The rise of prepaid debit cards is helping payments processor Total System Services Inc., also known as TSYS, expand as it works to grow its payments volume.
The Columbus, Ga.-based company, which manages card-issuing activities for banks and processes card transactions for merchants, said the number of stored-value accounts on file at the end of the first quarter was 62.3 million, an increase of more than 50% from a year earlier.
That growth contributed to an overall increase in accounts on file — a key performance metric for TSYS that also includes consumer, commercial and government cards — by 10.3% to 356.7 million, the company said April 26 as it reported quarterly earnings.
“We are trying to find the norm for this prepaid business,” Philip Tomlinson, TSYS’ chairman and chief executive, said during a conference call with analysts. “It is a business that has not historically been large. The numbers are now starting to become meaningful and we have got two or three really, really large prepaid clients that really drive those numbers.”
One of those clients is Green Dot Corp., a Monrovia, Calif.-based company that markets prepaid debit cards primarily to underbanked consumers. Green Dot, whose cards are issued by partner banks, uses TSYS to process its customers’ transactions.
While many mainstream banks issue prepaid cards as part of employee payroll, government benefits and health care reimbursement programs, few issue them as a mass-market offering for general, everyday spending. Recent restrictions on debit card overdraft fees and the Federal Reserve Board’s pending caps on debit interchange fees have prompted more mainstream banks to consider doing so.
Prepaid cards technically are not subject to regulatory limits on overdraft fees and they currently are exempt from the Fed’s proposed debit interchange cap, which would take effect on July 21.
Such limitations on debit could drive more prepaid business for TSYS, which got into the prepaid business several years ago with the expectation that its bank clients “would want to be in that business,” Tomlinson said.
“That did not work out, particularly over the last two or three years, but we do think that they will issue more prepaid cards as time goes by,” Tomlinson said.
Thomas McCrohan, an analyst with Janney Montgomery Scott LLC, said he expects banks will find ways to market prepaid cards for consumers accustomed to using traditional financial services. “The prepaid product isn’t just for the unbanked,” McCrohan said.
What will slow banks down — and potentially crimp TSYS’ expectations — is the effect that future mobile systems could have on their willingness to invest in developing prepaid products, McCrohan said.
“What [banks] are struggling with is the convergence with mobile,” McCrohan said. “Is it premature to start issuing prepaid cards if it’s going to go the mobile route?”
In a research note published on Wednesday, McCrohan also noted that stored value cards generate the lowest revenue per account for the company.
On the merchant side, the number of point of sale transactions TSYS processed in the quarter ending March 31 fell 8.3% to 1.2 billion, which Jim Lipham, a senior executive vice president and chief financial officer, said on the conference call was due to the loss of a large merchant client last year.
The company said its net income fell 4.9% to $48.8 million as operating income in its North American segment fell 20.9%.
TSYS recorded diluted earnings per share of 25 cents, in line with analysts’ estimates and down from 26 cents a year earlier. Its revenue grew 3.9% to $429.4 million.
What do you think about this? Send us your feedback.
