NetSpend Corp., a provider of general-purpose prepaid cards, announced June 26 that it had signed an agreement to buy Skylight Financial Inc., a payroll cards vendor.
The deal shows that the industry continues to consolidate as prepaid card providers look to stake out their territories, observers say.

Austin, Texas-based NetSpend decided to buy Atlanta-based Skylight because the deal would give NetSpend a new way to reach unbanked and underbanked consumers, Dan Henry, NetSpend CEO, tells Prepaid Trends.

NetSpend cardholders can have paychecks directly deposited to their cards, but the company does not offer cards through employers, Henry says. Buying Skylight enables the company to do so, he adds.

The Skylight management team, including CEO Kevin Lee, will stay in place, Henry says.

The company expects to close the deal in the third quarter. Henry declined to disclose Skylight's price or how many cards it has outstanding. He did say that this year Skylight cardholders would use their cards to spend about $1 billion, and NetSpend customers would use their cards to spend about $5 billion.

The NetSpend-Skylight deal represents horizontal integration in the industry, with companies buying one another to increase the scale of the business they already do, says Gwenn Bèzard, director of research at Boston-based Aite Group LLC.
That stands in contrast to First Data Corp.'s deal for Atlanta-based Interactive Communications International Inc. (InComm).

The First Data deal represents vertical integration, where First Data, which is based in Greenwood Village, Colo., wants to control more of the prepaid card business from end to end to increase margins, Bèzard says.
"Now the consolidation is accelerating," Bèzard says. "That is probably the only generic statement you can make across the prepaid industry."
Henry says the prepaid market continues to grow and offers tremendous opportunity for many players.

In a presentation at SourceMedia's third annual Underbanked Financial Services Forum in Miami last month, Henry estimated about 5 million open-loop prepaid cards are in circulation despite a market of 40 million to 100 million potential customers.
(SourceMedia publishes Prepaid Trends.)
"There is room for all the players in the space in my opinion," Henry told the conference audience. "I'm not competing with these people–we're all building this industry."

NetSpend's cornerstone product is its All-Access Prepaid card. The card operates on either the Visa or MasterCard networks. Consumers can purchase the card at more than 20,000 locations and reload it at 60,000 locations.
Two banks issue NetSpend's cards: Metabank, which is based in Storm Lake, Iowa, and Inter National Bank, which is based in McAllen, Texas.

The company also offers travel cards and general-purpose gift cards. NetSpend cardholders also can sign up for a savings account that is attached to their cards. The company offered a 5% promotional interest rate from October to March. Inter National Bank holds the accounts, which will continue to pay 5% until the end of the year, Henry tells Prepaid Trends.

In February, the company announced it signed an agreement with Advance America Cash Advance Centers Inc. to sell prepaid cards in Advance America's 2,600 payday-loan stores in 35 states.

Jamie Fulmer, Advance America spokesperson, tells Prepaid Trends that offering prepaid cards would provide Advance America's established customers more products and give the company a chance to reach new customers who do not have bank accounts and cannot use payday loans.

He says the company does not plan to offer loans using the cards.
Advance America and NetSpend share the fees from the sale and reloading of the cards. Consumers can reload their NetSpend cards at Advance America locations.
During an interview at the Prepaid Expo in Las Vegas in March, Henry said the prepaid industry's success depends on teaching consumers why prepaid cards could prove useful.

"There is a huge number of people that could benefit from the features of a prepaid card that don't even know about it," Henry said at the expo.

Prepaid cards offer the same spending controls as cash but enable consumers to shop on the Internet and rent cars, he says. Many rental-car companies do not rent cars unless the renter uses a credit card. NetSpend also offers automatic text alerts so consumers can check their balances in real time.

Using prepaid cards online gives consumers who prefer cash more options, Fulmer says. "We think that gives customers who purchase these cards the ability to enter the modern world without using cash or checks," he says.

At the underbanked forum, Henry said the prepaid industry should not make assumptions about the abilities and profitability of customers who do not make much money.

"Just because they don't make a lot of money doesn't mean they're stupid," Henry said of underbanked consumers.

Prepaid represents the next payments frontier because both the credit card and debit card markets are saturated with companies and consumers, he said.

The prepaid market provides financial-services companies with opportunities that otherwise would not exist, said Henry. The average balance on a NetSpend prepaid card is about $50, and the company has enrolled about 20,000 consumers in savings accounts.

Traditional banks cannot make money from a similar customer base because of the overhead of maintaining branches and hiring employees, Henry said.

"Is there a retail bank that can build a branch, stuff it full of new college grads and make money off of people with an average balance of $50? No," Henry said at the underbanked forum.

NetSpend hired Henry as CEO in February. He came two months after the company's deal to sell itself to McLean, Va.-based Capital One Corp. fell through. NetSpend and Capital One jointly announced in November that Capital One would buy a minority interest in NetSpend.

Henry, who was not CEO at the time of the agreement, tells Prepaid Trends the companies cancelled the deal, in part, because of regulatory questions around a bank being involved in prepaid cards designed for unbanked consumers and because NetSpend had more room to grow.

"A sale to Cap One was like punting on the second down, at the time," Henry says.
He says he decided not to sell a stake to Capital One, but the companies still have a good working relationship.

Henry's long-term plans focus on growing the prepaid market and winning customers among the underbanked. But he also sees opportunity in the next generation of customers. Henry also sees his 10-year-old son as a future NetSpend card user. "My goal is when he graduates from college, he takes our card and that's the only card he ever needs," he says.

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