Is An IPO in Prepaid Cards a Green Light for Growth?

A wide range of interested parties are contemplating the growth prospects for future growth in the prepaid card market. The unusual Green Dot (GDOT) IPO that is currently going to market is providing some existing shareholders with the opportunity to monetize a portion of their holdings. Green Dot will not receive any proceeds from the estimated $130 million IPO. Its shares will be available for purchase by new investors and the remaining shareholders will have a market for selling shares in the future, including the prospect of a market priced sale of Green Dot. Some key questions are worth exploring. What is driving the "prepaid card" market? What is the upside? Are prepaid cards destined to become an "every day" high usage card for the mass market?The payment applications covered by "prepaid cards" has been expanding over the past 15 years, expanding the volume of cards issued and transactions processed. Both "open" and "closed" prepaid cards still exist. The more dramatic growth has occurred with "open" cards, which are issued in conjunction with a branded payment transaction network like Visa, MasterCard, American Express, or Discover. In effect, these open, preloaded debit cards have expanded as a result of new end user defined purposes, such as government benefits, health insurance payment cards, employee payroll cards, and sponsored prepaid cards sold at retailers (e.g., Green Dot has branded national retailers like Wal-Mart, CVS, Walgreen's) or rebate cards (e.g., cell phone carriers).

A number of estimates have been published by others to describe the size and growth rate for all forms of prepaid cards. Let's use a compilation of some of these estimates: initial prepaid card issuing preloaded dollar value falls in a range of between $6 billion and $12 billion a year. Prepaid card issuing dollar value and transactions processed growth rates fall in an annual range of 12% to 30%. The average transaction dollar value is between $15 and $25. And the fees for reloadable prepaid debit cards can add up to between $20 and $40 per month depending on the issuer's fee schedule. These fees are at the crux of the business model for firms like Green Dot.

For those that want to take a deeper dive into the details, check out Michelle Jun's analysis (on behalf of the Consumers Union) that was published in August 2009, "Prepaid Cards: Second-Tier Bank Account Substitutes." Essentially, I view this analysis as a documentation of how the prepaid debit card market is designed to serve underbanked and unbanked consumers with an uninsured transaction account that offers the convenience of EFT/POS and ATM networks on a pay as you use it business model. The issuer and transaction processing entities generate revenue from a disclosed fee schedule that will garner more regulatory attention in the future. I do not see a prepaid card as a good fit for the vast majority of consumers that already have a checking account and debit card.

If most consumers are not good candidates for high usage, prepaid debit cards, then one must consider when this prepaid market will hit the wall and stop growing in the US. Probing for answers leads to a review of when the higher growth prepaid card applications will stop growing or adding new cards, to the base (e.g., payroll cards). A companion review of reloadable transaction volumes adds a second dimension to the answer. If both dimensions hit slower growth rates, then the overall prepaid card market will slow down to single digit growth rates and the buzz will fade away.

On the other hand, big stakeholders like the branded card platforms and networks are ready to make investments should any of them conclude that prepaid card growth prospects have at least a five year horizon. For example, American Express bought Revolution Money in November 2009 and Intuit bought ECHO in December 2007. I expect to see a few more deals in the prepaid market.

Bill Bradway, founder and managing director of Bradway Research LLC, analyzes the business strategies and IT investments of US banks and credit unions.