NetSpend Corp.’s planned initial public offering could help it fend off increased competition from banks and develop new features to win over unbanked consumers, industry watchers say.
The Austin, Texas-based prepaid card company said in a filing Thursday with the Securities and Exchange Commission it expects to raise up to $200 million in an IPO, becoming the second major marketer of prepaid cards to try going public this year. Its larger rival, Green Dot Corp., is in the midst of its own IPO, with its shares expected to be listed on the New York Stock Exchange in the coming week.
Green Dot’s plans, disclosed in February, are seen as a sign the prepaid market is maturing, and analysts say NetSpend’s announcement marks another milestone in the industry’s growth.
“With two of the largest players now ready to go public, it sets valuation parameters for many other prepaid players and stakeholders that are not public,” says John Grund, a partner who focuses on payments for First Annapolis Consulting in Linthicum, Md.
Green Dot and NetSpend, which both partner with banks to issue their general purpose reloadable cards and rely on retailers to distribute them, have been among the most aggressive prepaid marketers in terms of adding new features and services to their cards.
Such services, including direct deposit, savings accounts, bill pay, credit lines and insurance, are one strategy NetSpend, Green Dot and other prepaid card marketers have used to try to reduce churn.
In its filing, NetSpend said the average lifetime of a direct-deposit card is about 20 months, compared with 11 months for other prepaid cards.
Bob Hedges, a managing partner with Boston consulting firm Mercatus LLC, says going public positions the companies to head off increased competition that would result if more traditional banks decide to develop their own prepaid products as a result of new regulatory changes.
The Credit Card Accountability, Responsibility and Disclosure Act and new rules for overdraft protection have cut into revenue for banks’ credit and debit card businesses. New limits on debit card interchange fees that could result from the financial reform bill passed Thursday could further hurt the profitability of the card business.
The fact that the interchange amendment in the legislation includes a carve-out for reloadable and government prepaid cards may prompt banks to focus their attention on the prepaid space, Hedges said. Additionally, if banks start tacking on new fees to checking accounts and other products, as many expect, more consumers may consider prepaid cards a viable payment option.
“These companies–Green Dot, NetSpend–clearly want to get positioned to take advantage of the market opportunity coming their way,” Hedges says. “They’re getting their powder ready.”
The companies have relied on similar distribution strategies to attract customers, but there are key differences in how they plan to use the money from their offerings.
NetSpend plans to use the proceeds primarily to pay down debt and for working capital. As of March 31, it had $48.8 million of long-term debt that is due within a year, according to the S-1 filing by NetSpend Holdings Inc., its holding company. It had $13.8 million in cash.
Its filing did not say how many shares it plans to sell or what price it expects for them. Its stock will be listed on the Nasdaq Stock Market LLC.
Green Dot, on the other hand, will not retain any of the proceeds from its IPO because only existing investors are selling shares in the deal. The company on July 9 announced that investors, including chief executive Steve Streit, plan to sell up to 3.85 million shares at a range of $32 to $35. The deal is expected to raise $129 million.
The company in May issued 2.21 million shares of class A stock to its largest retail partner, Wal-Mart Stores Inc., as part of a five-year extension of an existing business arrangement.
Analysts view the decision to sell only secondary shares in the IPO as a sign Green Dot is in a strong financial position and does not need new capital to grow. It had no long-term debt and more than $97 million in cash as of March 31, according to a recent SEC filing.
Green Dot also is trying to buy Bonneville Bancorp, a Utah bank holding company, which would allow it to issue its cards directly to consumers and cut down on maintenance costs, experts says. The company expects the Federal Reserve Board to make a decision on its application this quarter.
Brian Riley, the research director for the bank cards service at the Needham, Mass., research firm TowerGroup, says the difference in the companies’ financial positions is “the most interesting thing” about their IPO filings.
It is not surprising that NetSpend, specifically, is planning an IPO given the company’s “eyes have been certainly on (doing) something bigger” to grow, Riley says, citing the fact that Capital One Financial Corp. had planned to buy NetSpend for $700 million in 2007 but ultimately backed out of the deal.
Going public will enable both companies to establish a market for their stock, but it also is likely to put pressure on them reduce their retail partner concentration, which Nicholas Einhorn, an analyst with IPO research firm Renaissance Capital LLC in Greenwich, Conn., says is a risk for investors.
Sales at Wal-Mart accounted for 63% of Green Dot’s operating revenue in the first quarter. Green Dot provides Wal-Mart’s prepaid MoneyCard, which is issued by GE Money Bank.
ACE Cash Express Inc., a payday-loan and check-cashing store operator, accounted for 37% of NetSpend’s 2009 operating revenue. It disclosed in its filing that ACE attempted to terminate its agreement with NetSpend in June over proposed modifications to their contract, but the issues recently were resolved.
The IPO could help in that area, though, Einhorn says.
“There’s a kind of … legitimizing effect to an IPO” that could help either company add partners, he says.
