U.S. Bank bets on prepaid plastic

U.S. Bancorp has long been a heavyweight in the credit card business. Now the nation's No. 5 bank aims to be a contender in prepaid debit and payroll cards.

The Minneapolis-based bank said Tuesday it is snapping up a leading processor of prepaid cards, staking out new territory in the burgeoning market for prepaid plastic.

The acquisition of privately held FSV Payment Systems Inc. doubles U.S. Bank's prepaid card operations, giving the lender significant expertise as well as a valuable processing platform. U.S. Bank also immediately gains a competitive foothold in the area of payroll cards, which employers use instead of paper checks to pay workers.

FSV Payment Systems will operate under U.S. Bank's Elan Financial Services brand. Terms of the purchase, expected to close in December, weren't disclosed.

The relatively young prepaid card market has rocketed in recent years in part because of the decline of free checking for customers with low balances, and as more employers pay workers with debit cards, experts say.

Banks, scouting ways to raise fee income given the weak demand for loans, are keenly interested in the space and the growing number of households with little or no relationship with a commercial bank.

Critics worry issuers will link prepaid cards to potentially expensive features or options that could trip up vulnerable users. The Consumer Financial Protection Bureau is mulling new safeguards.

"U.S. Bank just beat them to the punch, which I think is just great for U.S. Bank," Aufseeser said in an interview.

FSV makes U.S. Bank one of the largest commercial bank players in the payroll card market, at least on par with JPMorgan Chase, she said. The market for payroll cards is still dominated by First Data Corp., which has about half that market, she said.

U.S. Bank is among the country's largest credit card issuers, and prepaid cards are only a small part of its overall payments business. But it's been in prepaid cards for nearly 10 years, focused mainly on prepaid card programs for government agencies, said Kevin Morrison, senior vice president of U.S. Bank Retail Payment Solutions.

In Minnesota, for instance, U.S. Bank contracts with state agencies to handle prepaid cards for child support and unemployment benefits.

Last year, U.S. Bank began offering a general purpose reloadable prepaid card that it sells to the public. Such cards, offered through U.S. Bank branches, carry a $3 monthly charge.

FSV CEO Richard Savard said he and his management team will stay on after the sale. Savard said FSV employs about 210 people and handles gross debit volume of $5 billion to $6 billion a year, making it one of the larger prepaid processors. FSV's processing platform is specifically built to process prepaid transactions, Savard said.

"We spent millions of dollars over the last two years to make sure it's scalable, among other things," Savard said.

FSV processes payroll cards for a number of big U.S. corporations, such as Costco Wholesale Corp., Dollar Tree Inc., Walgreen Co. and McDonald's, which recently chose FSV to provide payroll card services for company-owned restaurants across the country.

It also has a team that develops custom solutions for clients. "When you pitch a large client like McDonald's ... you don't win that business on price," Savard said.