Facing slower growth, prepaid card marketers diversify

Green Dot Corp.’s move to buy UniRush, the biggest independent prepaid marketer in a steadily consolidating industry, is the latest sign that remaining stalwarts with reloadable cards will need to look in new directions for growth as acquisition targets dwindle.

One prospect is marketing demand deposit accounts to existing prepaid card users as a way to diversify and expand as new CFPB rules go into effect this fall adding limitations to traditional reloadable prepaid cards. Green Dot, for example, launched a virtual GoBank account in 2013, targeting consumers seeking a demand deposit account with streamlined features.

Now NetSpend, another top prepaid card marketer that's owned by payment processor TSYS, is testing its first-ever demand deposit account.

NetSpend alluded to the new product last month during a discussion about quarterly earnings. The company hasn’t disclosed specific features of the new account type or its launch partner (unlike Green Dot, NetSpend does not own a bank), but TSYS CEO Troy Woods told analysts it’s a large NetSpend distribution partner interested in extending a bank account product to its customers.

Observers speculate that a check-cashing company or payroll card provider could be a likely fit for NetSpend’s new venture, providing mutual benefits. Green Dot also sees growth opportunity with payroll cards, having just picked up the Rapid! PayCard corporate payroll card business with its UniRush purchase.

NetSpend’s goal with its new product is to expand relationships with existing customers and also reach new customer segments, according to Michael Reiff, NetSpend’s vice president of product management.

“While our new demand deposit account for customers who want a bank account is still in the internal testing phase, we anticipate it will include many new capabilities that NetSpend does not offer today including check writing and an enhanced savings feature,” Reiff said in an emailed statement.

NetSpend also plans to launch a small-business prepaid card for sole proprietors and LLCs, Reiff added.

In addition to finding new paths to organic customer growth, one reason NetSpend wants to get into bank accounts is to recoup the more than $80 million in revenue the company expects to incur from the new CFPB rules, which restrict overdraft services it currently offers on some of its prepaid cards, analysts say.

“It’s pretty clear that the money NetSpend is going to lose from the CFPB rules’ effects played an important role in the economics of their decision to launch a DDA product,” said Ben Jackson, a director of prepaid cards at Mercator Advisory Service. “The company obviously wants to offset those losses by diversifying their base by giving customers a choice between a prepaid card and DDA account.”

Prepaid card usage remains steady among many unbanked consumers and those who lean on the cards to control spending. Funds loaded onto prepaid cards will see a compound annual growth rate of 4% through 2019, according to data from Mercator Advisory Group.

The prepaid card industry not only faces stagnant industry growth, but other possible shocks from the new presidential administration, Jackson said.

“The prepaid industry includes closed-loop gift cards, transit cards and open-loop government benefit cards, and the new government could bring in new laws, regulations and budgets that affect all of these areas,” Jackson said.

Possibilities include government benefit cards losing funding, he said. For example, the U.S. Treasury Department currently supports the Mastercard-branded Direct Express prepaid card program issued by Comerica Bank for federal benefits recipients lacking a bank account.

Transit cards also could see growth or declines, depending on whether infrastructure spending rises or falls, Jackson said.

“Prepaid cards still have a lot of steady usage, but there aren’t a lot of big independent players left now, so it’s going to be tough to find growth without going in some new directions,” he said.