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NetSpend Trips, Green Dot Doesn't

Adam Rust's picture

Posted November 10, 2010

This week, Green Dot and NetSpend announced results for their third quarter earnings.

People have high expectations for companies with an established foothold in the prepaid card market. Every year, analytics firms publish estimates that predict more than 100 percent growth in reload volume, consumer accounts, and revenues. Every year, prepaid companies make reports that they have realized these gains.

Green Dot followed suit on Tuesday with some positive news. They more than satisfied investors when they reported thirty cents in EPS.

NetSpend (NTSP) did well, but not well enough. They paid off some of their debt with proceeds from their IPO. They managed to add 400,000 new accounts. Almost one in three cards is now direct deposit-enabled, compared to only 25.7 percent just one year ago. Gross dollar volume jumped by 33 percent year-over-year.

For most companies that would be a "door-blowing" report. Unfortunately, NetSpend has some high standards to meet. This is a company with a price-to-earnings ratio of 68. Compare that to the market as a whole, where the average P/E is more like 16.

Their shares dropped almost 8 percent before regaining a bit later in the day. Analysts though that they would report about $278 million in revenue, but NetSpend fell short.

Even if the numbers aren't perfect, they aren't bad, either. NetSpend still hasn't resolved some of its issues, though. They haven't resolved their situation with MetaBank. They've announced intentions to add three new bank partners. They have non-binding letters of intent with Bancorp Bank (TBBK) and Block Bank (HRB). The 10-q says that new relationships are at least 90 days away.

The lack of an answer with respect to new bank relationships is a problem, and it comes at the wrong time. NetSpend's 10-q contains this gem:

the most significant increases in the number of our active cards and our GDV typically occur in our first fiscal quarter as a result of consumers acquiring new cards and loading federal tax refunds onto their cards during tax season. In addition, the number of our active cards and our GDV typically increase from our third to fourth fiscal quarters as a result of increases in holiday employment and holiday-associated consumer spending.

That means that NetSpend is going to enter into the tax refund season without a long-term answer for their card issuer. None will replace

, where more than 70 percent of their cards are issued. There are other questions. The company is working on moving out of gift cards. Will they be able to replace that revenue?

NetSpend is going to have a hard time closing the door on its relationship with MetaBank. It isn't just that MetaBank issues most of their cards. NetSpend even owns 4.9 percent of MetaBank. Every day, a new litigation firm initiates a new class action law suit against MetaBank.

MetaBank continues to have its own issues. This blog records a comment from a panicked card consumer almost every day. It seems that MetaBank is demanding immediate repayment for outstanding i-advance debts. NetSpend's 10-qincludes the comment that "OTS has informed MetaBank that it will address in the future OTS’s expectations with respect to reimbursement of borrowers under the iAdvance program." That suggests that there may be more to come from the OTS.