MasterCard Inc. is teaming up with The Western Union Co. in the fast-growing market for prepaid cards, seeking to make it easier and more convenient to use the reloadable cards globally.
A year after Western Union began issuing prepaid cards bearing the MasterCard logo in the U.S., the companies say they will begin offering the cards in other countries, with the goal to make it possible for consumers worldwide to use prepaid cards to transfer and spend money.
As of Sept. 30, Western Union, based in Englewood, Colo., had more than 1.2 million prepaid cards activated in the U.S., nearly double the number from a year earlier. Customers loaded roughly $120 million on those cards during the third quarter.
Overall, the prepaid market has swelled in the past five years. In 2010, U.S. consumers alone loaded $40.85 billion onto prepaid cards, which function like debit cards, often using them for direct deposit of paychecks and government benefits. That was up from just $2.7 billion in 2005, according to Mercator Advisory Group.
As in the U.S., the companies expect that prepaid will appeal to customers who don't use traditional bank accounts. They estimated that 2.5 billion adults worldwide are "financially underserved."
The alliance will involve linking MasterCard's processing network and Western Union's distribution network, which includes 485,000 agents worldwide. Eventually, consumers in more than 200 countries will be able to combine loading money into prepaid card accounts and wiring that money around the world, and in many places use prepaid cards for purchases.
In developing countries, "there are no ATMs," said Western Union CEO Hikmet Ersek. That fact makes his company's network of agents important players in spreading electronic payments to countries where business is done almost entirely in cash.
That focus matches MasterCard CEO Ajay Banga's oft-stated target for growth: the 85 percent of the world's transactions that still take place in cash. The Western Union network will help address one big challenge in developing markets, Banga said, because there are often few places that handle cards for payments or cash advances in remote locations.
While the eventual goal is global, however, Ersek said one of the fastest growing markets for Western Union is money transfers within the U.S. Even within cities like New York, it can be more convenient for a customer to add money to a prepaid card account in one part of the city and allow a family member or friend to use the card or withdraw cash in another part of town.
William Blair analyst Robert Napoli, who covers both companies, said such an alliance makes sense. Western Union is "perfectly positioned" to help Purchase, N.Y.-based MasterCard expand its prepaid reach around the world, he said. "It's logical that there would be some relationship between the two."
The global prepaid market will likely triple in the next five to six years, he said. While the U.S. market has more competition, "internationally it's a more open field," he added. "I think there's a big opportunity."
Napoli doesn't see much risk in the deal, but he did say it will take time for the investments to pay off in terms of earnings for either company.
In afternoon trading, MasterCard shares lost $1.56 to $357.69. Western Union shares slipped 3 cents to $16.66.