For many unbanked consumers, getting a credit or debit card is challenging, if not impossible, so the only plastic in their wallets is a prepaid card. Now, as traditional credit becomes scarcer, even mainstream consumers are starting to use prepaid cards more frequently.

Many consumers turn to prepaid cards because they can't get traditional credit, says Steve Streit, the CEO at Green Dot, a prepaid processor in Los Angeles. "A lot of people want and need the power of plastic but they can't get or don't want the downsides of credit," Streit says. Fellow processors MetaBank, inComm and netSpend also say that they are seeing increased adoption among mainstream consumers, as well as increases in the dollar amounts being loaded onto the cards.

"Any new product segment takes time for consumer adoption and consumer awareness to take place and I think we're reaching that stage now," says Brad Hanson, president of Meta Payments Systems. "The industry is seeing triple-digit growth in [the reloadable prepaid card market] this year." Bruce Cundiff, director of payments research and consulting for Javelin Strategy & Research, says there are emerging examples of prepaid's impact, including banks and issuers backing out of the secured credit card market. For example, JPMorgan Chase shuttered Washington Mutual's secured card program shortly after it acquired Wamu last year.

"The evolution of the secured credit card, the fact that a lot of credit-card issuers are doing away with those products, I think that directly speaks to the evolution of prepaid," Mr. Cundiff says. "The secured credit card was basically a product to give people a Visa- or MasterCard-branded product so that they could use a card rather than carrying around cash. But more and more consumers are understanding that they can do that with a prepaid card - it doesn't have to be a secured card, it doesn't even have to be a debit card."

To be sure, the unbanked market is important to issuers. In an Aite Group study of unbanked and underbanked consumers, 43 percent of respondents said that they did not have a checking account due to credit issues and 28 percent cited excessive bank fees as the reason.

Still, the demographics of the prepaid cardholder have evolved. According to a recent study released by Javelin, households with incomes between $50,000 and $74,000 are more likely to use prepaid card than those in other income brackets. And it's not younger consumers embracing them; the survey found that prepaid card use was evenly dispersed among age groups, ranging from 18 to 64.

Prepaid card use is expected to surge in 2009, but that doesn't necessarily mean it will be a banner year for all card providers. Setup fees have already fallen from $19 to $9, on average, over the past two years, and further fee compression is expected, says Red Gillen, senior analyst with Boston-based research firm Celent. Moreover, monthly fees are likely a thing of the past, he said. "It's hard to argue for a monthly fee because you are not delivering any service, really. It's hard to justify a monthly fee."

In addition to fee compression, increased government regulation and competition could force some providers to either exit the market or find a merger partner, Green Dot's Streit says.

"It's hard to be profitable until you have scale," he says. "With our size, we keep making prices lower and lower." The company plans two new prepaid products that will be free for most GreenDot customers and low cost for everyone else. As bigger companies take a bigger piece of the market, a lot of smaller prepaid companies won't, at some point, be able to effectively compete. So some companies will fall off the map and some companies will get married."

Perhaps the only thing preventing mergers is the credit crisis, Gillen says. "I think that once we get out of this economic environment, we will see some acquisitions."

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