Einhorn says the short-term nature of the prepaid card can actually be one of its appeals. Using a prepaid card means you don't have to lock into a long-term bank or checking account to get a debit card. "You pay and use it for a month, and that is it," says Einhorn.

Another risk to watch for is that early investors and Streit, who founded the company, still own about 59% of the stock. They will be free to sell when lock-ups expire around mid- December, which could put downward pressure on the price.


NetSpend is the second-largest player in the reloadable prepaid space, with about 2.1 million active cards. It's in about 38,000 retail locations, but it has more of a presence at payday lenders and check-cashing outlets. One challenge for NetSpend is that Green Dot has locked it out of many of the most important retailers. But a plus for NetSpend is that it has more direct payroll deposit relationships -- with about 800 employers. People who put their paychecks on prepaid cards tend to keep the cards longer and use them more often.

NetSpend is a private company, but it is pricing shares next week for an IPO in the near future. Given the hot growth rates for this sector, and the sharp rise in Green Dot shares after its IPO, even if the stock has pulled back lately, demand for NetSpend stock in the IPO should be robust.

For retail investors, pre-IPO shares will be hard to get, unless they have large brokerage accounts at one of the underwriters, which include Goldman Sachs Group (GS, news), Bank of America (BAC, news) and William Blair. Be wary about chasing shares if they shoot up immediately after the IPO.

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Visa and MasterCard

These two credit card networks like reloadable prepaid cards because they offer three ways to make money. Visa and MasterCard collect licensing fees for use of their brands, and they each offer networks that prepaid card issuers can use when customers reload cards.

Finally, the more consumers use plastic, the more card-related fees they can collect on retail transactions.

Prepaid cards have been the fastest-growing form of payment at Visa for several years, but from a small base. Its brand is on more than 135 million prepaid cards in about 10,000 card programs in 110 countries.

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MasterCard is in six of the world's largest prepaid programs, and it is about to launch a new one with Univision, the TV channel that caters to Hispanics. Currently, reloadable prepaid cards are "a small part of revenue, but a big part of growth," says Laura Kelly, the head of prepaid cards at MasterCard.

Morningstar analyst Michael Kon has a four-star rating on Visa, the second-highest Morningstar rating. He has a three-star rating on MasterCard. But using these giants to invest in this trend is tough, since prepaid cards are such a small part of the companies' total business.

Western Union

Customers who already use Western Union instead of banks to handle cash and checks are exactly the kind of people who might use prepaid debit cards. Prepaid cards are "very much in our sweet spot," says Western Union's Stockdale. "Our money transfer business and bill paying business is very much the same customer."

Western Union has only 650,000 prepaid cards in circulation, but it is trying to win over customers by offering cards with no upfront costs or monthly fees.

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Western Union
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Another advantage for Western Union is that it has 430,000 offices in 200 countries and territories. The "un-banked" population is huge in many emerging countries where Western Union has a strong presence, including Mexico and Brazil. Barclays analyst Darrin Peller has an overweight rating on the stock in part because he thinks Western Union will be able to take advantage of this network to sell a lot of prepaid cards to all those people without bank accounts. Unlike Jackson, in Florida, they've never had bank fees to gripe about. So they just might give Western Union an earful about its fees, instead.

At the time of publication, Michael Brush did not own or control shares of any company or fund mentioned in this column.

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.