Competing prepaid card issuers may find an opportunity in the restrictions placed on Meta Financial Group Inc. by its regulator, observers say.
The Office of Thrift Supervision has directed Meta Financial’s MetaBank subsidiary to secure the regulator’s approval for new business partnerships and to shut down its iAdvance program that offers small lines of credit to prepaid card users (see story).
Though the restrictions do not necessarily affect MetaBank’s existing prepaid relationships, its partners may seek to break ties if the Storm Lake, Iowa-based company does not resolve its issues quickly, observers suggest.
The directive also may crimp other companies’ interest in offering short-term, small-dollar loans, which have become a more common retention tool for such prepaid card players as NetSpend Holdings Inc. and AccountNow Inc.
NetSpend also is a MetaBank customer, and it stands to be most affected by the agency’s action. MetaBank is the biggest issuer of NetSpend’s prepaid reloadable debit cards and accounted for 71% of its active cards as of June 30.
The two companies strengthened their ties in January by each agreeing to promote the other as their preferred partner. NetSpend also acquired a 4.9% equity stake in Meta Financial as part of the deal.
NetSpend also expected to have its shares listed soon on the Nasdaq Stock Market.
“The timing of this announcement is very unfortunate for them,” says Gil Luria, an equities analyst who follows NetSpend’s biggest competitor, Green Dot Corp., for Wedbush Securities LLC in Los Angeles.
A spokesperson for the Austin, Texas-based company declined to comment Thursday on MetaBank’s problems. In a Wednesday filing with the Securities and Exchange Commission, NetSpend said MetaBank plans to continue servicing its existing agreement in light of restrictions the OTS has placed on the issuer’s ability to enter new business agreements.
However, if the actions further limit MetaBank’s ability to operate, the issue could force NetSpend to look to its other issuing banks to continue providing prepaid cards, the filing said.
“Under our arrangements with our issuing banks, we have agreed upon sharing of certain revenues, costs and expenses,” NetSpend said. “Changes in these arrangements could have a material adverse impact on our results.”
The risks came to light Oct. 12, when Meta Financial disclosed in an SEC filing that the OTS ordered it to shut down its iAdvance program, causing its shares to plummet more than 30% the next day.
Through the iAdvance program, MetaBank offers prepaid card users short-term, high-interest loans.
The OTS found that MetaBank “engaged in unfair or deceptive acts or practices” in operating the program and ordered the issuer to discontinue the program, the company said.
The agency also is requiring MetaBank to obtain prior written approval to enter new business agreements, including for issuing prepaid cards, originating tax refund anticipation loans or amending existing business agreements.
MetaBank expects the loss of the iAdvance program and potential discontinuance of its tax-refund programs to eliminate a “substantial” amount of its Meta Payment Systems division’s gross profit.
Meta Financial did not respond to calls or e-mails for comment on Oct. 14.
A spokesperson for the OTS declined to comment or provide a copy of the supervisory directive it sent to MetaBank.
NetSpend, which offered the iAdvance product, does not expect the program’s discontinuance to have a material impact on its business, according to its filing.
Analysts say they did not expect MetaBank’s challenges to seriously hurt other key partners, including Western Union Co. and AccountNow. AccountNow, a San Ramon, Calif.-based prepaid card marketer, was offering the iAdvance product to customers using its MetaBank-issued prepaid cards.
The company also recently began offering a similar credit product through First Bank of Delaware in Wilmington. However, Bancorp Bank, a subsidiary of the Wilmington, Del.-based bank holding company Bancorp Inc., issues the cards tied to the program.
AccountNow did not make an executive available for an interview, but James Jones, its CEO, said in statement that it offers credit products such as iAdvance as “value-added services.”
“AccountNow is interested in offering products that are attractive to our customers and, at the same time, are considered appropriate by the applicable regulators,” Jones said. “We will continue to pursue partnerships where both of those conditions are satisfied.”
MetaBank is one of two issuers Western Union works with for prepaid cards, the other being Bancorp Bank.
“We’ll take steps as appropriate to ensure our [prepaid] program has the proper support from our issuing banks,” Tom Fitzgerald, a spokesperson for the Englewood, Co.-based company said. Western Union was not offering the iAdvance product, he added.
Tien-tsin Huang, an equities analyst with J.P. Morgan, said in an Oct. 13 research note he does not expect the issue to affect Western Union’s prepaid growth plan, but the company “may want to reevaluate its issuing bank relationship with MetaBank.”
If MetaBank’s problems persist, NetSpend and its other card partners could shift business to other issuers, says Tim Sloane, director of the prepaid advisory service at Mercator Advisory Group in Maynard, Mass. Such a move could be difficult depending on the terms of agreements in place but not impossible, he says.
“If you had sufficient time, if your sales volumes are high and your inventory is low, you could just let that sell out,” Sloane says. “Then the transition becomes less costly to you.”
The OTS’s action against MetaBank could cause other companies offering short-term, small-dollar programs or those considering developing them to reconsider doing so, says Kimberly Gartner, the associate director for the Center for Financial Services Innovation in Chicago.
“I do think there’s a customer need for loan products, and there are some positive product advancements that are in development around longer amortization, links to savings and around increased transparency and clarity for customers,” she says.
Such programs are still rare in the prepaid space, but more companies have talked about offering them, Gartner says.