Visa, MasterCard Seek Growth Through Prepaid Debit Cards

NEW YORK (Dow Jones)--Credit-card companies are tapping an unlikely market - customers with no bank account and lousy credit.

For people who can't get a credit card because of poor credit, or none at all, prepaid debit cards enable them to make cashless purchases, online payments or over-the-phone transactions. It gives the banks that issue these cards - which work like a debit card but aren't linked to a bank account - access to 80 million American adults who don't have a checking account or credit card, yet still have an estimated $1 trillion in income. Banks are reaching these customers through retail prepaid debit cards as well as payroll and government- benefit cards.

Even heavyweight retailer Wal-Mart Stores Inc. (WMT) is getting in the game, announcing earlier this month that it would expand its non-banking financial services - including check-cashing and money orders - and that it would begin issuing a Visa debit card under its name.

Visa International and MasterCard Inc. (MA), the payment-card giants, see prepaid cards as a key growth area. Todd Brockman, senior vice president of prepaid products for Visa USA, said they complement existing credit and debit products.  David Robertson, publisher of the Nilson Report, a consumer-payment systems newsletter, said prepaid cards give credit-card companies a slice of transactions that were previously mostly cash. It could also establish records of new customers-potentially leading to those customers being offered debit or credit cards in the future.

Growth opportunities could provide some relief for Visa and MasterCard because the debit sector has become more competitive. Earlier this month, a New York district court judge ruled unlawful Visa's practice of charging fees to any large financial institution that decided to issue debit cards under the MasterCard brand. The move, which discouraged defections, helped solidify Visa's strong position in the debit market.

Prepaid cards are still years away from being a significant source of revenue for the card companies or getting a significant slice of that $1 trillion in unbanked income. Prepaid cards processed $50 billion worth of transactions in 2006, and that includes a corporate-incentives card long issued by American Express Co. (AXP).

By contrast, last year Visa, MasterCard, American Express and Discover cards issued in the U.S. were used in $2.4 trillion of credit and debit card transactions, according to Nilson. Visa and MasterCard said they're paid a franchise fee by banks that issued a Visa- or MasterCard-branded card, and are also paid fees based on purchase volume, similar to their other card products.

Obstacles for future growth remain. Gwenn Bezard, an analyst with Aite Group, a financial-services research and advisory firm, said it will be difficult for prepaid cards to represent a large percentage of revenue for Visa and MasterCard because core credit-card operations and traditional debit cards are already so well established.

Alternative To Check-Cashing And Direct Deposit.
Much of the growth so far has been limited to Visa and MasterCard-branded gift cards and government benefit programs. Retail cards are also beginning to catch on.  For employers, paying employees with prepaid cards eliminates the costs associated with paper checks -printing and sending the checks, as well as the need to replace mutilated checks.

"Prepaid cards have become very popular in certain employer segments where employees don't have direct deposit, like temporary employment agencies, transportation and food and retail services," said Scott Galit, senior vice president of prepaid operations for MasterCard.  States and companies pay a one-time cost, which varies according to the program being implemented, to provide an employee or benefit recipient with a card. There is generally no restriction on how funds can be used, just like cash, and identification isn't required for a sale.

Amerco's (UHAL) main operation, U-Haul, fully implemented a Visa prepaid payroll card program in 2002. The card meant employees didn't need to go to the office to get a paycheck and saved on labor for the company.

"It took my crew in payroll a good day to sort the checks - four people full- time for a day getting checks sorted and ready for distribution," said Sam Austin, director of operations for U-Haul.  U-Haul said that 15% of its employees use Visa payroll cards, with most of the rest on direct deposit. Typically, checks are only issued when new employees haven't yet signed up for direct deposit or a payroll card. Between issuing prepaid cards and pushing its direct-deposit program for employees with bank accounts, U-Haul saved $1.10 per payment, or about $500,000 a year.

"Electronic payment was really a boon during 9/11 because planes were grounded and many payments couldn't be delivered, and during Katrina we couldn't even find some of our employees in Louisiana and Mississippi," Austin said. "A lot of (U-Haul) locations were underwater," but employees that weren't dependent on paper paychecks were still able to receive their salary.

Tax-preparation and personal-finance company H&R Block Inc. (HRB) offers customers the option to put their tax refunds on prepaid MasterCard-branded debit cards through its H&R Block Bank program.  The company said customers who signed up - 40% of whom didn't have a checking or savings account - saved $30 million on check-cashing fees. H&R Block has more than 1 million active cards, and its customers reload about $1.2 million a day. 

A representative for H&R Block said there's a $1.50 charge for cash withdrawals at ATMs, but added that the company's employees talk to clients about ways they can avoid fees, like getting cash back when making grocery-store purchases. There is no fee for signature or PIN purchases, voice or Internet account inquiries, payroll direct deposit or reloading the card at stores.

From Food Stamps To Debit Cards
Thirty states have or will implement a Visa prepaid program in lieu of child support or other types of checks, Brockman said.  "We started a pilot in early November and didn't start with large volumes until mid-December," said Sarah Dixon, director of the state of Indiana's debit- card program for unemployment benefits. Dixon said the biggest obstacle was resistance to a new, unfamiliar system. The state implemented the cards in small batches of about 8,000 or so a week to stay out of the headlines and avoid a popular backlash. About 80,000 cards have been mailed since November.  Claimants had to learn that they would incur fees if they withdrew from their account more than once a week, or from out-of-network ATMs, but Dixon added that many of the fees were waived in the beginning. Regardless, Dixon said card fees were small compared to check-cashing fees.

The Nilson Report's Robertson said that compared with what unbanked consumers pay in check-cashing and money-order fees, prepaid cards are probably less expensive, but not as cheap as traditional credit or debit cards. Robertson also said fees vary widely depending on the issuer.  Indiana will save $1.8 million a year in check-printing and mailing costs, the unemployment office said.

My First 'Credit Card'
A prepaid cardholder doesn't have to wait for payday to add money to a card. Visa has a partnership with Safeway Inc. (SWY) to allow prepaid users to load their cards at cash registers at Safeway's grocery stores. Safeway, through its prepaid-card and payments unit, Blackhawk Network, also sells the cards as a budgeting tool for teens, college students and travelers.  Anne Coleman, a Diablo, Calif., homemaker who's retired from her family's building supply company, got her first reloadable card as a gift.  "I go to Safeway to reload it," said Coleman, who already has a traditional bank account and credit cards. She especially likes using the prepaid card for online purchases, she said, because it's anonymous and because an identity thief would only have access to what's loaded on the card.  While Coleman doesn't use the card as a budgeting aid, many of the children in her extended family do.  "I buy them for gifts for bar mitzvahs and graduations, or for when they go off to college," said Coleman, who estimates she buys 15 cards for holiday gifts. "Some of the kids put their allowance on it, and they love to have a 'credit card.'"

-By Jonathan Vuocolo, Dow Jones Newswires; 201-938-5964; Jonathan.Vuocolo@ dowjones.com