When eFunds Corp. of Scottsdale, Ariz., purchased the prepaid debit card processor WildCard Systems Inc. in July, the $228.8 million acquisition represented a turning point for the company.
Earlier eFunds had sold off its unprofitable automated teller machine management business to refocus on its core transaction processing and risk assessment businesses.
Observers consider WildCard, since renamed eFunds Prepaid Solutions, to be the leading processor of network-branded prepaid debit cards.
The largest issuers of such cards use WildCard's processing platform. JPMorgan Chase & Co., for example, uses it to process prepaid cards distributed for a wide range of payments and government benefits. Last fall JPMorgan Chase issued hundreds of thousands of American Red Cross and Louisiana prepaid debit cards distributed to those displaced by Hurricane Katrina.
As part of eFunds, WildCard processed millions of transactions initiated on relief cards last year.
Mainly as a result of shedding its money-losing ATM division and picking up WildCard, eFunds reported earnings per diluted share of $1.17 for last year, a 41% increase from a year earlier. The earnings rose despite a 9% revenue decline, which was caused by the ATM division sale.
However, eFunds' financial report for the first quarter of this year shows what appear to be weaknesses in prepaid processing. Perhaps the most prominent sign of that weakness is the imminent departure of Larence Park, who has led eFunds' Prepaid Solutions since the acquisition.
Paul Walsh, eFunds' chief executive officer, announced May 3 that Mr. Park would leave the company next month.
Mr. Park was a co-founder of WildCard and served as its CEO from 1997 until it was purchased. The announcement of his departure was the leading reason eFunds' stock has sunk 13% since hitting a high of over $25 a share the day before the announcement, one source familiar with the purchase of WildCard told ATM&Debit News.
As part of the acquisition, Mr. Park and other WildCard executives have an "earn-out" agreement with eFunds, the source said. That provision would provide Mr. Park additional earnings if the processing unit exceeded certain revenue thresholds this year.
His departure plan may be a sign that WildCard's processing volume is not growing as fast as many thought it would, the source said. "The reason the stock is down is the investment community is wondering why Park left."
In a question-and-answer session with analysts on May 3, Mr. Walsh was asked why Mr. Park would leave his prepaid processing leadership position before a possible payout from the earn-out provision. Mr. Walsh said, "Larry and his team will remain eligible for that."
The prepaid revenue threshold for this year is $106 million, he said.
That day eFunds reported that its prepaid operation, the second-largest in its transaction processing division, generated first-quarter revenue of about $21.8 million. The operation's loss of about $3 million after expenses contributed significantly to eFunds' 10.1% net income drop in the quarter, to $10.7 million.
(There is no year-earlier revenue comparison for the prepaid operation because eFunds did not own WildCard at that time.)
The first-quarter results suggest that eFunds' prepaid operation would generate less than $106 million of full-year revenue. But analysts say the prepaid business is highly seasonal, with much higher transaction volume initiated on prepaid cards in the fourth quarter than in any other quarter.
"You make 35% in the fourth quarter in prepaid; that's what I see," says Paul Tomasofsky, the president of Two Sparrows Consulting LLC.
Moreover, other WildCard executives subject to earn-out provisions, including WildCard co-founder Gary Palmer, are staying on at eFunds. Mr. Palmer's responsibilities in the prepaid unit are increasing, according to eFunds.
In a recent interview with ATM&Debit News, Mr. Palmer said he expects the prepaid processing division to remain the fastest-growing transaction processing business at eFunds. Payroll cards and government and employee benefits cards "are getting triple-digit growth."
He noted that most states have not converted from a check-based benefits payment system to prepaid cards.
Mr. Walsh told analysts that eFunds should begin getting some cost savings from its prepaid processing operation this year as the WildCard processing platform is integrated into eFunds' platform.
