Prepaid cards — typically marketed to young consumers with low incomes — are starting to find a new audience: small businesses.
Just as parents use prepaid cards to control their teens' spending, employers are increasingly distributing the reloadable plastic cards to workers to use for paying work expenses.
The adaptation is happening in two ways. In some cases, business owners are buying prepaid cards that are specifically tailored for business use, though few such targeted products are available today. In other instances, businesses are simply buying cards designed for consumers and then repurposing them.
The scale of the opportunity for banks and other prepaid companies is hard to measure. Some industry observers believe that small-business cards are likely to remain a niche business. But others argue that the market remains underdeveloped because banks have been slow to cater to it.
"I would tell you that we're probably a good year away from having a lot of exciting things to talk about," says Jerry Federico, national product manager for ProfitStars, a division of Jack Henry & Associates that is marketing a small business prepaid card to banks. "But it is definitely moving in the right direction."
Traditionally, small-business owners turn to credit cards, debit cards, checks or an old-fashioned petty cash drawer when they need an employee to pay a business or travel expense. Each of those payment methods has certain drawbacks, though.
A credit card requires business owners to assume the risk that their employees will use the company's plastic improperly. In many cases, opening such an account also requires a personal guarantee by the business owner.
With debit cards, the entire business checking account gets exposed to potential fraud. Checks require the owner's signature in advance of the purchase. And cash brings a slew of disadvantages, including the need to handle change.
Some prepaid cards, including the Bluebird card from American Express (AXP) and Walmart, allow customers to create sub-accounts, each of which is linked to a specific piece of plastic. Those cards can be distributed to different employees, with the business owner in control of the amount of money in each sub-account.
One prepaid card geared specifically to small businesses is the PEX Card, which is offered by a New York company of the same name in conjunction with Bancorp Bank (TBBK) of Wilmington, Del.
The PEX Card allows small business owners to establish sub-accounts for each of their employees. When the firm's employees are in a retail store, ready to make a purchase, they can notify their boss, who can immediately transfer sufficient funds to the appropriate sub-account.
"You're giving someone enough responsibility so they can do their job, but not so much responsibility that it creates exposure for the business," says Toffer Grant, chief executive officer of PEX Card.
Business owners that buy the PEX Card can also establish spending rules, including daily spending caps and limits on the kinds of stores where the cards can be used.
PEX Card charges businesses a $49.95 account set-up fee, plus a $7.50 monthly fee for each card issued to an employee. The product is being targeted to blue-collar industries, including building companies, plumbing firms and transportation companies, according to Grant.
Unlike white-collar firms, where employees are often happy to earn rewards by putting business charges on their personal credit cards, blue-collar workers generally expect their employers to cover their expenses upfront, he says.
Denton Home Professionals, a seven-employee plumbing company in Texas, is among the businesses that use the PEX Card.
The firm's owner, Tanya Carter, says that prepaid cards make sense for residential plumbing jobs, since the company's plumbers often do not know what parts they will need until they arrive on the job.
"It might be as small as a $10 part, but you might need to go to Home Depot to do that," she says.
Using the PEX Card gives the company greater control over its expenses while limiting its potential liability, Carter adds. "The cost is so minimal in the grand scheme of doing business that it has proven to be effective."
Prepaid cards offer banks the opportunity to retain their small business customers while also generating fee income, says ProfitStars' Federico, who is making his sales pitch mostly to small banks.
He expresses frustration with the slow response of bankers. "They just don't know how to sell," Federico says. "They're used to people coming into their branches genuflecting and asking for answers."
Outside observers expressed greater skepticism about the size of the opportunity for banks. At the moment, the market for small business prepaid cards is dwarfed by the market for consumer cards and payroll cards, which allow employers to avoid cutting paychecks.
"This market has been slower to develop than other segments of the prepaid industry because it is perceived to be, and has been, smaller than other segments," says Joshua Gilbert, a principal at First Annapolis Consulting.
"I think it's an interesting market," he adds. "It's going to take a while to evolve."
Madeline Aufseeser, an analyst at Aite Group, expresses enthusiasm about the usefulness of prepaid cards for small businesses.
"But the market is just starting to get there," she adds. "It's definitely a niche market."