The Prepaid Nation

By Gross, Daniel | Newsweek, October 25, 2010 | Go to article overview
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The Prepaid Nation


Gross, Daniel, Newsweek


Byline: Daniel Gross

New businesses target the 'unbanked.'

The list of companies lining up to sell shares to the public can tell you a lot about what trends are hot in the global economy. Some recent filings include First Wind Holdings (wind farms!), SinoTech Energy (China! Oil!), and Campus Crest Communities (fancy housing for rich college students!). Then there's NetSpend, which is seeking to raise $200 million.

NetSpend, based in Austin, Texas, is what you might call an inverted credit-card company. Its products are prepaid debit cards that can be loaded with cash by employers, or government agencies, or retailers--kind of like gift cards for everyday use. Its customers are the legions of the "unbanked," people who don't have bank accounts or credit cards, but who earn, receive, and spend money. Between 2005 and 2009, NetSpend's revenues rose fivefold and net income surged from $700,000 to $18.2 million. Last June NetSpend reported 2 million active cards and $8.8 billion in transactions conducted in the previous 12 months. NetSpend is following a larger rival, Green Dot, into the public markets. Green Dot has a relationship with Walmart--the giant retailer pays some of its employees by giving them loaded debit cards. In the second quarter, Green Dot says its business soared 77 percent from the year before.

Welcome to Prepaid Nation. These types of arrangements are typical of developing-world countries that lack financial infrastructure and a culture of credit. And while the hysterical claims that the U.S. is losing its First World status as a result of the recession are overblown, Americans have become more receptive to business models that might not have made sense in the credit-fueled haze of 2005 and 2006.

The debit-card industry isn't the only large sector that has glommed on to business models previously seen only in places like sub-Saharan Africa. TracFone Wireless--a unit of Mexico's America Movil, the largest cell-phone company in this hemisphere--boasts 15 million prepaid subscribers in the U.S. In its most recent quarter, Sprint reported that profits from its U.S. prepaid wireless business doubled to $928 million from $469 million a year, while profits from its (traditional) postpaid business fell 7 percent. In the past year, Sprint has seen its prepaid customer rolls more than double, from 4.

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