NetSpend Quietly Partners with PayPal on Prepaid

The prepaid card marketer NetSpend Corp. is teaming up with PayPal Inc. in a deal that has so far been the subject of little fanfare by either company.

NetSpend disclosed the five-year agreement to manage and process PayPal-branded prepaid cards in a one-paragraph 8-K filing with the Securities and Exchange Commission dated Oct. 28.

A spokeswoman for NetSpend declined to comment because she said the company is in a quiet period before its earnings release, which is scheduled for Thursday. A spokeswoman for PayPal, a unit of eBay Inc., said only that it has not yet announced anything official.

Though few details are known, analysts expressed optimism about the deal's potential to attract new business to NetSpend.

"PayPal is a great brand and it's got a lot of exposure," says John Kraft, a senior research analyst with D.A. Davison & Co. It is "encouraging to see [NetSpend] broadening their footprint" through deals with companies like PayPal, he says.

The agreement also follows last month's distribution deal with convenience store chain 7-Eleven.

NetSpend, of Austin, Texas, has been ramping up expansion efforts after losing several crucial check-cashing distributors earlier in the year. The company has struggled to grow its business in line with competitors since it went public last October, even leading to rumors of a buyout.

NetSpend will "act as the exclusive (subject to certain limited exceptions) provider of program management and processing services for PayPal-branded open loop, general purpose reloadable prepaid cards in the United States," according to the Oct. 28 SEC filing.

The filing does not disclose any information about revenue-sharing or other financial arrangements between the two companies, leaving analysts uncertain of how big of a win the deal is for NetSpend.

"I've talked to a couple of investors who are really excited and others who are just not sure what this means," says Kraft.

The filing also notes that NetSpend has "agreed not to provide program management or processing services for prepaid cards marketed through retail channels by certain named competitors of PayPal."

Who exactly those named competitors are "will be my first question" for NetSpend, says Kraft. "I'd like to know who all that excludes."

Prepaid competitor Green Dot Corp. "also made their pitch for PayPal," Kraft says, citing his conversations with the Monrovia, Calif., company. But "they aren't going to be terribly upset, because they'll go after whoever PayPal would have restricted," he says.

PayPal's reasons for choosing NetSpend might be unclear, but the pairing makes more sense than the alternative, says Thomas McCrohan, a managing director at Janney Montgomery Scott.

A deal with Green Dot "would be an awkward relationship" for PayPal because both companies "market cards to retail buyers," meaning the two are more like competitors, he says. NetSpend, by contrast, distributes its cards through check-cashing stores and other such locations that are generally off PayPal's radar.