Debit & Prepaid

Prepaid Cards Target Bieber Fans, Ex-Addicts and the Fee-Averse

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. and American Express Co.

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.

BillMyParents' Pitch

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, 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.

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.

Blocking Vice

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 DiscoverFinancial Services should acquire NetSpend Holdings Inc., a program manager. Green Dot Corp., 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."

Fees Vary

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.