing $260 billion in aggregate income.

And there is plenty of opportunity there. Celent estimates that the potential market size for the so-called general purpose reloadable cards in the U.S. is roughly $192 billion. In 2006, only $710 million was estimated to have been loaded on general purpose, reloadable cards in the U.S., compared to actual spending via credit and debit cards of $2.88 trillion, Celent says.

Looking outside the U.S., the potential for these cards is enormous, others say.

"We believe that there will be rapid adoption of prepaid in these emerging

countries alongside debit," Buse says. "Debit grew so substantially in the U.S. because we all had checking accounts. In these emerging economies today they don't usually have an electronic payment relationship."

Global prepaid card spending will be nearly $680 billion by 2015, Laura Kelly, head of MasterCard's Global Prepaid Product Development and Management, said during the company's investor day last month. Kelly cited a figure from the Boston Consulting Group.

"In the mature markets, U.S. for example,

prepaid is growing at double-digit rates. In the emerging markets it's growing at triple digits," she says.

Battle for Market Share

While MasterCard remains far behind Visa in the debit card space -- something it is vigorously trying to change -- it's unclear which payment network has the leg up on the prepaid market. But David Robertson, publisher of

The Nilson Report

, a newsletter for the payments industry, says Visa has generally a larger share of the government sector, while MasterCard is bigger in gift cards.

But both companies are working toward grabbing a larger market share.

More than 30 states in total are using or in the process of implementing Visa prepaid cards, the company says. Last week, Visa won a contract with the state of Michigan to disburse unemployment funds through its prepaid cards.

Last year, Visa created the Wal-Mart Money Card, a reloadable prepaid Visa card for the unbanked who use


(WMT) - Get Report

for basic money services. The card is issued by GE Money, a unit of

General Electric

(GE) - Get Report


MasterCard won a contract with the Treasury Department and


(CMA) - Get Report

as the card issuer to offer prepaid debit cards to the unbanked for Social Security payments. The contract, announced in January, will offer receivers faster access to their Social Security, without the need for high check-cashing fees.

MasterCard has also been working with tax services provider,

H&R Block

(HRB) - Get Report

, over the past few years to offer customers prepaid cards with their refund anticipation loans on the cards.

Still, challenges exist in the small but growing market.

Unlike a debit card that may have overdraft protection, customers cannot exceed the amount of money that's on the general purpose reloadable cards when making a purchase. Therefore, it's important that customers be aware of how much money is on the card and are able to get that balance from the merchant. Customers also must be able to use both the card and another form of payment for the same purchase if needed and, most importantly, easily place more money on the card, Visa's Buse says.

Though the uses of prepaid cards will continue to grow strongly over the next few years, they will still represent a tiny fraction of personal consumption expenditures a few years from now, analysts say.

"I think prepaid is a great story,

but it's going to take many, many years before you start to see prepaid meaningfully impacting Visa's growth prospects," says Aite Group research director Gwenn Bezard. "In order to make a difference in their volumes, you need a lot of transactions. It is a tiny portion of their overall activity."

Most of the growth will have to come from something else -- credit, debit and emerging categories, he adds. "They have to get people to use the accounts more and more, but they have to get people in accounts where they haven't used before," such as bill paying for utility bills, quick service restaurants, and commercial payments.