When Simple announced that it was going to be acquired by Spanish bank BBVA Compass for $117 million, some observers called the price modest. After all, its investors had put $15 million into the company. The price must have been low, because it was only a modest eight-bagger.
But how can that possibly be the case? Simple was sold for $117 million, but it only had 100,000 users. Do the math: BBVA just paid $1,170 for each sign-up. Could those account holders possibly have enough lifetime value to ever allow BBVA to earn back that much money?
I think they might have gotten a little too optimistic.
But it gets worse. Simple's claim to having 100,000 customers is something of a mirage. That number counts everyone who ever signed up for an account. But the real number is surely going to be far lower, because the only customers that matter are the ones that have open and active accounts. Moreover, the idea of "active" is itself somewhat of a low bar. Being "active" can mean that a card is only slightly more than moribund. Some companies call an account "active" when it has recorded one transaction in the last 90 days. It is also true that many people are serial openers.
I asked the CEO of one program manager with an app-first prepaid card about his reaction to the announcement.
"I have no idea how many truly active users they really have," he said. "But it is certainly less than one hundred thousand. At least NetSpend has processing capabilities plus some decent retail distribution. GreenDot has its bank plus a very good retail footprint and a cash load network. Simple has none of these valuable assets. Good negotiation on the part of Simple and its investors."
He added "I don't think it creates a solid reference for other program managers."
One defense for the price would be to say that BBVA just avoided paying the costs of acquiring customers on its own. True enough, it does cost money to find new accounts. I have heard that companies often see average costs per new account of almost one hundred dollars.
A more plausible explanation is that BBVA bought new customers and an existing platform. BBVA now has Simple's software, their marketing scheme, their app, and their back-end infrastructure. That is worth something. Anyone who is in prepaid already has established a moat. Bancorp has a sweet moat and so does TSYS.
Simple has a great app and that is worth something. BBVA's insight could be that they have just bought a toehold into the future of account acquisition. For the moment, cards with excellent apps are the exception. But in years to come, it is likely that the app will be the lead interface. People are going to get an account by downloading the app first. Already, this is what most people do when they get a GoBank account. Going forward, online and retail will take a step back.
Speaking of Bancorp, but for the moment BBVA plans to let Bancorp remain as the issuer of those Simple accounts.
But assuming that BBVA runs Simple right out of the box, there are still other costs involved that must be paid. BBVA will have to integrate Simple into its legacy systems. At the very least, they are going to have to switch Simple over to its issuing division. Until they do, they will have to let interchange revenues slip out of their grasp. Making that switch is a cost that would have been avoided if BBVA had built out its own platform.
Chase did a great job of building out an integrated customer experience when it created Liquid. This is the right thing to do, in my opinion. It puts teeth into the idea that prepaid accounts are a gateway back into the banking system. But it is also a profitable one. Chase now reports that it is graduating some of its Liquid customers into its traditional product lines. For an example of what it looks like when a prepaid line is never integrated, look no further than Wells. The web site for Wells' prepaid card is a ghetto. It segregates its prepaid card customers in to a separate log-in and takes them to a stand-alone site. Even if you have another account with Wells, you cannot see it. If BBVA is truly going to use Simple as a means to expand its retail customer base, then it has to spend money here. That is money that it would not have had to invest if they started their own channel.
I'm not trying to take anything away from Simple's product. All in all, they have put together a very rich product. It is more than just a spend account. It has budgeting tools, remote deposit, and a nice app. In fact, it is just as cool as GoBank. It might be even better if it has a better way of speeding up the time that it takes to see a remotely-deposited check clear.
What this Says about the Valuation of other Prepaid Card Program Managers
Green Dot reported that it had 4.7 million active accounts at the end of 2012. In the last three years - a fair approximation for the period of time during which Simple opened 100,000 accounts - Green Dot has activated 23 million new cards. Does that mean that their prepaid business is worth $26.9 billion all by itself? They have an issuing bank and the nation's largest reload network to boot. That doesn't seem to square with Simple's deal, because as of this morning Green Dot's enterprise value is less than $500 million. That represents a valuation of about $20 per sign-up.
Most acquisitions end up being a "win" for the company that gets purchased and an expensive opportunity for the management of an acquiring company to look bold and creative. I suppose the logic here is that this is a financial synergy. BBVA had cash and Simple had the growth opportunity. But it takes a lot of imagination to believe that BBVA will ever look back and feel good about this decision. Congratulations, Simple!