NetSpend announced plans last week to sell shares through an initial public offering.This is an important moment in the prepaid field, and when coupled with the Green Dot IPO this week, it should signal that the prepaid card market is maturing.
We know that prepaid cards matter, because they may be the main financial tool for the unbanked market in the near future. The FDIC says that 60 million adults, or about one in four in the US, are unbanked. Even though these individuals don't use a bank, they still make payments. In 2009, they sent about $1.1 trillion. That's a lot of money. Prepaid cards are only beginning to reach this market. According to NetSpend, about one in six unbanked has a prepaid card for some purpose. NetSpend has more than 2 million card accounts right now.
JLL Partners is a mid-stage investment in New York. JLL has some of the characteristics of Sequoia, a private equity firm that has a stake in Green Dot. Like Sequoia, JLL is not focused on one sector. Aside from NetSpend, they have positions in an overhead door company, a community bank, an aerospace manufacturer, and a pharmaceutical research firm. Actually, to say that they have no focus is not quite true, because they are very active in health care and pharmaceuticals.
Still, they are like Sequoia in that they do have exposure to more than one firm in the financial services market, and
they are also like Sequoia in that they have active positions in the alternative financial services world.
To me, their most intriguing position relative to this deal is their stake in Ace Cash Express. Ace provides a variety of products in the alternative financial services market, from checking cashing and money transfers to payday loans. The typical Ace Cash Express store is everything that a bank is not - located in a strip mall, with linoleum floors and anonymous office furniture. There are no branded lollipops or televisions with in-house networks made to resemble CNBC. Just simple...What's also interesting is that Ace Cash Express and NetSpend don't get along. Ace says that NetSpend has violated their agreement, and they want out of the deal, even though the two groups do a lot of business together. In fact, Ace is NetSpend's largest partner, with 37 percent of their revenues.
JLL purchased Skylight Financial in 2007. Skylight was acquired by NetSpend in 2008 for $26.3 million. Skylight markets cards for US Bank and SunTrust. The Skylight One Card is a debit card that accepts direct deposit. It is one of the cards that allows consumers to receive overdraft services (services being a term that begs interpretation).
More about Net Spend
NetSpend manages 2.08 million active card accounts. Green Dot, by comparison, has about 3.38 million accounts. Accounts have grown four fold since 2005. With each year, a higher share of those cards have direct deposit.
NetSpend purchased 4.9 percent of outstanding shares in MetaBank in 2010. NetSpend has an agreement with MetaBank, where each designates the other as their preferred partner in the prepaid debit card field. As if to underscore the tight interlinks in this market, MetaBank has a nine percent stake in Cash America.
NetSpend is not a bank, and they depend upon the fees from the banks that issue their cards for the great majority of their revenues. NetSpend merely distributes and processes the cards. Fees paid by a NetSpend customer are delivered to the bank. NetSpend does almost 70 percent of its business (by card accounts) through MetaBank, although it also works with US Bank, Inter National Bank, and SunTrust.
NetSpend derives 19 percent of its revenues from interchange fees. That is less than Green Dot, for instance, where more than 27 percent of fees in the quarter ending 10-31-09 were from interchange.
With that set of bank partners, their cards are regulated by the Federal Reserve, the OTS and the OCC. At each, deposits are insured by the FDIC. Going forward, each regulatory agency has no reason to ignore the expansion of the card market, as each has a member bank that interacts with NetSpend. There are other banks and thrifts in this space (Urban Trust, Synovus, M&T) , as well. So let's just say that no one gets a pass.
A New Regulatory Framework
The new Dodd-Frank bill carves out protection for small banks, including Inter National and MetaBank, that allow higher interchange fees on GPR card transactions. The rule says that interchanges fees have to be reasonable and proportionate to the actual costs of providing the transactions, but that standard will only be applied to banks with assets of more than $10 billion. Bully for MetaBank, Inter National Bank, and if Green Dot were to acquire Bonneville Bancorp, then Bonneville, too! Interchanges fees are not de minimis. They accounted for 19 percent of NetSpend's operating revenues in 2009.