10/5/2010 6:00 PM ET|
The next Visa and MasterCard?
Fed up with banks or spurned by them, millions of customers are turning to prepaid plastic that works like an ATM card. Two young companies could emerge as giants in this space.
But innovators have been on the case for a while -- helping fed-up customers like Clearwater, Fla., nurse Edna Jackson dump traditional bank accounts, and aiding many consumers simply spurned by banks.
Jackson got frustrated years ago with a constant barrage of large bank overdraft charges for overspending by just a few dollars.
So three years ago, she opted for what's now one of the hottest alternatives -- a reloadable prepaid card that lets her manage her money without ever dealing with a bank. "I really enjoy my card. I use it for everything," says Jackson. She likes the card so much she tells her friends to get one, too.
In fact, use of prepaid cards has been soaring, a trend that should continue for years both in the U.S. and abroad. The Mercator Advisory Group, a research firm, estimates that the $8.7 billion loaded onto reloadable prepaid cards in the U.S. in 2008 will grow to $118.5 billion in 2012, or 92% a year
That's exactly the kind of multiyear trend in which it often pays to invest. And just as the credit card world has Visa (V, news) and MasterCard (MA, news), this one also has two leaders: Green Dot (GDOT, news), whose stock you can buy now, and NetSpend, a private company preparing to go public.
How they work
With reloadable prepaid cards, users typically go to stores to put cash onto a piece of plastic that works like a debit card. Usually bearing a Visa or MasterCard logo, these cards can be used at most retailers. They also allow users to withdraw money from ATMs, pay bills and do transactions online.
While formally issued by banks, they are managed and marketed by other companies, and consumers never interface with the banks themselves.
You might think Visa and MasterCard would feel threatened by reloadable cards. Instead, they see them as a growth driver. These two credit card giants make money by licensing their brands and taking a little piece of every transaction. That's why both companies are also potential ways to buy this trend, along with Western Union.
The two newer names are the ones that show the strongest growth, though. Customers put $5.8 billion on Green Dot cards and $7.3 billion on NetSpend cards last year, and that will rise sharply by many estimates.
Operating revenue at Green Dot, which practically invented this space, more than tripled from 2006 to last year, to $234.8 million. Green Dot reported $15.5 million, or 29 cents a share, in earnings on $92.8 million in revenue for the second quarter. NetSpend revenue almost tripled from 2006 to last year, to hit $225 million. NetSpend expects to report $5 million to $7 million in net income on $65 million to $68 million in revenue in the third quarter, about flat from the first two quarters of the year.
No fee-free lunch
Why are prepaid cards so popular? Simply put, a lot of people are fed up with banks, and they're not taking it anymore. "The fees are what really pushed me away from the banks," says Jackson. "The fees can be outrageous. With the prepaid card, I don't have that worry."
Mind you, reloadable cards do charge fees. It's just that they can be lower, with fewer surprises. Prepaid card issuers charge anywhere from $3 to $5 for a card. Monthly fees run around $6, and it can cost up to $5 each time you put money on a card, though direct deposit of paychecks is typically free.
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