Prepaid debit cards gaining currency

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Private companies such as First Data Corp, owned by Kohlberg Kravis Roberts & Co KKR.UL, NetSpend Corp, and GreenDot Corp, which recently filed for a $150 million IPO, are also some of the major players in the industry.

CARD NETWORKS JUMP IN

Visa Inc and MasterCard Inc process payments from prepaid cards. Although these transactions account only for a small part of their business, MasterCard called prepaid "a large opportunity" and "a high growth area" during its quarterly earnings call last month.

Visa said in April that prepaid is on its way toward materially contributing to its revenue and may report the business from prepaid transactions separately as it goes into 2011.

In a report last year, the Federal Deposit Insurance Corp estimated that at least 25.6 percent of U.S. households, accounting for about 60 million Americans, were unbanked or underbanked.

"Prepaid is still a niche product in a developmental phase. But relative to the growth of other products, it's still something to talk about," said John Grund, a partner with payments firm First Annapolis Consulting.

"This is a huge priority for both Visa and MasterCard, as a growing market where there's room to run for both parties."

MONEY TRANSFER GOING PLASTIC

Western Union, which had issued over 365,000 prepaid cards at the end of the first quarter, intends to double that number and have more than 750,000 cards in use by the end of the year, the company said in April on its post-earnings call.

Some analysts say Western Union, the world's largest payment-transfer company, may be positioning itself to benefit from any changes to the traditional means of remitting money.

"Western Union is being smart about making sure that if there are changes, they are a part of it," D.A. Davidson's John Kraft said.

Prepaid cards are also increasingly becoming a means of paying employees. In September 2009, Wal-Mart started paying its employees who did not receive direct deposits with loaded prepaid cards instead of checks.

"The number one factor driving it is cost savings (for the employers), and saving money on manual processes and paper checks," Signal Hill's Tandon said.

Workers are also expected to benefit from payroll cards because of the security and convenience that comes with the cards, as they can be used at outlets where debit cards are accepted, as well as at ATMs to withdraw cash.

REGULATORY HURDLES

But regulation could become a hurdle to prepaid-card issuers. A Senate amendment to the financial reform bill would limit the fees that debit card issuers, including prepaid issuers, could collect from merchants.

Banks currently receive so-called interchange fees from merchants every time a consumer pays for something with plastic.

"Some of the regulations could potentially dampen prepaid card growth," MoneyGram CEO Pamela Patsley said.

By restricting interchange fees, the amendment would reduce the profits available to prepaid-card issuers and indirectly to Visa and MasterCard.

"The Durbin amendment is the big concern right now because of what it would do to the debit interchange, and it specifically singles out prepaid cards as being part of that," Ben Jackson, a senior analyst at Mercator Advisory Group said.

(Editing by Anil D'Silva and Vinu Pilakkott)