The days of prepaid as being the red-headed stepchild of the finance industry may have ended in November when two 800 pound gorillas of the financial world, Visa and MasterCard reported improved earnings, both due to the increased use of prepaid debit cards.



Visa

Visa released its fourth quarter and full fiscal year 2009 earnings reports.  In the report, Visa said that it had turned a loss of $356 million in the fourth quarter of 2008 to a net income of $514 million in the fourth quarter of 2009. Earnings per share, excluding one time items, outstripped analyst’s estimates of $.72, coming in at $.74 per share.

Almost a billion dollars worth of change. (I realize that billion seems puny today.)

What accounted for the difference? Well, normally big turnarounds like this are due to an uptick in payment volume, but Visa’s volume actually dropped a couple percentage points to $687 billion. Total volume slipped 3 percentage points to $1.1 trillion from the prior year. (Yes, that’s “trillion”!)

It is what led to this remarkable turnaround that is significant for TPP readers. It was not a bailout, TARP funds or deregulation/reregulation that was responsible. It was debit cards. Yes, prepaid debit cards.

Visa has been making solid commitments to prepaid by expanding its brands and enhancing its networks to handle prepaid transactions.  In 2006, Visa announced that it had added the capability for consumers to add funds to its reloadable prepaid cards. Dubbed the “Visa Prepaid Load Network,” the strategy was to target the estimated 80 million unbanked consumers in the U.S.

By the end of 2006, Blackhawk Network, a Safeway company, introduced Visa ReadyLink, opening a potential 60,000 retail locations to the Visa prepaid strategy.

The strategy has obviously begun paying off. The number of cards carrying Visa branding rose, worldwide, to 1.7 billion, with the total number of transactions at 10.5 billion.



MasterCard

On the other side of the wallet, MasterCard also announced higher than expected earnings, which it said was due to expense trimming, increased fees and greater use of debit cards.

MasterCard’s third-quarter 2009 net income was $452 million, or $3.45 per share, compared with a loss of $194 million, or $1.48 per share, a year earlier. A turnaround of over $600 million, a per share earning of $3.48 per share, excluding special items.

Contrasted with Visa, MasterCard’s volumes were actually up slightly, .3% to $633 billion. Like Visa, MasterCard said increased use of debit cards accounted for the turnaround in earnings. MasterCard has invested a lot of money and effort in building reloadable networks, especially mobile reloadable networks.

Again, remember that neither company asked for, or received any form of bailout. In fact, new regulations designed to rein in credit card companies have been passed or are being considered. What both Visa and MasterCard did was to correctly see an opportunity and make the investment in time and money needed to capitalize on it.

It is probably no surprise that in these turbulent economic times, debit cards are on the increase while credit products are on the decline. It is no surprise, but the extent to which prepaid has is still significant, and historical.



What Does it Mean for the Future?

Had prepaid been responsible for one of the major financial companies success, it would have been noted, but not necessarily earth shaking. For two of the biggest companies to have the same result represents a clear change in the way prepaid will play in financial business strategies in the future. Prepaid will no longer be seen as “gravy,” a non-essential service, but as a cornerstone.

Some may say that this is just a passing phenomenon due to the current economic situation. They may be right, but it may also be that the changes to the economy may be a permanent part of the landscape going forward. Many consumers, already buffeted by credit card debt, may turn to debit cards as they take on more and more of the characteristic of credit products.

It will also depend on what Visa, MasterCard and the other credit card companies do going forward -- whether they leverage on the opportunity created and how they develop business strategies in the future.

But, whatever comes next, there is one thing that is true. Prepaid is no longer an afterthought.