NetSpend Deal may be A Wake-up Call for Banks

  When Capital One Financial Corp. in August bought prepaid card distributor NetSpend Corp. for $700 million in cash, the McLean, Va.-based institution's hunger for new business and consumer financial-product relationships already was well-known. But the deal caught the industry unaware of bank discussions with nonbank entities in prepaid, observers say.
  "It's really a move that nobody was expecting, although we had forecast that a lot of issuers would go into prepaid," says Adil Moussa, an analyst with Aite Group LLC, a Boston-based consultancy. "We honestly did not foresee it happening so quickly. It consolidates a lot of product types in Capital One's hands and allows for cross-sales."
  Capital One could not help itself, paying a premium for the Green Dot and InComm competitor, observers say. NetSpend's distribution network includes 15,000 locations such as Safeway supermarkets and ACE check-cashing outlets where Visa- and MasterCard-branded prepaid cards can be purchased, and 50,000 places where funds can be reloaded. The company claims 1.5 million active customers.
  More prepaid deals are coming and could arrive relatively soon, Moussa says. "A lot of issuers have some prepaid cards but don't have the penetration level in the consumer marketplace and merchant reload [sites]," he says.
  Dan O'Malley, Capital One's director of payments, says Cap One sees "tremendous growth potential in this space." He cites 2006 market estimates of $104 billion in prepaid spending, up from $64 billion in 2004.
  Prepaid debit cards fill an important void, offering an alternative to cash for the 70 million consumers who lack or choose not to have a traditional bank account, O'Malley says. "Prepaid cards, in combination with our decoupled debit, credit card and banking products, enable Capital One and our co-brand partners to provide a card option for every customer," he says.
  Capital One's decoupled debit card, a co-branded MasterCard-branded product, can access checking accounts at any financial institution. Sheetz Inc., an Altoona, Pa.-based supermarket chain, in June began testing the co-branded Cap One rewards debit card at 12 of its stores (Industry News, July).
  The rewards are relatively high on Cap One's decoupled debit card for signature transactions because of the cobrand agreements-80 cents per $100 spent versus 10 cents for a traditional Visa and MasterCard debit card, according to Gwenn Bézard, Aite partner and research director.
  And Capital One already is applying its test-and-learn expertise to the prepaid business, O'Malley says. "We will be launching several new products over the next year, bringing even more options to our customers," he says.
  Branded prepaid cards such as those NetSpend supports are going to be in more prevalent use with the unbanked or underbanked, recent immigrants and illegal immigrants, Aite's Moussa says.
  Moreover, expensive secured credit cards have been a hard-to-take alternative for consumers with poor or nonexistent credit histories, notes Ed Lawrence, managing associate at Auriemma Consulting Group of Westbury, N.Y. "There is a negative connotation to secured cards," he says. "The positive alternative is prepaid."
  Lawrence recommends that other credit card issuers consider a strategy similar to the one Capital One has crafted and suggests consolidation may be the best way to build. "Capital One bought prepaid. It bought a book of business and a platform," he says.
  Lawrence says the deal also sends a message to the industry. "Someone's willing to put out a lot of money to say, 'Prepaid is a big business. I'm not going to reinvent the wheel. I'm going to take the existing model and build upon it,'" he says. "This acquisition builds integrity for prepaid."
  Cap One has set a price for prepaid companies such as NetSpend, Lawrence contends. Where banks were unwilling to buy companies, it is likely the purchase will cause other big players to look at nonbank originators of prepaid card relationships, he says.
  MORE DEALS AHEAD?
  Besides causing turbulence with big banks, Cap One's NetSpend acquisition could prompt independent prepaid card issuers to listen to bank offers, Lawrence says.
  The addition of debit and prepaid plastic not only fills out a suite of products to attract consumers, but it also provides Capital One more ways to woo co-brand partners, says Lawrence. "If Capital One expands to rewards on the prepaid card, they up the ante," he says. "That will put pressure on other banks."
  Prepaid cards may generate less in deposit balances than traditional debit cards do, but if Capital One gives its NetSpend cardholders rewards similar to those provided with traditional debit cards, it can make a profit, Lawrence says.
  Capital One paid a lot of money to get into prepaid with a book of business and a way to expand, Lawrence adds. "It's going to reopen the thought process at banks just like Capital One has done with decoupled debit," he says.
  "Banks thought they had it made with debit until Capital One introduced debit cards not related to checking accounts," Lawrence says.
  (Kelly Shermach is a freelance writer who also is employed part-time as a marketing communications associate at Auriemma Consulting Group.)
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