More About NetSpend

The trail to understanding MetaBank leads to NetSpend.  Along the way, there are clues that reveal how some of America’s largest financial institutions are finding a way to get a cut of the newest high-fee predatory loan product – the prepaid debit card with an attached line of credit.

I went into plenty of detail last week to understand how NetSpend’s prepaid debit cards work. My conclusion was that they are very expensive and that they seem to have only minimal safeguards in place.

NetSpend made an investment in MetaBank in January. It was an interesting month for MetaBank, the tricky thrift from South Dakota. MetaBank also sold more than 9 percent of its outstanding shares to Cash America, a large payday lender.

If that makes you worry, then you might not be surprised to learn more about NetSpend.  NetSpend started out as a joint venture between the Texas Growth Fund, Inter-Atlantic Partners, Gefinor Ventures/GEFUS SBIC.  In 2004, NetSpend reached an agreement to accept a large investment from a mid-stage venture capital fund.  Oak Investment Partners put $170 million in NetSpend. Oak has a had a rough go – over the years, they are averaging an ROI of about 1 percent. That number might have been better – in 2007, Capitol One reached an agreement to buy part of NetSpend for $700 million.  Capitol One backed out of that plan, but they still came on board with a minority investment in the firm.

For their investment, Oak got to put one of its own at the helm of NetSpend.  Eugene Lockhart became President shortly after 2004.  Lockhart is an executive who formerly served as the CEO of MasterCard International.  He worked in Bank of America’s credit card division.

Inter-Atlantic claims that its portfolio of firms have issued 20 million prepaid debit cards to customers who need cash through both NetSpend and HigherOne. HigherOne is a firm that disperses refunds to university students.  A Higher One account includes checking, a credit card, and FDIC-insured deposits. HigherOne’s bank partner is not MetaBank or Inter National Bank. It is Bancorp Bank.

Bancorp Bank (TBBK) is another bank that specializes in payments processing through “branch-less banking”.    Bancorp (Kind of a plain vanilla name, eh?) is headquartered in Wilmington, Delaware.  It has a branch office in Sioux Falls.  Its offices are less than one mile from MetaBank.  Bancorp Bank’s largest investor is Wells Fargo, who report to owning more than 11 percent of the firm through various entities.  Unlike some of these other institutions, Bancorp appears to serve more than just the poor.  They have card accounts for health-savings accounts and for transit benefit cards. Still, they are no angels.  Bancorp Bank is behind the Rush Card.  The Rush Card, with its products like the BabyPhat Card (“activate for $19.95, never more than $10 in fees per month!”), has very high fees.  Oh – and look at this – the other bank partner (aside from Bancorp Bank) in the Rush Card is M&T Bank!

BabyPhat, from Bancorp Bank and M&T Bank, offers instant approval for people with no credit history. FDIC insured.

I guess this is turning into a complicated analysis.  That is because it is.  There are a lot of people who want to get in on the opportunity to make a buck off the poor.  That interest seems to come from across the country – from privileged venture capitalists in Westport, Connecticut, to state pension funds in Washington, to “advisors” in Palo Alto, to card companies in Austin, Texas, and to banks in Mexico and South Dakota.

In the last year, regulators have weighed a decision to allow more private equity investment in banks. Right now, private equity firms are limited to owning no more than one-third of the shares in any bank.  Private equity firms that own banks like to have control over their investments. (J.C. Flowers bought the First National Bank of Cainesville, in Missouri, earlier this year) The placement of Eugene Lockhart at the helm of NetSpend in but one more example of that desire. Owning a bank also gives private equity firms a conduit into FDIC insurance and to the discount window.

NetSpend is not a bank, of course. Private equity firms with large stakes in NetSpend are not banks, either.  They are private firms with little regulatory oversight.  They are partnering with banks to offer products that are backed by FDIC insurance.

Getting Started

Fringe banks are often the location for innovation.  Later on, once something is proven to be successful, the large banks move in.  I imagine that the possibilities present by prepaid card banking will be no different.  Right now, MetaBank, Inter National Bank, and Bancorp Bank are discovering how this can work.  For MetaBank, profits on their MPS unit more than make up for a banking operation that loses money.

The big banks are going to notice, though. It was the same with payday lending and with refund anticipation loan lendings.  Small banks like First Bank of Delaware, Crusader Bank of Pennsylvania, and Republic Bank of Kentucky made the initial foray into payday lending. In a few years, once the profits were proven, Wells Fargo and Bank of America created vehicles to access some of those cash flows.  Republic Bank, along with River City Bank and Pacific Capital, were the initial players in refund anticipation loan lending.  It was not long, though, before HSBC and JP Morgan Chase entered that market.

Already, it is evident how the nascent prepaid card market is going to get the big banks attention.  Capitol One, M&T, and Wells Fargo have already established their toeholds.