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Green Dot Corp.'s initial public offering will be a major milestone for the prepaid card market regardless of the company's ability to reach its recently disclosed price targets.
July 9
NetSpend Corp.'s planned initial public offering could help it fend off increased competition from banks and develop features to win over unbanked consumers, industry watchers said.
The Austin company said in a filing Thursday with the Securities and Exchange Commission that it expects to raise up to $200 million in an IPO, which would make it the second major marketer of prepaid cards to try going public this year. Its larger rival, Green Dot Corp., is in the midst of its own IPO, with its shares expected to be listed on the New York Stock Exchange this week.
Green Dot's plan, disclosed in February, was seen as a sign that the prepaid market was maturing, and analysts said NetSpend's announcement is another milestone in the industry's growth.
"With two of the largest players now ready to go public, it sets valuation parameters for many other prepaid players and stakeholders that are not public," said John Grund, a partner who focuses on payments at First Annapolis Consulting in Linthicum, Md.
Green Dot and NetSpend, each of which issues general-purpose reloadable cards in partnership with banks and relies on retailers to distribute them, have been among the most aggressive prepaid marketers in terms of adding features and services to their cards.
Such services, including direct deposit, savings accounts, bill-pay, credit lines and insurance, are a strategy NetSpend, Green Dot and other prepaid card marketers have used to try to reduce churn.
In its filing, NetSpend said the average lifetime of a direct deposit card was about 20 months, compared to 11 months for those without that service.
Bob Hedges, a managing partner at the Boston consulting firm Mercatus LLC, said going public positions the companies to head off increased competition that would emerge if more traditional banks decide to develop their own prepaid products in the wake of regulatory changes.
The Credit Card Accountability, Responsibility and Disclosure Act and new rules for overdraft protection have trimmed revenue from banks' credit and debit card businesses. New limits on debit card interchange fees that could result from the financial reform bill passed Thursday could further hurt the card business' profitability.
The fact that the interchange amendment in the legislation includes a carve-out for prepaid cards may prompt banks to focus their attention on the prepaid business, Hedges said. Also, if banks start tacking on fees to checking accounts and other products, as many expect, more consumers may see prepaid cards as a viable payment option.
"These companies — Green Dot, NetSpend — clearly want to get positioned to take advantage of the market opportunity coming their way," Hedges said. "They're getting their powder ready."
The companies have relied on similar distribution strategies to attract customers, but key differences exist in how they plan to use their IPOs' proceeds.
NetSpend plans to use the money primarily to pay down debt and for working capital. As of March 31, the company had $59.1 million in outstanding debt under a term loan, according to the S-1 filing by NetSpend Holdings Inc., its holding company. It had $13.8 million in cash.
Its filing did not say how many shares it plans to sell or what price it expects to get. Its stock will be listed on the Nasdaq Stock Market LLC.
Green Dot, on the other hand, will not retain any of the proceeds from its IPO because only existing investors are selling shares in the deal.
The company on July 9 announced that investors, including Chief Executive Steve Streit, plan to sell up to 3.85 million shares at a price in a range of $32 to $35. The deal is expected to raise $129 million.
The company in May issued 2.21 million shares of class A stock to its largest retail partner, Wal-Mart Stores Inc., as part of a five-year extension of an existing business arrangement.
Analysts view the decision to sell only secondary shares in the offering as a sign that Green Dot is in a strong financial position and does not need new capital to grow. It had no long-term debt and more than $97 million in cash at March 31, according to a recent SEC filing.
Green Dot also is trying to buy Bonneville Bancorp, a Utah bank holding company, which would let it issue its cards directly to consumers and cut down on maintenance costs, experts said. The company expects the Federal Reserve Board to decide on its application this quarter.
Brian Riley, the research director for the bank cards service at the Needham, Mass., research firm TowerGroup, said the difference in the companies' financial positions is "the most interesting thing" about their IPO filings.
It is not surprising that NetSpend, specifically, is planning an IPO given that the company's "eyes have been certainly on [doing] something bigger" to grow, Riley said, mentioning that Capital One Financial Corp. had planned to buy NetSpend for $700 million in 2007 but ultimately backed out of the deal.
Though going public will let both companies establish a market for their shares, it also is likely to put pressure on them reduce their retail partner concentration, which Nicholas Einhorn, an analyst at the IPO research firm Renaissance Capital LLC in Greenwich, Conn., said is a risk for investors.
Sales at Wal-Mart accounted for 63% of Green Dot's operating revenue in the first quarter. Green Dot provides Wal-Mart's prepaid MoneyCard, which is issued by GE Money Bank.
ACE Cash Express Inc., a payday-loan and check-cashing store operator, accounted for 37% of NetSpend's 2009 operating revenue. It disclosed in its filing that ACE tried to terminate its agreement with NetSpend in June over proposed modifications to their contract, but the issues recently were resolved.
The IPO could help in that area, though, Einhorn said.
"There's a kind of … legitimizing effect to an IPO" that could help either company add partners, he said.
