The OTS directive to MetaBank sent the Iowa thrift's shares tumbling and then set off a series of subsequent events, from the suspension of an IPO to problems in the tax plans for several national tax companies, but all of it could come undone relatively quickly.
Here is the background: The OTS Directive broke existing plans at Santa Barbara Tax Products Group, at NetSpend, and at Jackson Hewitt. SBTPG had an agreement (from August 10th) that it would work with RALs and RACs from MetaBank. SBTPG intends to facilitate RALs in the upcoming tax year. NetSpend made MetaBank its preferred bank partner. Jackson Hewitt needs more RAL money, and it needs it to be wrapped up in five weeks.
This announcement poses a significant regulatory problem for MetaBank. It comes at absolutely the wrong time for
both Jackson Hewitt and for SBTPG.
For NetSpend, this might only be a minor bump. Last night, the company issued a new S-1 and announced that it intends to refile its IPO. NetSpend says that the loss of i-advance will not have an impact on its earnings. It is hard to believe that it won't have some kind of impact, but even if it does reduce fee revenue, NetSpend is still a company where income and revenues are both growing rapidly.
IPO analysts have repeatedly mentioned that NetSpend faces some regulatory liability in conjunction with the OTS' deletirous statements about MetaBank's lending. I cannot make a judgment as to the likelihood of that taking place. Outside of what the law says, it is still true that shedding i-advance removes a lot of stigma. The MetaBank spokesperson referred to i-advance as "the payday product." It is addition by subtraction. Drop the dead weight of the payday label, and the entire NetSpend brand is elevated.
The NetSpend cards, once un-burdened by the presence of an i-advance, come across as a very different set of goods. Suddenly, the worst feature of the NetSpend card is gone, whereas its potential as a positive financial tool for consumers remains in place. NetSpend cards do enable people to use basic banking services, and there are certainly millions of people that need those services and that are not currently getting them from a traditional bank branch account.
Sans an i-advance feature, NetSpend still has a profitable business model. They have 2.1 million active cards. Consumers conducted transactions worth almost $5 billion on their cards in the first six months of 2010. That GDV represented an increase of 36 percent from the period just one year earlier.
Here's the thing about this situation: NetSpend doesn't need MetaBank's i-advance product in order to make money. That cannot be said for some of the other players in this saga. When MetaBank has trouble with the OTS, Jackson Hewitt loses its financing with Wells. When MetaBank can't offer refund anticipation loans, then Santa Barbara Tax Products Group doesn't have a rational for being in business.
NetSpend's new S1 shows that existing private shareholders are putting up 16.26 million shares for sale in the new IPO. In the original S-1, those private shareholders (JLL, Oak, et al) had intended to sell 16.56 million shares. There is a difference of 308,442 shares. If the shares fetch what NetSpend expects they will ($11.18), then the difference amounts to $3.49 million.