NetSpend Holdings Inc. says it would not shy away from offering new credit products to its prepaid card customers despite regulators clamping down on its largest issuer.
Though Meta Financial Group Inc.’s iAdvance high-interest, short-term loan program has been shut down, NetSpend, which offered iAdvance, says there still is room for some form of lending product among its offerings–most likely a “micro-type loan product” at “rates and fees that no one else in the industry can match,” Dan Henry, NetSpend’s chief executive, said during an earnings conference call Nov. 10.
NetSpend expects to consult with regulators and consumer advocates on how to design such a product, Henry added.
The Austin, Texas-based prepaid card seller has been working to add new partnerships with issuer banks since Meta Financial Group, whose MetaBank subsidiary is its largest issuer, disclosed last month that the Office of Thrift Supervision forced it to eliminate a loan program called iAdvance for engaging in unfair or deceptive practices (
NetSpend is continuing to form new partnerships with issuers while also trying to add new retail partners to expand its customer base, Henry said.
“While we believe Meta remains strong financially, our sponsor-bank diversification strategy continues,” he said.
MetaBank provided 72% of NetSpend’s issued cards as of Sept. 30.
NetSpend previously disclosed that it had nonbinding letters of intent to add Bancorp Bank and H&R Block Bank as issuers. They are subsidiaries of Bancorp Inc. and H&R Block Inc.
“We expect to have a pretty good group of banks to choose from,” Henry said.
In response to an analyst’s question about what the OTS saw as problematic with the iAdvance product, Henry said his speculation is an anti-payday loan sentiment drove the decision.
“What regulators saw here was an opportunity, if you will, to nip this loan in the bud and go ahead and get those turned off before they got too large and gained too much traction,” he said.
NetSpend does offer an overdraft-protection product in its payroll business.
In its quarterly earnings filing with the Securities and Exchange Commission, NetSpend said that, historically, a “significant amount” of revenue from its cards marketed through employers has come from overdraft fees. That revenue is threatened by overdraft rules that took effect July 1 requiring banks to obtain customer consent before charging overdraft fees on certain transactions.
It plans to continue working with banks that are able to offer overdraft protection, Henry said.
NetSpend wants to add new issuers to grow its retail distribution channel, which largely consists of payday lending and check-cashing retailers.
“We’ve got a couple of larger transactions … that we’re looking at,” Henry said, indicating that the pipeline of new distributors looks good.
NetSpend owned a stake in Meta Financial Group that as of Sept. 30 was worth about $4.8 million. The value has since declined between $2.4 million and $2.9 million, according to NetSpend.
A robust retail channel has been key to the success of NetSpend’s rival, Green Dot Corp., which is considered the largest prepaid card program manager. The Monrovia, Calif.-based company sells its cards through more than 50,000 retail store locations, including those of Walgreen Co., CVS Caremark Corp., 7-Eleven Inc. and Wal-Mart Stores Inc. Wal-Mart accounted for about 63% of Green Dot’s revenue.
NetSpend, which also has a large employer payroll card business, sells cards through Ace Cash Express Inc., a payday lending and check-cashing store operator that accounts for about 37% of its revenue.
Henry declined to discuss the specific type and size of retailers NetSpend is pursuing.
“The big question that’s out there is: is it going to be something meaningful like Target,” or smaller retailers, says Gil Luria, a senior vice president with Wedbush Securities in Los Angeles.
Adding new retailers is also key to leverage NetSpend’s existing processing platform, Luria says.
David Parker, a senior analyst with Lazard Capital Markets in San Francisco, says he suspects NetSpend is focusing on multi-lane retailers, starting with smaller players first.
“It’s easier to get some of the smaller merchants,” Parker says. “You might see those before you see a large one signed.”
The product resonates well with retailers, he adds. “It’s a natural avenue for them to try to penetrate further,” Parker says
A benefit to NetSpend’s payroll-distribution channel is it tends to attract more long-term cardholders. Those that buy a card for a single purpose from a retailer do not always continuing using it.
NetSpend has been successful at pushing direct deposit to its cardholders. This typically results in larger amounts of money being loaded onto its cards. Direct deposit accounts for about 73% of money that was loaded onto its cards in the third quarter.
By comparison, Green Dot said about 40% of the money loaded onto its cards was from direct deposit.
NetSpend is looking at adding other features, including a rewards program, to improve cardholder retention.
“We’re still in [a] relatively early stage of that,” Henry said.
During the quarter ended Sept. 30, NetSpend’s number of active cards, or those that have had a purchase, load or ATM withdrawal in the last 90 days, grew 24% from a year earlier, to 2.1 million.
Gross dollar volume, or the dollar volume of debit transactions and cash withdrawals made with its reloadable cards, increased 33%, to $2.4 billion.
Revenue increased 22%, to $68.2 million from higher transaction volumes, which helped boost NetSpend’s interchange and service fee revenue.
Net income increased 78%, to $6.4 million. Earnings per diluted share were 7 cents, up from 4 cents a year earlier.
NetSpend is forecasting full-year revenue in the range of $272 million to $274 million and adjusted net income in the range of $32 million and $33 million.
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