Meta Financial Group Inc. has secured $5.65 million worth of funding from a very nontraditional — and potentially controversial — source: Cash America International Inc., a payday lender.

The Storm Lake, Iowa, banking company sold 265,000 shares of common stock, for $21.33 per share, to Cash America last week, in what J. Tyler Haahr, Meta's president and chief executive, called a "passive investment. There is no management involvement, there are no board seats that go along with that investment."

Cash America now owns 9.1% of Meta's common stock — or 80 basis points below the level at which regulators would take an active interest in the sale.

"This particular transaction is unusual, and if it's nothing more than a passive investment on Cash America's behalf, then that's fine, but if they were going to go more than 9.9% you'd wonder if the regulators would look at that really hard," said Richard Levenson, the president of the investment bank Western Financial Corp. in San Diego. Above 9.9%, "you have to get approval, there's control issues."

The Meta deal was the first instance of a payday lender investing in a traditional financial institution that Levenson was aware of. But, he said, "we're starting to see more creative methods of raising capital, because the traditional methods of going out to retail and institutional investors who specialize in investing in community banks, that market has been diminished, has dried up."

Meta's choice of backer might not be as counterintuitive as it looks. The banking company, which specializes in issuing prepaid cards for several marketers, already indirectly serves some of the underbanked consumers who rely heavily on payday lenders and other alternative financial providers. And Cash America already sells some customers prepaid cards that are issued by Meta Bank and marketed by NetSpend Corp.

Given Meta's past relationship with Cash America, Haahr said, "we thought we could get very favorable terms to what other capital raisers have been going for."

Many banks cut ties with payday lenders several years ago under scrutiny from regulators. But "Meta has been a pioneer. They were one of the first to work with payday lenders, check cashers, all those companies that traditional banks looked down their noses at," said John Racine, a managing principal at the consulting firm Altamont Partners (and a former editor of American Banker).

"I don't see what a regulator has to be concerned about," Racine said. By providing products to payday lenders — but not lending directly to underbanked consumers — "they're really, as a bank, not taking a risk with that customer."

Meta issued the shares to Cash America at fair market value, based on the 20-day average of the stock price, Haahr said, unlike "the vast majority of PIPE [private investment in public equity] deals that have been getting funded in the financial institution area."

Cash America did not return calls. Henry Coffey, an analyst who covers the payday lender for Sterne, Agee & Leach Inc., called the sale "a strategic relationship with someone who's obviously going to be a real customer" for Cash America. The company's "goal has been to build out a technology platform for delivering small-dollar loans," including products like prepaid cards, "with the most interesting market being that 600 to 700 FICO, the client who's being hosed by their bank."

The bulk of the infusion is earmarked for Meta's payments unit, in what Haahr called a broader plan to "refocus our payments systems business on its core mission." As part of that refocusing last week, Meta laid off 48 of about 350 employees in its payments unit, mostly research and development staff. "We were expanding the role we were taking in transactions and doing more product development and new products, as opposed to the sponsorship and service-type business that had been our core business," Haahr said, adding that Meta is not discontinuing any products or businesses. The Argus Leader of Sioux Falls reported the layoffs last week.

Haahr would not identify specific plans for Cash America's $5.65 million investment, other than to cite steady growth in Meta's payments business over the past five years. "We thought it was prudent while we are growing and profitable to raise some additional capital for what we believe could be additional significant growth."

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