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NetSpend Holdings Inc., a marketer of prepaid debit cards, is working with banks to broaden its distribution network beyond retailers and check cashers.
February 26 -
BB&T is launching a prepaid card that costs slightly more per month than some competing products — but lacks many back-end fees that have caught the ire of advocacy groups.
February 16 -
It makes sense that a handful of banks looking for new revenue streams have approached Green Dot about starting programs to offer their customers prepaid cards.
February 11
As banks join forces with prepaid card companies, reputational risks loom.
Many banks are planning to offer the reloadable cards as an alternative product for customers who do not qualify for traditional checking accounts or cannot afford them after banks add new fees. So, some banks are partnering with third-party companies that operate their own prepaid systems, such as NetSpend Holdings Inc. and Green Dot Corp.
These partnerships may help banks save time and money in establishing programs, but with consumer advocates pouncing on prepaid cards' fees and partners of the third parties facing their own regulatory pressures, the onus is on banks to conduct due diligence, analysts say.
Some of NetSpend's biggest card distributors are check cashers and payday lenders, which have been the target of state legislation and complaints from consumer groups. In October the Office of Thrift Supervision forced MetaBank, the biggest issuer of NetSpend's cards, to end a high-interest, short-term loan program it offered through prepaid card companies for what the OTS called unfair and deceptive practices. (NetSpend has pursued other issuing bank partners to diversify beyond the Meta Financial Group Inc. subsidiary.)
"The fact that NetSpend has business partners that are under a great deal of scrutiny may scare some banks away from wanting to partner with them," said Gil Luria, an analyst with Wedbush Securities in Los Angeles.
Additionally, consumer groups have called on prepaid card companies to lower or eliminate fees. Analysts have speculated that the new Consumer Financial Protection Bureau will target prepaid fees.
A spokesman for Advance America, Cash Advance Centers Inc., a Spartanburg, S.C., payday lender that sells NetSpend cards, said its partners "don't have a concern about how critics define our business."
Executives at NetSpend and Green Dot, two of the largest prepaid program managers in the country, say that their fees are low and are clearly disclosed.
If anything, discussions with banks have played "to our favor" by highlighting NetSpend's transparency, Dan Henry, the Austin company's chief executive, said in an interview Thursday. The fees on its prepaid cards are equal to or lower than those banks are adding to traditional checking accounts, he said.
NetSpend announced last week that it would sell cards through First State Bancshares Inc., a Farmington, Mo., holding company that operates the 33-branch First State Community Bank.
All program functions, including account management and card issuing, are being handled by NetSpend and its own issuing partners, essentially making First State like any other distributor.
To First State, "it's another product that we can offer [consumers] without sending them out of the bank with nothing," Jennifer Lee, the deposit operations manager for First State, said in an interview last week.
Lee said by e-mail Thursday that the bank researched "a variety of vendors and chose the vendor we felt provided the best product for our customers."
NetSpend and its vendors are responsible for handling regulatory compliance, Lee said.
Small and midsize banks are more likely to work with a third party because of the investment such programs require, whereas large banks may run their own programs, said Jonathan Donahue, the global relationship manager for banking and financial services at Genpact LLC, a business process outsourcing firm.
Ben Jackson, a senior analyst in the prepaid advisory service at Mercator Advisory Group in Maynard, Mass., said, "I don't think that people are going to … [say], 'Oh, well I see they work with NetSpend and they work with payday lenders, so I'm not going to deal with them,' … the real question is whether or not a regulator would look at that."
Jackson said it is unlikely that will happen but that it underlines that banks must make "sure the regulator understands … that this is not an entree [for] trying to get into the check-cashing business or payday lending business."
Green Dot sells its cards primarily through retailers, not payday lenders and check cashers.
Depending on how banks structure their partnerships, they "will need to put some man-hours in vetting that all of the things are being done appropriately," he said.
Steve Streit, Green Dot's chairman, chief executive and president, agreed but said the due diligence that banks would perform when partnering with a prepaid company is no different from their due diligence of other vendors. "Banks are in the business of choosing outsource partners all the time," Streit said Thursday.
Green Dot is in talks with banks interested in working on prepaid programs, but there are no deals to announce, Streit said.
