It used to be that when you turned 18 you started getting friendly letters from credit card companies inviting you into the fold. Going to college often meant getting your first piece of plastic.
Today the rite of passage begins earlier. Within the last few months, a spate of start-ups and big-name credit card companies have begun offering prepaid cards to young teenagers both in high school and junior high to give them more buying power on the Internet and to groom them as future credit card customers.
The companies offering these products say that the prepaid cards for minors which, by law, cannot have revolving credit functions help teach the youngsters how to budget money and that they give parents, who fund the accounts, greater control and supervision of what is bought. From a business perspective, the cards could arguably foster brand or company loyalty among young customers and give the issuers bigger shares of the estimated $140 billion that teenagers spend each year.
But some consumer advocates call the trend alarming and cite it as another example of greedy card companies trying to get people children, of all people to spend more than they should. The industry is just trying to get into their pocket earlier in life, said Edmund Mierzwinski, consumer program director for the U.S. Public Interest Research Group in Washington. We dont like it.
Among the big names in this business are American Express Co., which is working with a company called Zowi Corp. to issue a product for teenagers, Cobaltcard, that can be loaded with up to $500 and used online or off. Chase Manhattan Corp., while not actually issuing such cards, is the merchant-acquiring partner of RocketCash, another card company targeting the teenage market. And Visa U.S.A. has introduced a product called Visa Buxx, which any member bank can issue.
Company executives say these products are no different and no less benign than gift cards or debit cards. A parent decides how much the child can spend and puts this sum in a designated account. The card will not be accepted if the account balance does not cover the cost of an item. A teenager could overspend only if a merchant lets a sale go through without checking whether the account can cover it.
Most of these cards are targeted at people 13 through 17 years old, though the Cobaltcard, which American Express began issuing last week, aims for young people up to 22 years old.
This is a market with tremendous potential, which right now is spending largely with cash, said Larry Sharnak, senior vice president at American Express. We want to give them a tool thats safer than cash.
The card is safer than cash, Mr. Sharnak said, because if it is lost it will be replaced with no loss of money. And it is safer than credit, he said, because teenagers can spend only a preset amount. Indeed, one independent company proffering a prepaid teenage card, DoughNet, boasts on its Web site that its product cannot mess up your parents credit.
All the cards are closely tied to the Internet; they offer Web sites on which teenagers and their parents can monitor their accounts. The companies involved stress the importance of parental involvement, and, in most cases, only a parent is authorized to replenish an account.
Randall Chesler, president and chief executive officer of Zowi in San Francisco, said his companys Cobaltcard for American Express is built with a targeted acceptance feature that prevents it from working at inappropriate Web sites, such as those that peddle pornography, firearms, or alcohol.
Jeff Kann, executive vice president of Visa U.S.A., emphasized that the Visa Buxx card, which became available in September, is specifically marketed to parents. Banner ads are on Web sites favored by adults, not teenagers. Print ads appear in magazines like Good Housekeeping, he said, not Seventeen.
Mr. Kann said the Buxx Web site got 500,000 hits between late August, when Visa announced the product, and mid-September, when it was brought to market. But we do not have a number of how many have signed up, he said.
The cards are free to parents and children. The issuers aim to make their money from merchant fees and from the float they get when they invest parents account deposits before the teenagers spend them.
Stephen Brobeck, executive director of the Consumer Federation of America, said these cards pose far less risk to consumers than regular credit cards, but he added, we would challenge the banking industry to encourage teenagers to save money, not spend it.
Credit counselors say they see more and more young adults falling into debt, Mr. Brobeck said. Cards for teenagers, he said, will only encourage spending.
The research is clear that consumers spend more when theyre paying by plastic than when theyre paying by cash or check, Mr. Brobeck said.
But card company executives say their products can serve as teenagers first learning tools for money management. Mr. Kann of Visa said the Buxx Web site offers a questionnaire that parents can use to gauge their childrens financial know-how. He said the card does not discourage saving. Saving is very important, but in order to save money, you have to be able to budget money, he said.
Mr. Sharnak of American Express said, We believe its very important to start teaching financial management to this young market.
And Paul Herman, cofounder of a teenage card company called iCanBuy, said, If you hand the kid a $50 bill, you dont know if hes buying drugs, beer, or if its getting stolen. With a card, the kid and the parent know exactly where it goes.
James L. Accomando, president of Accomando Consulting Inc., a financial services and management consulting firm in Fairfield, Conn., called the teenage market one of the most underserved but influential segments in the United States. He said it is too soon to say how the cards are faring but predicted they would be a phenomenal success.
The smaller companies such as DoughNet, RocketCash, and iCanBuy will probably try to get early market share, Mr. Accomando said, then team up with bigger names. Ultimately, these cards are of interest to the large credit card companies to drill down into the teenage market, he said. The real test will be whos running the lead on market share 10 years from now.