PURCHASE, N.Y. — MasterCard Inc., a longtime laggard in debit, is increasingly pinning its hopes of catching up with Visa Inc. on prepaid cards.

The prepaid market remains tiny, but these cards are gaining popularity in the recession. And while the traditional U.S. debit market is dominated by large retail banking companies whose card-branding decisions largely determine the networks' market share, in prepaid the field is wide open.

"Prepaid is a small fraction of the overall debit spend. But it's growing a lot faster," Timothy H. Murphy, MasterCard's group executive of core products, said at its Purchase headquarters last week. "It's one of the things that, if we continue to outperform in the space, can really help us."

In the last nine months, MasterCard has lost two top U.S. debit issuers. In September Royal Bank of Scotland Group PLC's Citizens Financial Group Inc. said it would switch to Visa. And this month JPMorgan Chase & Co. said it would convert much of the debit portfolio of Washington Mutual Inc. — once MasterCard's largest debit issuer — to Visa.

The loss of such business has been particularly hard for MasterCard to offset in the recession, as consumers have switched much of their spending from credit to debit, and banking consolidation has decreased the overall number of portfolios in play.

But though MasterCard executives say it is not giving up the fight for share in the traditional debit market, it sees a bigger opportunity to gain a foothold in prepaid. "The relative size of prepaid to debit ultimately remains to be seen, but the opportunity is vast," Murphy said. He cited a study that MasterCard commissioned from Boston Consulting Group Inc. a year ago, which predicted that the global prepaid open-loop market would grow to about $680 billion by 2015, or more than three times its size in 2007. "We hope to grow faster than the market between now and 2015," he said.

Still, that number pales next to current worldwide debit volumes. MasterCard alone reported $735 billion in worldwide debit volumes for 2008.

Another reason MasterCard likes prepaid is there are more potential customers. "One of the really interesting opportunities in prepaid is the different partners from our classic partner set," Murphy said. "There's no question that some of the big banks are interested in prepaid and we're working with them. But the reality is that a lot of prepaid providers are smaller financial institutions, they're program managers, they're processors. Those institutions, I think, are capable of driving the growth of prepaid, and one of the things you need to be able to do to grow prepaid … is to work with them."

Philip J. Philliou, a former MasterCard executive and a partner in the Philliou Selwanes Partners LLC consulting firm, said prepaid could serve as "the entry point for MasterCard into Visa banks, for debit. Prepaid is still essentially a debit program, just marketed differently."

Murphy said that last fall, there was a "shifting of focus" from debit to prepaid for MasterCard's Integrated Processing Solutions system. A year ago, when the system was unveiled, Murphy said it would "help us win business" in debit. But last week he said the system is gaining most of its interest from prepaid providers, like Swiss Bankers Prepaid Services Ltd. and Travelex Group. (MasterCard has announced one traditional debit customer for the system, Security Service Federal Credit Union.)

"The pipeline is richer on prepaid than … we would have initially expected, partly because of this environment," Murphy said. "We've said, 'Well, this is an area where you need to focus.' "

JPMorgan Chase — which acquired Wamu's banking operations last year — confirmed Wednesday that it would move "a substantial portion" of Wamu's debit portfolio to Visa over the coming months. MasterCard spokeswoman Naya Larsson said the switch would not materially affect its revenue. "We continue to enjoy a strong global relationship with Chase," she said, and "we have the opportunity to retain a portion of the Washington Mutual debit portfolio."

Last week, before news of the portfolio switch broke, Murphy said: "Debit's critical. … We recognize and acknowledge there's a scale disadvantage" for MasterCard in the business. But he sounded an optimistic note. "It isn't easy, but we're sticking at it," he said. "This year, a number of the larger players are looking at their branded decisions. I believe there are a lot more … opportunities to win than opportunities to lose. … There's nothing more important than being engaged with those big players today, and that's what we're doing."

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