he difference between solvency and success for many ISOs and merchant level salespeople (MLSs) is a steady residual stream and a healthy lineup of auxiliary products. And some hot auxiliary products on the scene today are prepaid debit cards.

According to Gwenn Bézard, Research Director with Aite Group LLC and co-author of the research report "Prepaid Cards: A Market Overview," the prepaid market represents a fast-growing market opportunity.

"In coming years, sheer size and rapid growth will place the prepaid market at the forefront of the competition among card processors," Bézard said. "No other payment product enjoys such tremendous growth opportunity within and outside the United States.

"For card processors, if merchant and issuing processing were yesterday's growth engine in the United States, closed-loop and cash-based money transfers are today's growth engine, then open-loop prepaid cards are the growth engine of tomorrow. By 2009, prepaid processing will be as large an industry as the debit card and ATM processing industry was in 2004," he said.

CardMarte Inc., a turn-key provider of prepaid debit cards, is poised to take advantage of this growth, offering prepaid PIN-based debit cards and prepaid signature-based MasterCard-branded cards. "This is an emerging market, and ISOs who add this product to their merchant account products can realize revenue streams that have the ability to dwarf their credit card residual income today," said Alfred Urcuyo, CardMarte's Chairman of the Board.

Prior to starting CardMarte in 2002, Urcuyo worked on the acquirer side of the business, which gave him experience that he considers vital to the intelligent design of CardMarte's mission and products.

"There are a lot of laws and regulations that impact each of our programs, from the [USA] Patriot Act to payroll regulations to cross-border laws, and we had to create a design to keep us in compliance in every possible area," Urcuyo said.

"More importantly, we had to design a system flexible enough to keep us in compliance as new laws and regulations come up, and to be able to integrate new technologies. We didn't want to build our business on technology with a short shelf life. "We designed our systems from scratch as a prepaid system. Prepaid systems have specific requirements. We're not just trying to stretch a credit system to fit. Our system has the ability to pay commission for up to 20 different levels.

"Agents can go into our system with their password and check the usage commissions they'll be receiving on every card, in real time. I just don't think you can do that with a 'bandaid' system."

CardMarte offers both closed- and open-loop stored value cards. All cardholder deposits are insured through the Federal Deposit Insurance Corp. in the United States.

Closed-loop stored value cards are issued by a specific merchant or merchant group and can only be used at that specific merchant location or merchant group (for example, store, mall, gift, loyalty, college cafeteria or health insurance cards).

Open-loop stored value cards are issued with card Association branding and can be used at a more universal network of PIN-based (Cirrus and Maestro) or signature-based (MasterCard) transaction merchants or ATMs where the Association brand is accepted.

Stored debit or credit cards are a convenient way for consumers to access funds, and appeal particularly to the unbanked. They are also convenient for those who want to transfer money quickly and inexpensively: missionaries or travelers away from their home base for extended periods; or for parents who want to provide secure, but limited, spending capabilities for children away from home.

For consumers, they operate just like any other debit card. The cards are prepaid with a loaded value and can be used at ATMs for cash withdrawal or at PIN-based merchant locations for purchases until the loaded value is spent. The cards can be reloaded again and again.

Payroll card growth provides additional opportunities

For this reason, using prepaid debit cards for payroll or benefits is growing in popularity for employers, particularly those who employ large numbers of unbanked individuals (who can't accept direct deposit), foreign workers, and temporary or seasonal workers.

Once the initial prepaid debit payroll card is issued, all employer-employee payments are made electronically, saving large employers significant payroll processing expenses.

According to a Celent study, "Payroll Cards: A Direct Deposit Solution for the Unbanked," on average, it costs an employer $1.90 to cut a paycheck in-house. Direct deposit can reduce the cost of issuing checks by approximately 65%.

Large companies, however, or those in industries with high percentages of unbanked employees such as agricultural, food service, maintenance, fabricated products, or construction, often find that many employees cannot take advantage of direct deposit. For those employers, prepaid debit payroll cards may be the answer.

CardMarte provides employers with promotional and instructional materials in English and Spanish (and additional languages upon request) to help businesses explain and enroll their employees in the prepaid card payroll plan.

CardMarte is happy to allow ISOs to sell any of its products in any way. But according to Urcuyo, a bottom-up approach to payroll deposits often works best.

"It's time consuming (profitable, but slow) to sell to HR departments," he said. "We provide forms that can be given out at the merchant's location that the customer can fill out and take to their employer to be enrolled one-by-one.

"For the employer, it works just like any other direct deposit payment: There is no charge for them.

The unbanked employee gets their paycheck loaded into their debit card, and every time their pay is deposited, the merchant, the agent, everyone up the food chain gets a commission."

Targeting Latin Americans

Born in Nicaragua and raised in Costa Rica, Urcuyo began by focusing on building relationships in Central and South America to capture customers in the United States who have family abroad, a rapidly growing market segment. Several Latin American countries count remittances from the United States as their number one gross national product.

Many of these recent immigrants are among the unbanked or underbanked, but additionally, they are looking for an inexpensive and convenient way to transfer money to relatives back home. Customers can get a secondary PIN and give it to a relative or associate to use in the United States or abroad, reloading it as desired.

CardMarte's cards can be issued by partner banks in the Caribbean, Dominican Republic, Ecuador, Panama, Costa Rica, Nicaragua, El Salvador, Honduras and Guatemala.

"It's against the card Association rules to send a U.S. card into another country," Urcuyo said. "People do it, of course, in small amounts, but it's not legal, and you can't build a business that way. The alternative is an international card, which is expensive.

"We partner with Latin American banks. So in the U.S., the customer gets a U.S. MasterCard. And in Latin America, they get a Visa card. It's associated with their account, but it's issued locally and has local representatives. So ultimately, we can be the lowest cost provider."

How it works for merchants and ISOs

CardMarte's relationship with VeriFone has made startup pretty painless for many merchants. "Any merchant with VeriFone 3730, 3740 or 3750 POS terminals can just download our system onto it," Urcuyo said. "We also have a virtual terminal to access the system over the Internet, so they don't need any POS terminal at all." It doesn't matter what processor the merchant uses.

Merchants like CardMarte's prepaid cards because customers are likely to return to the store regularly to reload and shop. Merchants' customers like using the cards because they can be reloaded at any location where the CardMarte Global ReCash symbol is seen (or reloaded automatically by their employers).

Participating merchants get a residual income for the life of the card they sold, even if it's loaded at another location.

"Let's say a merchant sells 3,000 cards over the course of a year," Urcuyo said. "Now, it's a new product, so they're not going to sell 3,000 cards overnight. But once they reach that level, the merchant could bring in $11,000 to $15,000 a month in residuals. And that helps retention. Who's going to switch to a new system, when they're pulling in over $5,000 a month without much effort?"

Distributors and their reps receive a share of the continuing revenues from the use of the cards sold for the life of the card, again regardless of whether cardholders load the cards at different locations from where they bought the cards.

In addition to agent income from the issuing side of interchange, fees are generated from card issuance, money transfers, reloading, ATM usage and account balance inquiries.

"If an agent sells to 10 merchants, and each of those 10 merchants sells 3,000 cards in the course of a year, the agent can make $30,000 a month," Urcuyo said. The margins are good now, but as the industry becomes more competitive those margins are likely to shrink.

"We have no plans to lower our commissions, but I can envision a time when we might," Urcuyo said. "Still, the industry will become more competitive because the demand will grow. You can make your money from larger amounts from fewer people, or smaller amounts with more people; either way, you spend the money the same.

"That's the way we run our business. We give away most of the upfront fees in commissions. And I'm OK with that. We make our money on the backend. We make very little, but we make it from a lot. A well-positioned prepaid debit product should be a profit center for all the parties involved: the merchant, the sales rep, the ISO, the acquirer."

Looking forward

Urcuyo sees the prepaid debit card industry as still in its infancy.

"I remember when prepaid phone cards came out, and people said it would never work, that it would be too difficult for Latin Americans to use," he said. "They may be humble, or even unsophisticated; some of them have never used an ATM, but they're not stupid.

"People underestimate how quickly word of mouth can spread, especially in Latin America. Once someone uses a prepaid debit card and sees how convenient it is, they'll tell their friends." This spring, Urcuyo expects CardMarte to unveil new technology that will allow its customers to access balance information and transfer funds from their cell phone. He said that there are 100 million people and over 50 million cell phones in Mexico.

"Nicaragua is the second poorest country in Latin America, but nearly half the population has cell phones. You can use your cell phone to transfer money to your Mom in El Salvador.

"It'll happen in real time, and she'll even get a message on her cell phone that the transfer has occurred. Prepaid debit cards have huge potential. I think very soon it will be the biggest thing in the financial services industry."