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MasterCard is aiming to drive more prepaid card transactions through a deal with Wal-Mart to sell cards that promote shared accounts and bill payment.
August 3 -
Green Dot Corp.'s top executive says its reloadable prepaid cards will be exempt from the Federal Reserve Board's new rules limiting debit card interchange.
July 28 -
Many prepaid card companies will be forced to strip away features — or even change bank partners — if they want to qualify for exemptions from the new caps on debit interchange fees.
July 6
NetSpend Holdings Inc. has learned the hard way that tapping into the vast market of underbanked consumers isn't so easy.
The company's second-quarter revenue failed to meet analysts' estimates as growth in the activation of its prepaid cards slowed and it lost three distributors.
The card marketer's executives spent most of their earnings conference call on Wednesday explaining how they will spur growth — but analysts are skeptical.
"We are increasingly convinced that the best way to address this market in its earliest stages is through aggressive share gains, rather than near-term monetization," Andrew Jeffrey, an analyst with SunTrust Robinson Humphrey, wrote in a research report published Thursday. "NetSpend is actually headed in the opposite direction as it loses partners, ramps more slowly with others and spends more on developing new channels."
Jeffrey downgraded NetSpend's stock to neutral from buy.
The question that industry observers are asking is whether NetSpend's tribulations are specific to its own performance issues or indicative of broader challenges facing the burgeoning prepaid card industry.
Reloadable prepaid cards function like traditional debit cards but lack a link to a checking account and are typically marketed to low-income consumers through retail stores, check cashers, the Web and other channels. The amount of money loaded onto such cards in the United States is expected to top $200 billion in 2013, up from $42 billion in 2010, according to Mercator Advisory Group.
Companies like NetSpend and Green Dot Corp., its largest competitor, are counting on several factors to fuel growth in the market. New debit card regulations are prompting mainstream banks to add new fees on checking accounts and other products, prompting some consumers to seek alternatives. They also point out that there is an estimated 60 million unbanked and underbanked U.S. consumers, and only small percentage use prepaid cards today.
"The potential is there and is as great as it always has been," Dan Henry, NetSpend's chief executive, said in an interview on Thursday. "Our biggest inhibitor of growth has always been … a lack of awareness of the product by the consumer."
The Austin, Texas, company, which went public last year, is working to address awareness through new partnerships. For example, it is working with Viacom Inc.'s Black Entertainment Television to develop a prepaid card geared toward black consumers, a demographic that Russell Simmons' UniRush LLC company markets to with its Visa Inc.-branded RushCard. NetSpend expects the product to debut late this year.
Meanwhile, NetSpend is struggling to generate growth in its other distribution channels. These include check cashers, its largest segment, and non-standard automobile insurers, which it began working with this year.
Growth from auto insurers is taking longer than expected to ramp up, executives said, and it lost three unnamed check-cashing businesses as distributors for its prepaid cards. Two of the companies were acquired and the third decided to develop its own prepaid card program in-house.
It still works with its largest distributor, the check casher Ace Cash Express Inc. Ace accounted for about 35% of NetSpend's revenue in the second-quarter, George Gresham, NetSpend's chief financial officer, said during the conference call on Wednesday.
The recent setbacks reinforce the need for the company to diversify beyond check cashers for growth.
"If it wasn't clear before then, it certainly is now," said Gil Luria, a senior vice president with Wedbush Securities LLC.
NetSpend's weak growth is more a condition of individual distribution challenges than it is of the growth prospects for the prepaid card industry, Luria said. As justification, Luria pointed to Green Dot's second-quarter results, which included a 23% increase in new card activations versus NetSpend's 5%.
"Given Green Dot's ability to add cards has not been diminished and that NetSpend was very explicit about the fact that its loss of channel partners and the lack of success with new channel partners is really what it's challenged with … it doesn't appear … that there is a slow-down in the market," Luria said.
Luria also downgraded NetSpend's stock on Thursday, to neutral from outperform.
Ben Jackson, a senior analyst in the prepaid advisory service at Mercator, said the problem for some prepaid card marketers is less a lack of consumer awareness and more a lack of consumer understanding of the benefits of the cards.
"They're not necessarily sure about the value proposition," Jackson said. "If anyone feels confused by the fees or they think there's a pitfall in using these cards for some other reason that they haven't quite figured out yet, they're going to be wary about using them or reloading them."
NetSpend's shares fell as much as 40.7%, to $4.55, on Thursday on the downgrades and poor second-quarter results.
NetSpend's operating revenue increased 10.3% from a year earlier, to $74.4 million, below analysts' averaged estimate of $78.6 million.
Net income in the quarter rose 17.6%, to $7.6 million, or 8 cents per diluted share, from $6.4 million, or 7 cents per diluted share. Its adjusted earnings per share was 11 cents, in line with analysts' averaged estimate.
The volume of debit transactions and cash withdrawals that customers made with its reloadable cards rose 13%, to $2.6 billion.
The company said the number of active cards that were enabled with direct deposit capabilities, a feature the company pushes to increase use of the cards, rose 25.4%, to 771,000.
NetSpend reduced its revenue guidance for the year to $306 million to $314 million, from a range of $323 million to $333 million.
Henry said the company is working on inking more deals with partners in the near future.
"What is needed I think are more partners, be them banks, retailers, media companies, online … companies that have brand and have reach to be able to build awareness of this segment to the consumer," Henry said.
