Post by Bozur on Feb 28, 2005 17:32:30 GMT -5
INNOVATORS (NYT)
Brothers Raised on Cash Build a Business on Credit
By JENNIFER BAYOT
Published: February 22, 2005
George Brainard for The New York Times
Roy Sosa, left, and his brother Bertrand sell prepaid credit cards.
IN Monterrey, Mexico, where Roy and Bertrand Sosa grew up playing Atari and street soccer, cash paid for everything - the rent, the water bill, the white Volkswagen Beetle. Even at fancy restaurants, the brothers never glimpsed a Visa card, and they never used credit until college in Austin, Tex.
So in the late 1990's, when upbeat dot-coms promised to build online über-malls, the Sosa brothers wondered about how people without plastic could shop on the Internet.
"How in the world are all these millions of Americans going to be able to buy things online?" Roy recalled asking. For many people they knew, credit cards were still unfamiliar or out of reach, while checking accounts and debit cards were confusing or inconvenient.
Roy, then 28, and Bertrand, three years younger, hunted for another way to convert cash into digital dollars. Prepaid phone cards, sold directly in stores and vending machines, seemed like the right model. So, they thought, why not prepaid MasterCard and Visa cards?
Small-business advisers and lenders were skeptical, warning that customers for prepaid credit cards would be tough to find.
"The first thing that you heard was that, 'Oh, those people don't have any money,' " Roy said. The brothers changed their sales pitch, saying they would market the cards to tech-smart teenagers.
But their first instincts proved right. With little advertising and even less publicity, their company, NetSpend, has put its gold All-Access cards into the wallets of one million customers, typically people in their late 20's who earn under $30,000 a year.
"They understood a real market need," said Edward Kountz, senior analyst in the bankcards practice at TowerGroup, a market research company in Needham, Mass. "They're certainly one of a core group of providers."
Started in 1999 with $750, NetSpend has built its prepaid-card business by persuading banks to hold customers' deposits and by working with MasterCard and Visa to get merchants to accept the card. Prepaid cards, a nascent idea when the Sosas began offering them, are increasingly being promoted by big banks for other uses, including gift giving, remittances, wages, even welfare and child-support payments.
Sold at supermarkets, drugstores and check-cashing outlets, NetSpend's cards cost $9.95 up front, with either a $1 surcharge for each purchase or an $8 to $10 fee a month, all paid in cash. Such fees, which are standard among prepaid providers, have raised objections from consumer groups. But NetSpend and other companies say they charge less than competing services that their customers have long used, like check-cashing and money-transfer centers.
Besides using the cards in stores, customers can withdraw cash at A.T.M.'s, pay bills online and have paychecks directly deposited. For Penny Ballard, an administrative assistant in Phoenix who is trying to rebuild her credit, that means never again giving 2 percent of her paycheck to a check-cashing outlet or borrowing her friend's MasterCard to buy a plane ticket.
Like her parents, Ms. Ballard has never had a checking account and has no plans to open one. "This card offers all of the things the banks do," she said.
Roy Sosa said that NetSpend is tapping what he calls "the Wal-Mart cohort," meaning undervalued consumers who have considerable spending power. "We basically repackaged traditional financial services in a way that makes sense for those customers," said Roy, now 33 and the company's president. Bertrand, 30, is vice president in charge of marketing.
In a letter that Roy has saved, a customer in Houston said that until he bought the card, it was impossible for him to rent a car to see his children in Dallas, where their mother had custody, and take them out to a mall or restaurant. "It really highlights the opportunities that we can deliver," Roy said. "We can do this by allowing people to spend their money? To have their $20 be as good as anybody else's?"
Last year, NetSpend's customers loaded $1 billion in cash onto their cards, which are sold primarily in the Southwest but are also available in New York, Illinois and Florida. The company said it expected to double that volume in 2005.
NetSpend has also recruited H. Eugene Lockhart, former chief executive of MasterCard International, to lead its board; he succeeds Stephen B. Galasso, former president of credit cards at Bank of America. Mr. Galasso, who remains a director at NetSpend, was the company's chief executive for three years.
Based in Austin, NetSpend employs about 170 people at its new headquarters, at the Omni Austin Hotel office tower. The company bought the 12th-floor space from a defunct Internet start-up.
As NetSpend's business grows, its mission is expanding, the Sosas said. "The economy is like a highway, and there are some people that get pushed out," Roy said. "We like to think of ourselves as the access ramp."
This month, for instance, the company began offering cardholders free virtual accounts where they can set aside money for, say, a down payment on a car.
But prepaid cards lack the standard federal safeguards against loss, fraud and theft, said Jean Ann Fox, director of consumer protection for the Consumer Federation of America, an advocacy group in Washington. No law expressly governs them, and the Federal Deposit Insurance Corporation is still deciding whether its coverage generally extends to cardholders' deposits. "We're operating in a market where the plastic has gotten ahead of the protections," Ms. Fox said.
NetSpend, however, says it is voluntarily following the federal laws that govern debit cards, and in late 2003, after a lengthy and complicated application process, it became one of the few prepaid providers to have its accounts insured by the F.D.I.C.
The Sosas say that prepaid cards can work like financial training wheels, helping people learn, or relearn, how to use plastic wisely. To help its customers qualify for credit, the company is offering to share transaction histories with credit-card issuers, like a credit bureau would. "Would we like to keep the customer for another one or two years? Of course," Roy said. "Is it better for a customer? No."
But, he added, "if the word gets out that NetSpend is the way that you can enter the highway again," then there will always be people to buy its cards.
That was the case for Christi Turney, a real-estate agent in Palm Harbor, Fla., who had gone past the limit on her credit cards after her husband lost his job in 2002. No bank would give her another card, she said. "I was so desperate," she said. "I couldn't even rent a car for business trips."
Her prepaid card restored her buying power and helped her pride. "It's just the fact that you have access to things," she said. "You can take people to dinner, and they don't know it's your prepaid card."