Earlier this month venture capital firm Core Innovation Capital (CIC) invested $2 million in Plastyc, a prepaid debit-card provider in New York. CIC managing partner Arjan Schütte says 5-year-old Plastyc’s relatively low-cost cards -- 12 percent less to use, on average, than versions from competitors Green Dot and Wal-Mart -- impressed the New York City firm, which limits its investments to companies that provide financial services to the working poor and the underbanked. Plastyc’s mix of services unavailable on other cards, such as mobile-phone access and checks for paying bills, also persuaded CIC to make the bet. “They’ve been able to develop cool bells and whistles that offer functionality beyond the very basic vanilla offering that most prepaid cards have,” Schütte says.
Plastyc’s debit cards work like this: Users sign up online and receive the card by mail. Depending on the plan, they can load the card with as much as $5,000, use it anywhere that accepts Visa (Plastyc uses Visa as its payments processing network), and manage it online. “It’s a very compelling alternative [to] a checking account,” says analyst Ron Shevelin of bank advisory firm Aite Group. The total dollars loaded into prepaid debit cards will jump significantly -- from $42 billion last year to $201 billion in 2013, estimates Mercator Advisory Group, a payments research firm
Plastyc co-founder and Chief Executive Patrice Peyret, who also co-founded Mobile 365, a mobile messaging service that sold for $425 million in 2006, initially marketed the cards to baby boomers’ kids in high school or heading to college. He changed tack during the financial crisis. In early 2008, Plastyc began aiming the company’s card at people in their 30s and 40s forced to cut spending because of job losses or plummeting home prices. “Since then, the financial crisis has been fantastic for us, because we’ve had a lot of growth among working adults,” says Peyret, 53. He insists he’s not taking advantage of the poor. Plastyc’s cards are affordable and are as close to a traditional checking account as many of his customers will ever get, he says.
SMALL BUT GROWING
Four-employee Plastyc, which had $1.9 million in revenue last year, expects to reach $4.5 million this year and $10 million in 2012, Peyret says. Compared with Green Dot, which had 3.4 million active prepaid debit cardholders at the end of last year, Plastyc is tiny: It has just 125,000 cardholders now, with about 20,000 new customers joining a month. About 60 percent to 70 percent of Plastyc’s customers are individuals who use the cards as if they were checking accounts, paying bills, depositing paychecks, and withdrawing cash.
Frequency of use is crucial to Plastyc’s business model. Access to all services costs $2.99 a month, or 99 cents a month with a minimum balance of $500. ATM withdrawals cost $1.70 each, but cash withdrawals from retailers are free. Plastyc will send one check a month to any payee at no charge, with each additional check costing $2. Direct deposits are free. Plastyc makes a large chunk -- 40 percent -- of its revenue when cardholders spend their money, taking roughly $2 for every $200 spent. Peyret says the cut is the company’s share of the fees Visa charges businesses for use of its network.
Plastyc’s services are not always cheaper than a checking account at a bank. Bank of America, for example, started offering an account last August with no minimum balance or monthly service charge, provided the customer makes all deposits and withdrawals at an ATM and receives statements online. The bank does, however, charge an overdraft fee of $35 each time a person has insufficient funds to cover a transaction and $30 for stopping payment on a check. Overdraft charges and other banking fees are major reasons why people on a shoestring budget use prepaid debit cards, Schütte says.
PARTNERSHIPS WITH BANKS?
The banks Plastyc competes with today could become its partners in the future. That’s because of a financial reform law passed by Congress last year that affects debit-card swipe fees collected by Visa, MasterCard, and issuing banks. The Dodd-Frank Act, set to go into effect in July, requires regulators to ensure that the fees are “reasonable and proportional to the cost incurred by the issuer.” The change is expected to reduce by billions of dollars the amount banks collect on debit-card transactions. Prepaid debit cards are exempt, however, which could entice banks into the business. “Suddenly debit cards get a lot less attractive, and prepaid cards become more attractive,” says Zilvinas Bareisis, a senior analyst at banking consulting firm Celent. Proposals floating around Congress would apply restrictions on prepaid debit cards, too. But if those bills fail, banks could decide to start issuing their own cards or to partner with card providers to save the expense of building the business themselves, Bareisis says.
Peyret sees such partnerships as a way to expand Plastyc and move beyond individuals struggling to make ends meet. While he’s not in any talks with banks yet, he plans to spend most of the $2 million from CIC to prepare the back-end technology now. “There’s a major opportunity for us to become a private-label supplier of prepaid account services to banks,” Peyret says.