NetSpend Corp. on Feb. 16 posted solid fourth-quarter results as the prepaid card company bulked up its retail and banking partnerships and weathered increased scrutiny of its industry.
Over the past several months the Austin, Texas-based company has announced a host of new partnerships, including deals with 7-Eleven Inc., PayPal Inc. and a still-unnamed financial institution in New England.
But NetSpend and its main rivals have found their industry coming under fire as some consumer advocates argue that prices for their card services are too high. Companies generally market prepaid cards to poor consumers or so-called unbanked or underbanked consumers, who either don’t have or don’t regularly use a bank account.
Personal finance guru Suze Orman recently stepped into the fray after announcing her own branded prepaid card last month. Some of the card’s reviews were positive, but a heated debate broke out in the media, on Twitter and elsewhere over whether the product was a good value for low-income Americans (see story).
NetSpend chief executive Dan Henry says he sympathizes with Orman for fielding so much skepticism.
“If banks are great and banks are free, why are there at least 30 million Americans trapped in the cash economy? The answer is because they can’t get” a bank account, Henry said in a Feb. 16 interview.
“When Suze Orman comes on the scene and offers a product that’s dramatically better than the cash-based world, she’s criticized for it, just as we are criticized for it,” he added.
But if and how the industry can revamp its image remains to be seen. Henry suggests that bank partnerships can offer one possibility, saying during the interview that, while the number of banks interested in prepaid has dwindled over the past year, those partnerships still hold a lot of value.
“We talk about 30 to 60 million [unbanked] consumers, but our collective industry has reached just a small percentage of that. We have got to find other ways surround and reach that consumer,” he says. “Our expectation is that if our product is placed in hands of customer [at a bank], that should lend some pretty high credibility and trust in eyes of the consumer.”
“I also believe there are some banks we’re talking to that see this product not only as a product for when a customer is turned away [for a traditional checking account] but to serve the customers not profitable to the bank. And that’s where we might expand our customer base a little bit,” Henry adds.
He told analysts earlier on a conference call that the company is still working with a “handful” of banks on future partnerships.
Interest in prepaid may have peaked among banks last year, Henry conceded, as financial institutions awaited final details on the Durbin amendment, which was designed to cap debit interchange rates–a huge profit center for banks.
“With the Durbin amendment coming out, there was a time when a lot of banks were looking at prepaid. … But when the rules got clarified on Durbin, what was left were the banks that were seriously interested in serving this consumer,” Henry said on the call.
Observers say it is still uncertain how many traditional financial institutions ultimately will get into the prepaid market.
“How banks get involved in reloadable prepaid is one of the outstanding questions in terms of this whole market,” says Gil Luria, a managing director with Wedbush Securities. “Are banks going to go aggressively promote prepaid, or have they have absorbed impact of Durbin and do they not really care anymore?”
Banks may continue ceding most control of the prepaid industry to specialists such as NetSpend and its main rival, Green Dot Corp., he adds.
“The most interesting conclusion is that banks haven’t really done much,” says Luria, adding that “how banks get involved is important. To the extent that banks partner with Green Dot and NetSpend, it shows [the prepaid companies] still have a major role.”
Larry Berlin, an analyst with First Analysis Securities Corp., adds that so far interest has been higher among community banks than among some of the bigger financial players.
“There’s been good demand for programs from smaller banks,” Berlin says. “The larger banks are still a bit undecided.”
The bigger banks have a focus on “higher net-worth, middle-class” customers, whereas some of the smaller banks have more of a community focus and thus may prove more receptive to alternative banking products, he notes.
NetSpend’s net income in the fourth quarter rose 81%, to $9.6 million from a year earlier. Revenue grew 9%, to $76.8 million.
The number of active cards held steady at 2.1 million as of Dec. 31, the same as a year earlier, as the percentage of cards with direct deposit grew to 41% from 34%.
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