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Prepaid card use rising as credit cards stutter

Summary

As credit cards stumble in a unpredictable economy, three companies are rising stars in the prepaid market.

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Prepaid cards

Like swapping a Lamborghini for a Ford Fiesta, some credit card users are switching to the safer, less expensive payment vehicle of prepaid cards as the economy continues to travel downhill.

They’re known as general purpose reloaded cards, and they serve as budgeting tools for those looking to trim spending, and as mobile bank accounts for those just needing a card-based way to spend. The cards are convenient: They can be used at any merchant that accepts the Visa, Discover, American Express or MasterCard logo on the card, and they are growing in use: About $7.1 billion will be loaded on them in 2009, up from $2.1 billion in 2007, according to the Mercator Advisory Group, a research and advisory firm for the payment industry.

“Because of the economy, there is a shift with more consumers going from credit to debit and prepaid,” Brent Watters, director of marketing for Mercator Advisory Group says. “People are reluctant to use credit, and it’s pushing them to another payment vehicle.”

Three companies, Green Dot Corporation, the NetSpend Corporation and nFinanSe Inc., are helping with that push by managing and distributing the prepaid cards to a large number of supermarkets, drug stores and check-cashing services. The companies also provide the software, hardware and customer support needed to control all the cards, according to a New York Times article.

It works like this: Say you are spending too much on dinner every week and you need a way to budget that money. Instead of allotting some cash in an envelope for dinner, you go to Walgreens, Dollar General, Albertsons or another retailer and pick out a prepaid card. You buy the card for about $6 and load whatever amount of money on it you’ll need for a week of dinner. The company that distributed the card, whether it be nFinanSe Inc. or another, gets some of that $6, plus maintenance, reload and other fees, and you get a well balanced dinner.

“Even folks that already have a debit card are using a prepaid card to control spending or to budget,” Watters says.

Other than consumers who need to plug their spending, folks without a bank account are also looking at prepaid cards because they don’t include the credit checks and minimum account balances banks require. They’re convenient for large purchases, too, which is nice for someone who can’t get or doesn’t want a credit card.

No one can seem to agree as to how many Americans are without a bank account, so the statistic varies greatly — somewhere between 10 and 56 million. Determining that number is difficult because some researchers count users of prepaid cards as having a bank account, and some don’t. And the diverse banking regulatory system, with some banks federally regulated and some regulated by states, makes it tricky to sum up how many accounts there are and how many there aren’t.

Regardless what that number might be, it’s certain the companies providing prepaid cards are growing. Green Dot started selling general purpose reloaded cards in 2001 to chains such as Kroger and Walgreens. Today, they are selling to the retail giant Wal-Mart and pulling in $350 million in annual revenue, according to their website. Austin, Texas-based Netspend has about $180 million in annual revenue and 300 employees. And nFinanSe, which was founded in 2000, now has 80,000 cards distributed through Dollar General and Winn-Dixie supermarkets.

So whether you’re looking to reduce spending or just a new way to spend, be on the lookout for these payment vehicles to take off in the next couple years.

See related: 9 ways to budget with a prepaid card, The pros and cons of prepaid debit cards?, All about the Baby Phat Prepaid Visa card, 9 things you must know about prepaid cards

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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