Hot market. Cost-cutter. Big corporate clients.
U.S. Bank's deal for FSV Payment Systems summons all the right buzzwords. And, certainly, buying the prepaid card processor would let the main unit of U.S. Bancorp (USB) in Minneapolis bring prepaid card processing in-house and become a one-stop shop for prepaid.
But more importantly, the deal would provide U.S. Bank access to a crucial piece of the prepaid market it can do a lot with - the corporate payroll segment.
A significant piece of FSV's business is its payroll program management, which is a growing market for prepaid, says Kevin Morrison, the senior vice president of retail payment solutions at U.S. Bank.
Prepaid card marketers are fighting the perception that their products are disposable. Rather than buy prepaid cards for single uses, such as to fund online shopping or to receive tax refunds, prepaid providers are urging their customers to treat their cards more like a permanent bank account.
"The focus for the entire industry is maintaining that long-term relationship with the end user," Morrison says. "While we'll be able to leverage things like [FSV's] platform, they'll be able to leverage our existing relationships as well as infrastructure."
U.S. Bank and FSV expect the acquisition to close this month, with FSV becoming part of U.S. Bank's Elan Financial Services business. The companies did not disclose the financial terms of the deal.
U.S. Bank's expertise in regulatory compliance will help FSV adapt as the prepaid card market matures, says Rick Savard, FSV's chief executive officer.
"This sets us up probably to be the strongest player in the prepaid market today," he says.
U.S. Bank would be able to take advantage of FSV's existing customer base. FSV recently began handling McDonald's prepaid payroll processing, which means U.S. Bank could see a further influx of McDonald's employees using its products.
"In one step U.S. Bank has increased its prepaid portfolio and brought in a processing platform," says Ben Jackson, senior analyst at Mercator Advisory Group. "This will help it manage the costs of its prepaid programs while also bringing in more revenue sources."
Madeline Aufseeser, a senior analyst at Aite Group, was blunter about the potential competitive edge.
"U.S. Bank beat JPMorgan Chase to the punch," says Aufseeser, who has encouraged a vertical consolidation of the market and this month recommended that JPMorgan, which offers the Liquid prepaid card, partner with FSV.
Banks that offer multiple prepaid card programs can combine their prepaid payroll processing with their general prepaid debit card processing, bringing the management to the retail side of the bank instead of the treasury side, Aufseeser says.
The retail side of the bank is better equipped to manage prepaid because the bank focuses on consumer needs over corporate needs, she says. If employees leave their employers that have prepaid payroll card relationships at U.S. Bank, the bank will have an easier time continuing the relationship by marketing a prepaid debit product.
The expertise and volume enables U.S. Bank to compete with other financial institutions by allowing it to offer a more vertically integrated product, bundling processing, issuing and others functions such as customer service in one package, Jackson says.
U.S. Bank "holds the promise of bringing to market a true low-cost bank account alternative by substituting prepaid cards for checking accounts and then surrounding that account with all the financial services U.S. Bank offers through its mobile banking services," says Jim Wells, president of Wellspring Consulting International out of Fort Lauderdale, Fla.
A bank-owned prepaid card "does no harm but yet still gives [consumers] a relationship with an insured depository institution," he says.
Not only will consumers benefit from the acquisition, but banks prepaid card programs will also grow. Prepaid cards sold through banks see more success, says Aufseeser. Banks see longer relationships, higher direct deposit and more active use from their prepaid card products.
"While the deal may take some time to demonstrate its full effects, it will be valuable in the long run," Jackson says.