Will That Be Cash or Prepaid? NetSpend Buyout Rumors Swirl

Marketing to underbanked consumers isn't easy. Selling to them is even harder.

Greet Dot Corp., NetSpend Corp., and other companies that specialize in so-called alternative financial services are all scrambling to win their share of the 60 million U.S. consumers with limited exposure to mainstream bank products.

While they tout the market's vast size, prepaid companies' success at attracting these customers has varied, and some have been less successful than others at expanding into new distribution channels.

One of the stragglers is NetSpend, which has struggled to grow its business since a successful initial public offering last year. Now it is increasingly being talked about as an acquisition target.

The Austin, Texas, company operates prepaid debit card programs and partners with sponsor banks, which issue its prepaid cards largely to low-income consumers.

Since completing its IPO in October - on the heels of Green Dot's own initial public offering - NetSpend has had to seek new bank partners because of regulatory pressures on its largest partner, Meta Financial Group Inc.'s MetaBank.

NetSpend also recently said it lost three of its distributors in the check-cashing industries that sold its cards. Two of those distributors were acquired, and one decided to create its own prepaid card program in-house.

And while NetSpend management and other industry executives like to say regulators in Washington, D.C., love prepaid cards because they promote financial inclusion, consumer advocates have chided the company for charging customers high fees. (The company argues its fees are in line with industry averages.)

Some equities analysts have grown equally disenchanted with NetSpend's growth performance.

"Most investors appreciate the opportunity in the overall prepaid space, [with] 60 million unbanked and underbanked Americans, but it doesn't seem like you're executing on it," Bank of America Merrill Lynch analyst Jim Kissane told NetSpend CEO Dan Henry during the company's earnings conference call earlier this month.

"What is NetSpend not doing right to take advantage of the opportunity?" he asked.

Disappointing results have prompted speculation that NetSpend may get bought out, perhaps by Green Dot or Capital One Financial Corp. The McLean, Va.,-based bank backed away from a deal in 2007 to buy NetSpend for $700 million.

"We continue to have conviction that the" market for general purpose prepaid cards "is a large, early-stage growth opportunity," Andrew Jeffrey, an analyst with SunTrust Robinson Humphrey, wrote in an Aug. 4 research note to clients. "As a result, NetSpend's core distribution channel may represent an attractive acquisition candidate for a company seeking to expand its footprint."

Green Dot and Capital One representatives declined to comment on Wednesday.

Western Union Co. and H&R Block Inc. could also be candidates given they each have their own prepaid card programs and provide financial services to low-income and underbanked consumers, according to Gil Luria, a senior vice president with Wedbush Securities LLC. "NetSpend would help either expand their business in this fast growing segment," Luria wrote in an email.

Investors, at least, seem to like this idea. NetSpend's shares rose more than 8% on Tuesday, after a Reuters article said the company is looking more and more like a buy-out target.

A NetSpend spokeswoman declined an American Banker request for comment by email on Tuesday.

Henry said in an interview with American Banker this month ()