ip-hop and clothing mogul Russell Simmons, Co-Founder of Def Jam Records, targeted a new market in 2005 when he launched two Visa U.S.A.-branded prepaid cards, the Baby Phat Prepaid Visa Card and Prepaid Visa Rushcard.

The cards are designed to reach African-American and Latino consumers without access to checking accounts and were launched after Simmons' company, Rush Communications, noticed that online orders for Phat Farm and Baby Phat clothes were being purchased by consumers who didn't have credit or debit cards.

"Financial empowerment is the last leg of the Civil Rights movement," Simmons said in 2005.

In the United States, there are more than 40 million unbanked and underbanked consumers. Of those that are unbanked, 46% are African-American; 34% Hispanic and other; and 14% Caucasian, according to Chicago-based The Center for Financial Services Innovation.

But, Simmons' cards have come under fire because of high activation and transaction fees. Critics have even accused Simmons of using a good cause to further fill his pockets.

Simmons, although an unlikely prepaid-card candidate, realized what financial-industry innovators have known: Prepaid cards can help underbanked and unbanked consumers build financial independence while helping deployers pull in commercial revenue.

According to MasterCard Worldwide, prepaid-card transactions are expected to reach $275 billion by the end of 2009.

And in 2006, an estimated $117 billion in purchases will be made using prepaid products, whether in the form of gift cards, payroll cards or renewable prepaid cards issued under the MasterCard and Visa brands.

Lock and (re)load

Prepaid cards also have opened an avenue for ATM-transaction growth. "As long as growth continues in the prepaid space, like EBT, etc., the ATM will always be at the forefront," said Ben Psillas, President and Founder of the Allpoint network, now owned by Cardtronics Inc.

The Baby Phat and Rush cards, among other Visa and MasterCard-branded cards, can be loaded at ATMs, self-service kiosks or by direct deposit.

Jennifer Tescher, Director of the CFSI, said there is now a broader array of kiosk and ATM providers offering issuance and reload services at the ATM. And as the market continues, so will the transaction opportunities provided by ATM manufacturers.

Burnaby, British Columbia-based Tio Networks Corp. recently launched its 100 E-Wiz financial-services kiosks in convenience stores throughout Texas. The kiosks provide bill-pay and prepaid-card load and reload functionalities.

In addition, Monrovia, Calif.-based Green Dot Financial Network, a subsidiary of Green Dot Corp., launched in 2005 a network of prepaid reload stations at more than 35,000 locations.

"The real potential for these cards is as functionality increases for these products, they really do become substitutes for bank accounts," Tescher said.

"Nonbank prepaid card companies are using prepaid cards to tap into the market. Financial institutions are considering prepaid cards as a product to offer when someone doesn't qualify for a checking account."

Prepaid cards give unbanked and underbanked consumers financial flexibility. One Baby Phat user on www.prepaidcardforum.com, an industry blog, said she liked the card because there was "no credit check" involved.

"There is a lot of interest in using prepaid to build credit," Tescher said. "There's nothing like that at the moment, but credit bureaus are interested in the data."

Workin' hard for the money

As prepaid-card popularity grows, issues such as activation and transaction-related fees will arise.

"Prepaid cards that are overly expensive don't make sense," Tescher said. However, she added that prepaid cards reduce the amount of cash in pocket and provide greater financial access.

One area where prepaid cards are making headway is in the payroll-card space.

"On the payroll side, there is significant potential; but for the most part, banks see this as a way to help their commercial customers solve a problem or reduce costs. They don't really think or know much about the end user," Tescher said.

Payroll cards utilizing the prepaid format have become increasingly popular among employers. Frank D'Angelo, President of Metavante Corp.'s Payment Solutions Group, a subsidiary of Milwaukee-based Marshall & Ilsley Corp., said the company began processing payroll cards because of their synergy with debit cards and market opportunity.

"There are a lot of similarities between the normal debit and prepaid space," D'Angelo said. "When you look at the underbanked or unbanked, they don't have access to checking accounts. Prepaid cards give that underbanked consumer the same kind of flexibility."

According to CFSI, immigrants make up 32% of the total U.S. unbanked population. And unless thosse workers have Social Security cards, opening a bank account or even applying for a prepaid card is off limits.

So to further tap into the underbanked market, Metavante added bill-payment features to its payroll-card processing solution allowing consumers to pay bills, check account balances and order goods online.

D'Angelo suspects the industry will thrive over the next few years both in the United States and Europe.

"Security, flexibility and the cost of electronic transactions is easier," he said. "[Transactions] ride existing telephone lines and networks; you don't have to create anything new."

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