NetSpend Deal Affirms Prepaid's Might

Once the redheaded stepchild of consumer banking, the prepaid card business now looks more like the industry's future.

The prepaid sector's maturation got further affirmation this week with the announcement that Total System Services (TSS) had agreed to acquire NetSpend Holdings (NTSP) for $1.4 billion.

The deal's price tag is notable — a 26% premium over NetSpend's stock price at the end of last week — but perhaps even more telling was the identity of the buyer. TSYS is a well-established payments processor that wanted a piece of the fast-growing prepaid market, despite the fact that it has little experience dealing directly with consumers.

"We view the prepaid market as very large and attractive," TSYS president Troy Woods said during a conference call Tuesday. "The annual revenue opportunity for the prepaid industry is $4 billion and is projected to double over the next four to five years." (To view TSYS' presentations to investors click here. To view its presentation to employees click here.)

Even before the arrival of TSYS, a diverse range of financial companies had a foothold in the prepaid card market. Those firms include a credit-card issuer (American Express), banks (JPMorgan Chase and others), a money transmitter (Western Union) and a tax preparation firm (H&R Block).

"A variety of very different companies recognize the same need," says Gil Luria, an analyst at Wedbush Securities. "There's a very large underserved population that is currently consuming financial services in a very disadvantageous way."

And as more large players arrive, the prepaid market is becoming increasingly competitive, according to analysts.

"I think that people see an opportunity," says Larry Berlin, a vice president at First Analysis. "They see faster growth relative to credit or debit cards."

Prepaid cards are not only enjoying rapid growth, they are also becoming a more mainstream financial product.

Less than two years ago, a prepaid card being hawked by the Kardashian sisters was decried for what many considered predatory pricing. Now American Express is marketing its Bluebird card to college students, and the prepaid providers are inching closer to offering the same services as a checking account.

"Prepaid is the new checking," argues Patrice Peyret, chief executive officer of Plastyc, a prepaid service provider. "I suspect that a fairly large number of banks are now wondering, 'Should we also get into prepaid?'"

The chance to partner with banks that want to get into the prepaid business is one area where TSYS acquisition of NetSpend could pay dividends.

Austin, Texas-based NetSpend already partners with some banks. But it will try to cross-sell to other depositories that are in business with TSYS. The Columbus, Ga.-based payments processor services eight of the top 10 U.S. financial institutions, it says.