Prepaid Debit Helps a Key Metric Improve for TSYS

Register now

The rise of prepaid debit cards is helping the payments processor Total System Services Inc. expand as it works to boost its payments volume.

The Columbus, Ga., company, which manages card-issuing activities for banks and processes card transactions for merchants, said the number of stored-value accounts on file at the end of the first quarter was 62.3 million, an increase of more than 50% from a year earlier.

That growth contributed to an overall increase in accounts on file — a key performance metric for TSYS that also includes consumer, commercial and government cards — by 10.3%, to 356.7 million, the company said Tuesday as it reported quarterly earnings.

"We are trying to find the norm for this prepaid business," Philip Tomlinson, TSYS' chairman and chief executive, said during a conference call with analysts. "It is a business that has not historically been large. The numbers are now starting to become meaningful and we have got two or three really, really large prepaid clients that really drive those numbers."

One of those clients is Green Dot Corp., a Monrovia, Calif., company that markets prepaid debit cards, primarily to underbanked consumers. Green Dot, whose cards are issued by partner banks, uses TSYS to process its customers' transactions.

Many mainstream banks issue prepaid cards as part of employee payroll, government benefits and health care reimbursement programs, but few issue them as a mass-market offering for general, everyday spending. Recent restrictions on debit card overdraft fees and the Federal Reserve Board's pending caps on debit interchange have prompted more mainstream banks to consider doing so.

Prepaid cards technically are not subject to regulatory limits on overdraft fees and they currently are exempt from the Fed's proposed debit interchange cap, which would take effect July 21.

Such restrictions on debit could drive more prepaid business for TSYS, which got into prepaid several years ago with the expectation that its bank clients "would want to be in that business," Tomlinson said.

"That did not work out, particularly over the last two or three years, but we do think that they will issue more prepaid cards as time goes by," Tomlinson said.

Thomas McCrohan, an analyst with Janney Montgomery Scott LLC, said he expects banks to find ways to market prepaid cards for consumers accustomed to using traditional financial services.

Depending on how mobile systems evolve, banks may become less willing to invest in the development of prepaid card products, which in turn could slow banks down and crimp TSYS' expectations, McCrohan said.

"What [banks] are struggling with is the convergence with mobile," McCrohan said. "Is it premature to start issuing prepaid cards if it's going to go the mobile route?"

In a research note published Wednesday, McCrohan noted that stored-value cards generate the lowest revenue per account for TSYS.

On the merchant side, the number of point of sale transactions TSYS processed in the first quarter fell 8.3%, to 1.2 billion. On the conference call Jim Lipham, a senior executive vice president at TSYS and its chief financial officer, attributed that decline to the loss of a large merchant client last year.

The company said its net income fell 4.9%, to $48.8 million, as operating income in its North American segment fell 20.9%. Its revenue grew 3.9%, to $429.4 million.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER