ARLINGTON, Va. – The market for different sorts of prepaid cards will likely take off over the next few years, and credit unions will have a number of different opportunities to ride the trend. Over 50 million individuals in 10 million U.S. households do not have either credit cards or checking accounts and provide a tremendous pool of potential customers for a burgeoning pre-paid card industry, according to the PELORUS Group, a New Jersey-based marketing and research firm with roots in the telecommunications industry. The research firm also noted that more than 40% of credit card holders in the U.S. have cards that are within 5% of their credit limits. This shrinking credit gap makes these cardholders easier customers for prepaid products which are neither credit cards nor are tied to their checking accounts. This helps move stored value cards or pre-paid cards steadily away from being primarily telecommunications tools to more general financial tools. "Pre-paid services really started in the telephony market and moved over into other products," said Tom Miezejeski, vice president for research for the PELORUS Group. Miezejeski argues in the report that prepaid card technology is a good example of what another market researcher dubbed Disruptive Innovation. A disruptive innovation is one that initially starts out as a hardly noticed innovation but which becomes so popular that it winds up transforming, or disrupting, a previously static industry. As an example Miezejeski cited what happened when then innovative MCI began selling long-distance phone service at a rate only 60% or less than the price of the same service offered by AT&T. As long as AT&T had the dominant share of the market, he explained, it would have actually cost the company more to cut its prices and compete head-to-head. It was only after the lowered cost of long distance had completely transformed the long-distance telephone market, knocking AT&T out of the position it had held for years, did the two companies compete head-to-head. "A similar sort of thing could happen with cards," Miezejeski said, as prepaid cards begin to move away from their original niches of the young to people with poorer credit or no credit, and recent immigrants. Miezejeski and PELORUS cited VISA and MasterCard's recent loss of the Honor All Cards rules as being the spark that could start cards on their upward spiral. Not only is there a pool of people in the market for cheap electronic transactions who don't have access to credit or debit cards, there are also now a number of retailers who have an interest in moving customers away from credit card transactions into other forms of electronic payments – their own cards. In terms of expense, a pre-paid card program is a significantly less costly alternative than setting up an in-house credit card program, Miezejesjki noted. The real losers in such a shift would be the card issuers, Miezejeski argued. There are currently two types of prepaid card systems, he explained, the closed system and the open system. A closed system is one in which a retailer would accept pre-payment on cards that it could only use in one of its stores. An open system is one in which a retailer would accept pre-payment on a card which could be used in either its own stores or any other that accepts VISA or MasterCard. The card associations lose if retailers adopt closed systems, but they don't particularly care if the retailers adopt open systems, Miezejeski noted. "At least not from the standpoint of cost, since they get paid for the transactions that process through their networks," he said. The real losers in the open systems are the financial institutions since customers will be using the more available pre-paid cards than the bank or credit union issued credit or debit card. Credit Unions Getting In on the Market While no card executives contacted felt comfortable speculating on the possible rise of pre-paid cards, two credit card processors that serve a significant number of credit unions either have pre-paid products ready for their credit unions to offer now or have them in the works. Certegy Card Services, the Alpharetta, Georgia based card processor has six gift cards ready for their credit unions at this time, according to Leslie Rowe, a vice president of marketing for card services. Rowe said that the firm's new gift card are being rolled out now and that credit union members will be able to purchase and load them with the gifted funds from the institutions' Web sites, as well in the branches. The cards include a generic gift, one oriented to the holidays, and others oriented toward new births, birthdays and other special occasions she said. The cards will be branded as VISA or MasterCard and will bring the credit union the prevailing interchange rate, she added. An executive with PSCU Financial Services, the St. Petersburg, Florida, card processor for a number of credit unions that use Denver-based First Data Resources, said it is also following suit on the gift cards. PSCU member credit unions will likely be able to offer their members gift cards in time for the holidays, according Ron Silvia, director of debit programs for the card processing and product firm. Like Certegy's members, PSCU credit unions will allow their members to order the gift cards, which will be personalized to their recipients, from their branches or their credit union Web sites and will be able to use them wherever VISA or MasterCard are accepted. "We are about 90% done on this product," Silvia explained, "barring unexpected problems we plan to have it ready for our credit unions to offer by Christmas." Rowe also explained that Certegy is looking forward to rolling out payroll cards that credit unions can offer the sponsors of their larger Select Employee Groups. Banks and payroll firms introduced these cards to help employers with significant numbers of employees who don't have banking relationships to avoid using paper checks, and now credit unions will be able to offer cards to their SEGs with a similar desire. Silvia said that PSCU is also developing a pre-paid payroll card product. The practice of credit unions offering payroll cards has the potential to become somewhat controversial since the cards are aimed at people who are eligible for credit union membership and would otherwise be urged to establish checking accounts. But Cliff Rosenthal, executive director of the National Federation of Community Development Credit Unions, said that his organization is not taking a position on credit unions offering payroll cards and said that in some situations, the benefits can outweigh the need to use a checking account. [email protected]