Once focused solely on credit cards, Capital One Financial Corp. is expanding rapidly into the debit market and says its latest deal, for one of the top prepaid debit companies, will lure a new slice of customers to its other products.
The McLean, Va., company's $700 million cash deal Tuesday for NetSpend Holdings Inc. is an effort to reach consumers who are increasingly interested in debit products rather than credit, especially young people and those without bank accounts.
"The majority of consumers have some things they like to buy with credit cards and some things they like to buy with a debit card," Scott Grimes, Capital One's senior vice president of payments, said in an interview Wednesday. "We just want to make sure we have both of those offerings available."
Capital One would gain access to NetSpend's general-purpose, reloadable prepaid products, which are aimed mainly at the unbanked and underbanked, as well as students and children.
Mr. Grimes said Capital One sees a lot of growth potential for NetSpend's products.
"We believe prepaid pretty quickly becomes a lot more than underbanked," he said. "There are prepaid solutions for small businesses, for teens, students, health care, payroll. There's just a ton of applications for the prepaid space."
That potential also includes cross-selling other products to NetSpend's customers, Mr. Grimes said. "By acquiring prepaid customers, we think we're very well positioned to sell them other financial products as they mature financially."
The deal's origins reach back to February, when Capital One hired the Austin prepaid provider to help it develop a prepaid program of its own. Mr. Grimes said his company realized that buying NetSpend was an "attractive deal" in a market that he estimated is growing 60% a year.
Capital One also liked NetSpend's proprietary infrastructure, experience, and numerous retail relationships, he said.
NetSpend cards are sold at more than 15,000 retail locations, can be reloaded at about 50,000, and are sold online. Mr. Grimes said the extensive retail network is a potential distribution channel for Capital One's other products.
Rick Savard, NetSpend's chief executive, said Capital One has a well-established national brand, a strong marketing program, and customers in a broad range of markets, including subprime.
Many NetSpend executives worked in the retail industry, including Mr. Savard, who worked at Federated Department Stores (now Macy's Inc.). "If you look at the core strengths of both organizations, you wind up with a very powerful combination," he said.
Mr. Savard said that Capital One was attracted to a NetSpend feature that pays cardholders 5% annually on balances.
Customers also can find nearby locations where they can add funds to their accounts by sending NetSpend text messages; the company will respond with the five closest sites.
The deal is Capital One's second major move in the debit market this year. In March it began issuing a "decoupled" card that routes payments across the automated clearing house network and can be linked to accounts at any bank. The card carries the MasterCard Inc. brand and can be used at any merchant that accepts MasterCard products.
NetSpend's cards carry the MasterCard, Visa U.S.A., and Discover Financial Services LLC logos.
The former monoline card issuer expanded into banking by buying Hibernia Corp. in 2005 and North Fork Bancorp in December.
Capital One "has to worry about the future of credit cards," said Gwenn Bezard, a research director at the Boston market research company Aite Group LLC. "A lot of people are embracing debit, and that's why Capital One has introduced a decoupled debit card and bought NetSpend.
"They have a pretty comprehensive offering now," Mr. Bezard said.
The deal is scheduled to close next quarter.
