The allure of the fast-growing U.S. market for prepaid debit cards is pitting niche players like pop star Justin Bieber against financial giants including JPMorgan Chase & Co. (JPM:US) and American Express Co. (AXP:US)
Both Bieber and JPMorgan want to sell more of the cards, a part of the financial services business that holds as much as $1.7 billion in potential fees for banks seeking new revenue streams as they face growing competition and regulation.
Myriad players, including a firm catering to recovering drug addicts and alcoholics, are stepping up with their own products on the theory that some consumers may pay a slight premium for a card with novel functions -- or Bieber’s visage printed on it.
“The market for prepaid debit cards and payroll card products continues to grow at lightning speed, with new products racing to compete with mainstream consumer services like checking accounts,” Madeline Aufseeser, senior analyst with the Boston-based Aite Group, said in an e-mail.
Players also face more regulation and small firms will encounter pressure to consolidate as competition squeezes fees, she said.
JPMorgan and American Express are testing whether their sheer size and efficiency can bring greater market share by offering lower fees. Bieber’s partners and other competitors hope to fill smaller market niches and leave the nuts and bolts of the cards to others.
“We are leveraging assets, such as our ATM and branch network, that other players in the market don’t have,” Jonathan Wilk, consumer banking product and marketing executive at JPMorgan, said in an interview.
Michael McCoy, the chief executive officer of BillMyParents Inc. snagged teen heartthrob Bieber as a pitchman for a prepaid card that says it helps parents control their children’s spending. He said there will still be room for smaller players despite the presence of American Express and Chase.
“We’re not trying to boil the ocean,” McCoy said in an interview. “We’re very focused on our demographic and think we have a message and product design that is unique.”
The market’s appeal is already driving some acquisitions. U.S. Bancorp, (USB:US) the nation’s fifth-largest lender by deposits, said on Nov. 27 it would acquire FSV Payment Systems, a prepaid card program manager and processor.
Prepaid cards can take different forms, though they share the quality that consumers usually can’t spend more than has been deposited onto the cards.
One type of prepaid card mimics a checking account, allowing consumers to load and reload funds, have paychecks deposited directly, make purchases and withdraw money from ATMs. Employees can also get paid on a separate employer-issued card.
Americans are projected to increase purchases made with prepaid cards by 5.3 percent annually to $139.4 billion in 2017, according to Beth Robertson, director of payments research at Pleasanton, California-based Javelin Strategy & Research Inc. Aufseeser of Aite said the market, including general purpose and payroll cards, could reach $168 billion by 2016, with about 1 percent of that going to fees.
At the same time, the Consumer Financial Protection Bureau may write new rules for the cards. It sought public input about the prepaid market in May.
Consumers choose prepaid cards to limit their spending to money they actually have and to avoid fees on checking accounts. Banks can also offer the cards to people who don’t qualify for checking accounts because, for example, they have poor credit.
Many prepaid cards are also exempt from a federal rule under the 2010 Dodd-Frank Act that limits debit-card swipe fees, increasing their value to banks, Robertson said.
In much of the prepaid debit card market, as many as six kinds of companies may be involved in a single card, including the bank that holds money stored on the card, a payment-network owner, a retail distributor and a so-called program manager that oversees the web of business arrangements.
JPMorgan introduced its prepaid card, Chase Liquid, in July. American Express brought out its Bluebird brand, sold at Wal-Mart Stores Inc. (WMT:US), in October. Because both companies control some parts of the business already -- American Express has a payment network, Chase a branch system for distribution -- they say they can offer lower prices.
Cardholders of JPMorgan’s Liquid aren’t charged for cashing checks and loading them onto cards if they use one of the 17,500 Chase ATMs or 5,500 branches nationwide. Customers pay a flat monthly fee of $4.95, and face no limits on withdrawals at Chase branches or ATMs.
American Express abandoned monthly fees entirely, and doesn’t charge cardholders if they withdraw cash through its MoneyPass network, which has about 22,000 locations, provided they have their paychecks directly deposited to the card. Since it owns a payment card network, it earns a swipe fee from merchants who accept it.
“Because we own all parts of the value chain within AmEx we are able to offer it much better as an overall value proposition,” Laura Kelly, senior vice president of the Americas for global payment options at American Express, said in an interview.
Prepaid cards are still new to many consumers, which is why the entrance of firms such as JPMorgan and American Express is good for the industry, said Michael Hafer, senior vice president of global-stored value at Western Union Co. (WU:US) The Englewood, Colorado-based company offers prepaid cards in the U.S. and 11 other countries where the under-banked populations generally are high.
“Bluebird and Chase doing large-scale marketing helps the overall market,” Hafer said.
The cards contrast strongly with one of the industry’s misfires, the 2010 introduction and quick cancellation of the Kardashian “Kard,” as it was known. Reality-television celebrities Kim, Kourtney and Khloe Kardashian proposed to charge $59.95 for six months, a $1.50 fee for ATM withdrawals, and penalties if a card is declined.
“There’s nothing glamorous about a prepaid card that comes with a bunch of hidden fees and other gotchas,” Suzanne Martindale, then a policy associate for Consumers Union, the nonprofit publisher of Consumer Reports, said at the time.
Television host and personal-finance author Suze Orman attracted her own cadre of critics when entering the market in January 2012 with her self-branded “Approved Card” issued with a $3 monthly charge and other fees.
BillMyParents is betting that celebrity endorsements might not be such a bad thing if the card’s fees and a pop musician’s juice are perceived to serve a higher purpose: controlling your free-spending teenager.
The company already markets a card aimed at teens, which works on MasterCard Inc.’s (MA:US) network, allowing parents to receive notifications of where it is used, add funds in an emergency and block usage at some no-go spots such as liquor stores and casinos. McCoy, the CEO, said market research put “Justin at the top of the list” of the best celebrities to pitch the card.
On Nov. 28, it announced a deal with Bieber in which the pop superstar will be a “brand ambassador” for a similar card, and will produce videos promoting responsible spending by teens. The company will pay the singer an advance, monthly incentive compensation and royalties for each account opened, according to a regulatory filing. Bieber also received warrants to purchase at least two million shares of the San Diego-based firm’s stock.
McCoy said the contrast with the Kardashian venture is that the card is not built around its profitability for Bieber.
“We didn’t dumb down the card or increase the fees to do a deal in the celebrity space,” said McCoy, who left his position as president of credit cards at San Francisco-based Wells Fargo & Co. (WFC:US) to run BillMyParents.
Lauren Saunders, managing attorney in Washington at the National Consumer Law Center, said that BillMyParents seems to have avoided “pulling a Kardashian.”
“It looks like a pretty standard card -- not the best, not the worst,” Saunders said in an interview.
Eric Dresdale, co-founder and managing member of Next Step Network LLC, based in Highland Beach, Florida, has developed a concept for a prepaid card that caters to former addicts like himself.
A recovering alcoholic and prescription drug abuser, Dresdale started a prepaid card with his partners in October. It blocks vice-related purchases in hopes of encouraging virtue. The card can’t be used at liquor stores, bars, escort services, casinos or tattoo parlors. It bars cash withdrawals.
Dresdale says the features justify a $14.95 monthly fee -- about three times the industry average of $5, according to Saunders. Another fee of 50 cents is assessed when a person attempts to use the card in a restricted location.
“We’ve had a number of people try,” Dresdale said in an interview. “We look at it as a consequence fee.”
About 40 people have signed up to use the card, Dresdale said.
The proliferation of prepaid-card brands and the fragmented value chain means the industry is ripe for consolidation, Aite Group’s Aufseeser said. The result could be that prepaid-card strategies mimic the co-branding strategies of credit cards, where a celebrity or organization shares the profits from a card handled entirely by a major issuer.
“We will see in their place cards that are handled by the big issuers and program managers,” she said. Aufseeser thinks Discover Financial Services (DFS:US) should acquire NetSpend Holdings Inc., a program manager. Green Dot Corp. (GDOT:US), another program manager, could also be an acquisition target, she said.
“I think it’s entirely possible as the industry gets larger and consolidates over time,” said BillMyParents’ McCoy. “I think there would be a number of companies that would be interested in a product like ours.”
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