Normally the province of the underbanked, prepaid cards are entering the consumer mainstream.
At the same time the recession is leading credit card issuers to raise their underwriting standards and yank or reduce customers' lines, many budget-conscious consumers are switching from credit to debit to control their discretionary spending.
Observers say these trends have created an opportunity for prepaid providers to sign up a different type of customer.
"Issuers are tightening credit, and where they're tightening credit are the most credit-needy segments, so that certainly opens the door for prepaid products to gain share and penetrate that segment," said John Grund, a partner in the card-issuing practice at First Annapolis Consulting Inc.
Voluntarily or not, some consumers have already made the switch from credit to prepaid, according to a study published Monday by the Network Branded Prepaid Card Association, a trade group, and the Center for Financial Services Innovation, a nonprofit affiliate of Chicago's ShoreBank Corp.
Of the 400 prepaid cardholders surveyed in March, 47% said they used to have a general-purpose credit card, and 33% said they still had one.
Of those who had or once had such a card, 74% said they were "somewhat" to "not at all" satisfied with the experience.
The reloadable prepaid card "is a noncredit payment tool that has virtually ubiquitous use that is attracting more people either because their credit is challenged, or because it's a budgeting tool," said Kirsten Trusko, the trade group's president and executive director.
Though she did not have specific statistics, Trusko said "a lot of our members are seeing dramatic growth."
One such member is Green Dot Corp., a prepaid distributor that helps run programs for retailers like Wal-Mart Stores Inc. and banking companies like Citigroup Inc. and also sells cards bearing its own name.
Mark Troughton, Green Dot's president of cards and network, said the Monrovia, Calif., company, whose customers currently number "in the millions," is "well exceeding" its forecast that the figure will grow more than 50% this year.
Troughton predicted that the banked customers would either replace their traditional checking accounts or maintain them but switch most of their spending from a regular debit or credit card to a prepaid card.
"We're seeing prepaid becoming much more attractive to a broader segment of the population," he said.
"The current economy is to prepaid what high gas prices were to hybrids. … This is a transformational event."
That opinion is commonly held among prepaid executives, according to an Aite Group LLC report published last week on a survey of executives from 21 such companies. It found that 71% expected the recession to have a "somewhat to very positive impact" on network-branded prepaid cards.
Gwenn Bezard, a research director at Aite and the author of the report, said he expects prepaid growth to be largely driven by consumer dissatisfaction with the pricing on traditional checking accounts.
"You'll have more people not able to afford the checking account anymore and probably switching to prepaid cards," he said. "The need for plastic is there and is not going to go away."
About 51% of Green Dot's cardholders use their prepaid card in addition to a traditional bank account, Troughton said.
"I think that a significant portion of those guys are using it as an alternative to credit, and that's why they're maintaining their existing bank account," he said.
"We think prepaid's big days lie ahead, as people look at how they can broaden the offering and provide greater value and control to the traditionally banked, and how do they start to appeal to mainstream consumers."
Most industry members still see the prepaid card as an alternative to the traditional checking account, not as a rival to the credit card.
Prepaid cards can carry significant fees for up-front purchase, reloading and monthly maintenance, but those fees can be less onerous for some consumers than the costs associated with traditional checking accounts.
(An Aite report released in February found that roughly 9 million households pay more in overdraft or other fees associated with their checking accounts than they would in prepaid card fees.)
"There's a real opportunity here for banks to offer a product that's part of their better checking account suite," said Jennifer Tescher, the director of the Center for Financial Services Innovation. "This is particularly true in this moment when a huge percentage of prepaid users complain that overdraft protection drove them out."
The recession and its effects on consumer behavior have "the potential to be a game-changer, but general awareness of this product is still relatively low, and penetration is still relatively low when compared to the adult population," she said.
"A lot depends on broader efforts by the industry to increase awareness and better market the product."
Bankers in the prepaid field agree that their peers need to do more to market the products beyond the traditionally underbanked.
"There's opportunity on the banks' books for customers that are there that they may look at as less than profitable," said Mick Conlin, the senior vice president of agent products for Meta Payment Systems, a unit of Meta Financial Group Inc. that helps other financial institutions market the prepaid cards issued by the Storm Lake, Iowa, company's MetaBank.
"The nonbank marketers have pretty much dominated the prepaid space since its inception, and the banks are now beginning to see that there's a real market there," he said.
Conlin acknowledged that bankers are concerned about cannibalizing their traditional checking accounts by aggressively marketing prepaid cards to existing customers.
"Finding a way to do that so that that doesn't happen is very important," he said.
"I see a growing kind of interest in prepaid among banks, but I don't think they're yet to the point where they're worried about it on the whole."
Competition — of all kinds — may be the best incentive for bankers to enter the prepaid business, Conlin said.
"The rise of the nonbank marketers and their success serves to raise the awareness of the need to do something," he said.
"If a large bank were to enter this market in a big way," it would be "a positive sign, and would help to raise the profile of the product."