In a transaction that probably reflects the increasing priority for prepaid card program managers to lower their customer acquisition costs, AccountNow has announced that it intends to buy nFinanSe. Most likely, the key value for AccountNow, a mid-sized prepaid PM whose cards are marketed over the internet, is to gain the foothold established by nFinanSe in several national retail stores.
nFinanSe is a small prepaid card program manager whose relative anonymity obscured its excellent offering. AccountNow, by contrast, is a relatively large PM whose stumbling block to gaining market share has been its lack of presence in any
This small transaction could be a part of larger things to come. The tea leaves in prepaid point to an era of margin compression, as more competition in retail stores puts downward pressure on prices. Green Dot has benefited from exclusive agreements with national retailers, but earlier this year it announced that several were going to expire.
The threat of compression could be more than enough to trigger a wave of consolidation. For the moment, prepaid is incredibly fragmented. That diversity is most prevalent among program managers and less so among issuers or processors.
nFinanSe cards distinguished themselves by their cost. The cards came with free customer service and no transaction fees. It also costs less to load them. nFinanSe cards can be loaded with a Reload Pack for $2.95. Given that other loads (Moneygram, ReLoadIt and Green Dot MoneyPak) can cost more than four dollars, the cards give consumers an opportunity to save money.
I think its likely that the key value of nFinanSe to AccountNow is their reach in stores.
“There are going to be winners and losers in GPR,” said Mike Harris of Core Innovation Capital during a Tuesday webinar. “The key question is distribution channel. [Companies want to] control customer acquisition costs.”
Certainly, AccountNow will have to pay the stores that put their cards in their racks. nFinanSe cards are available in Dollar General, Northeastern convenience store chain Cumberland Farms and TA Gas. Until now, the status quo at AccountNow had been to attempt to drive applications to its web site. That may have been accomplished through lead generation, where standard business practice is to sell leads to the highest bidder in an auction that lasts only a few seconds, or through more traditional internet advertising. Opening new accounts on the internet is expensive not just because of the cost of finding customers. Its even more problematic because many people sign up for a card but then never activate it.
These agreements are vital because they will enhance the ability of AccountNow to generate new customers. In the GPR market, where so many people hold their accounts for a short time, companies have to win new accounts every day in order to survive.
The agreement also promises that AccountNow will earn some cash flow on reloads.
Unlike the MoneyPak, an nFinanSe card can be reloaded immediately. When a consumer buys a load their funds are available as soon as the clerk swipes their card and scans the reload bar code. By contrast, most reloads require the consumer to enter a unique code from the reload packaging on to a secured web site. Thus, the consumer gets two value propositions: lower price and quicker utilization.
At the time of the sale, one share of common stock in nFinanSe was trading for 8/100ths of one cent. Today, the price has dropped to just 5/100ths of one cent. On Tuesday, nFinanSe common stock had a market capitalization of $25,500. Its capital came largely from debt.
Green Dot's Advantage
If it does become true that the prepaid sector begins a wave of consolidation, then the winners will be those that have the flexibility to act when opportunities emerge.
No one is better positioned to take advantage of a buying opportunity than Green Dot. Last quarter the company reported that it had approximately $200 million in cash, cash equivalents, and short-term investments on its balance sheet. NetSpend, by contrast, had just $26 million. Green Dot has no long-term debt. NetSpend has $70 million in long-term debt.
It is separate question as to if the two big guys have similar acquisition needs. Green Dot has a bank, for instance. NetSpend's retail relationships trend toward other unbanked financial services providers - particularly with payday lenders - whereas Green Dot has always marketed through traditional retail first. Nonetheless, both have the same need as the one that probably underlies the motives of AccountNow: they must find a way to continually acquire new customers.