Banks' New Money Machine: Prepaid Cards

Gus Artiles used to wait anxiously for the mail carrier on Friday afternoons, hoping his California state disability insurance check would arrive before his bank closed for the day. Now Artiles, 54, doesn't worry about the the mail. By Friday morning, Bank of America (BAC) automatically loads his funds onto a prepaid card, which Artiles uses to buy groceries and gas like a regular debit card. "It's a beautiful thing," he says. "It's more convenient, and you get your money a lot faster."

Artiles is one of almost 2 million people taking part in "one of the largest prepaid programs on the planet," says William M. Sheedy, the head of Visa's (V) Americas group, referring to California's effort to use prepaid cards for unemployment benefits, disability insurance, and paid family leave programs. Such demand from governments as well as employers is helping power the prepaid card market. Last year, people used prepaid cards for $65 billion in transactions, up from $48 billion in 2009, according to the . Sanjay Sakhrani, an analyst at KBW, estimates that would have generated about $1 billion in transaction fees for card issuers. That comes as banks look for ways to replace the $25 billion in projected lost revenue that recent credit and debit card reforms may cost them, according to Boston Consulting Group.