NetSpend Forges Ahead Despite Issuer Woes

NetSpend Holdings Inc. said it won't shy away from offering new credit products to its prepaid card customers even though regulators are clamping down on its largest issuer.

Though Meta Financial Group Inc.'s iAdvance high-interest, short-term loan program has been shut down, NetSpend, which offered iAdvance, said there is still room for some form of lending product among its offerings — most likely a "micro-type loan product" at "rates and fees that no one else in the industry can match," NetSpend Chief Executive Dan Henry said.

NetSpend expects to consult with regulators and consumer advocates on the design of such a product, Henry said.

The Austin, Texas, prepaid card seller has been working to add new partnerships with issuer banks since Meta Financial Group, whose MetaBank subsidiary is its largest issuer, disclosed last month that the Office of Thrift Supervision forced it to eliminate a loan program called iAdvance for engaging in unfair or deceptive practices. NetSpend cannot enter new relationships with retail distributors that are subject to third-party agreements with Meta without Meta's first obtaining OTS approval.

NetSpend continues to strike partnerships with issuers while also trying to add new retail partners to expand its customer base, Henry said during an earnings conference call Wednesday.

"While we believe Meta remains strong financially, our sponsor-bank diversification strategy continues," Henry said.

MetaBank provided 72% of NetSpend's issued cards as of Sept. 30.

NetSpend previously disclosed that it had nonbinding letters of intent to add as issuers Bancorp Bank and H&R Block Bank (subsidiaries, respectively, of Bancorp Inc. and H&R Block Inc.).

"We expect to have a pretty good group of banks to choose from," Henry said.

When an analyst asked why the OTS had ordered the iAdvance product halted, Henry said it may have been an anti-payday-loan sentiment.

"I think what regulators saw here was an opportunity, if you will, to nip this loan in the bud and go ahead and get those turned off before they got too large and gained too much traction," he said.

NetSpend does offer an overdraft protection product in its payroll business.

In its quarterly earnings filing with the Securities and Exchange Commission, NetSpend said that, historically, a "significant amount" of revenue from its cards marketed through employers has come from overdraft fees. That revenue is threatened by overdraft rules that took effect July 1 requiring banks to obtain customer consent before charging overdraft fees on certain transactions.

It plans to continue working with banks that are able to offer overdraft protection, Henry said.

NetSpend wants to add new issuers to grow its retail distribution channel, which largely consists of payday lending and check-cashing retailers.

"We've got a couple of larger transactions … that we're looking at," Henry said, indicating that the pipeline of new distributors looks good.

NetSpend owned a stake in Meta Financial Group that as of Sept. 30 was worth about $4.8 million. The value has since declined between $2.4 million and $2.9 million, according to NetSpend.

A robust retail channel has been essential to the success of NetSpend rival Green Dot Corp., which is considered the largest prepaid card program manager. The Monrovia, Calif., company sells its cards through more than 50,000 stores, including those of Walgreen Co., CVS Caremark Corp., 7-Eleven Inc. and Wal-Mart Stores Inc. Wal-Mart accounted for about 63% of Green Dot's revenue.

NetSpend, which also has a large employer payroll card business, sells cards through Ace Cash Express Inc., a payday lending and check-cashing store operator that accounts for about 37% of NetSpend's revenue.

Henry would not specify the type and size of retailers NetSpend is pursuing.

Gil Luria, a senior vice president with Wedbush Securities in Los Angeles, said "The big question that's out there is, is it going to be something meaningful like Target," or smaller retailers.

Adding new retailers is also crucial if NetSpend is to leverage its existing platform, Luria said.

David Parker, a senior analyst with Lazard Capital Markets in San Francisco, speculated that NetSpend is focusing on multi-lane retailers, starting with smaller players.

"It's easier to get some of the smaller merchants," Parker said. "You might see those before you see a large one signed."

"I think the product resonates well with retailers," he added. "It's a natural avenue for them to try to penetrate further."

A benefit to NetSpend's payroll distribution channel is it tends to attract more long-term cardholders. Those that buy a card for a single purpose from a retailer do not always continue using it.

NetSpend has been successful at pushing direct deposit to its cardholders. This typically results in larger amounts of money being loaded on to its cards. Direct deposit accounts for about 73% of money that was loaded on to its cards in the third quarter.

By comparison, Green Dot said about 40% of the money loaded on to its cards was from direct deposit.

NetSpend is looking at adding other features, including a rewards program, to improve retention.

"We're still in [a] relatively early stage of that," Henry said.

NetSpend's number of active cards, or those that have had a purchase, load or ATM withdrawal in the last 90 days, grew 24% from a year earlier in the third quarter, to 2.1 million.

Gross dollar volume (the dollar volume of debit transactions and cash withdrawals made with its reloadable cards) rose 33%, to $2.4 billion.

Revenue rose 22%, to $68.2 million, on higher transaction volumes, which helped boost NetSpend's interchange and service fee revenue.

Net income rose 78%, to $6.4 million. Earnings per diluted share were 7 cents, up from 4 cents a year earlier.

NetSpend is forecasting full-year revenue in the range of $272 million to $274 million and adjusted net income in the range of $32 million and $33 million.