The prepaid card company, which has struggled to grow since it went public in October 2010, on Nov. 3 posted largely solid third-quarter results.
Though the number of total active cards slipped, NetSpend emphasized potential gains from a host of new partnerships announced in recent weeks, including deals with 7-11 Inc. (
Executives also indicated more new deals might be afoot.
“We just had two meetings this week with large potential partners that could be very rewarding,” Dan Henry, NetSpend CEO, said in an interview.
The company has been hustling to regain its position after announcing last quarter that it had lost three check-cashing partners that sold its cards. Rumors swirled that the beleaguered Austin, Texas-based company was a potential acquisition target as it strained to expand its business (
“The signing of partnerships should be a positive for them,” says Larry Berlin, an analyst with First Analysis Securities Corp. “Management seems to be moving and growing in a changing space.”
During a Nov. 3 earnings call, Henry said NetSpend “just signed” with an undisclosed “large financial institution in New England” to issue payroll cards to some of the bank’s corporate customers. He did not elaborate on the deal.
The new deal eventually could expand to include issuing reloadable prepaid cards from the bank’s 1,500 branches, Henry added.
Analysts hope to hear more about that deal, which “could be very interesting as we learn more” about how large the partnership is and how it is structured, says First Analysis’ Berlin. “There’s a lot of potential there.”
Payroll and other prepaid cards both work like debit cards without being tied to a checking account. Companies distribute payroll cards to employees in lieu of a paycheck. The cards are popular among companies that hire employees without checking accounts who otherwise would have to redeem their wages at check cashers, which can be costly.
NetSpend executives said on the earnings call that the company continues to expand its payroll card business, with more than 1,100 employers using the service.
Henry added in the interview that he generally views banks as “potential partners,” noting banks turn away as many as one in five customers that come in to open a checking account because low-income consumers are an increasingly unprofitable group.
“We’re talking to more and more banks trying to find solution to that,” Henry said. “We’re going to see major banks moving into this space. Whether they partner with us or not, it’s still going to be a positive to NetSpend and everyone in this industry.”
New regulations that capped overdraft fees and the amount of money issuers earn from debit interchange could help propel more banks into the prepaid space, predict some observers.
“Consumers are now less profitable for banks than they used to be,” says Wedbush Securities analyst Gil Luria.
One alternative is to sell certain “borderline customers” alternative products at a lower cost, such as prepaid cards, he says.
That move by traditional banks is in the “very, very early stages,” Luria says. “Only a handful of banks have even tried to do this.”
And whether the trend catches on remains to be seen.
“If prepaid made sense before, [banks] would have done it,” says John Kraft, senior vice president with D.A. Davidson & Co.
The way new bank rules are written “it’s pretty clear that [regulators] don’t want the banks changing debit accounts to prepaid accounts to avoid [interchange fee] caps,” he says. “You really haven’t seen big launches in prepaid from the banks, and it makes sense because banks have always been able to have prepaid.”
Overall, though, Kraft is optimistic of NetSpend’s potential.
NetSpend still faces several “company-specific headwinds” thanks to the loss of the check-cashers and the company’s decision to exist in the gift card space, he says.
But the company is “still growing pretty nicely. As soon as those headwinds dissipate, you’ll have the tailwinds of new partners,” says Kraft.
NetSpend reported third-quarter profits of $8.3 million, up 30% from a year earlier. Revenue rose 9% to $74.3 million.
The total number of active cards declined 3% to 2.1 million, though the number of active cards with direct deposits rose 21% to 816,000. NetSpend considers direct-deposit cardholders more lucrative because consumers tend to keep the card longer, and deposits bring in regularly scheduled cash-loading fees.
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