TSYS to Buy NetSpend in 'Transformational' $1.4B Prepaid Deal

For the processor Total System Services (TSS), buying the prepaid card marketer NetSpend (NTSP) is transformational. For NetSpend it's going to be business as usual, the companies say.

When the $1.4 billion all-cash acquisition is completed in mid-2013, TSYS will consider NetSpend its fourth line of business in addition to North America Services, International Services and Merchant Services. It will be the first time TSYS will own a business that sells directly to consumers.

"We have never corporately or personally been in the consumer business, and part of their business is the consumer business," says TSYS chairman and CEO Phil Tomlinson in an interview. "We really do think this is a transformational deal."

For NetSpend, however, TSYS plans not to mess with what it considers to be a winning formula. "We've got the right people to manage it and run it," he says.

TSYS is keeping NetSpend execs such as its CEO, Dan Henry, and its president, Chuck Harris. NetSpend will continue to operate out of Austin, Texas. TSYS announced the acquisition on Feb. 19 after the market closed.

"The most important thing to me is that NetSpend is going to be able to continue to fulfill its mission," Henry said in a conference call after the acquisition was announced.

"Our merger with TSYS can only accelerate our growth," Henry adds.

TSYS turns 30 this year, and it is well aware of the need to keep up with its younger rivals. In an October conference call to discuss earnings, Tomlinson acknowledged the threat posed by mobile card-reader companies like Square Inc. and prepaid card marketers like NetSpend.

There are "more innovative and different things happening in the payments industry than I've seen in the past 30 years," Tomlinson said in October.

Shortly thereafter, TSYS bought ProPay, a Utah-based independent sales organization with a Square-like card reader called ProPay Jak.

Because TSYS is already a large prepaid card processor — "I think we're the probably the largest in the world," Tomlinson says — the NetSpend purchase "in some ways … seems like a perfect fit for us," he says.

"We process a lot of banks and they're starting to go after the banks," Tomlinson says. "We have several mutual customers today."

NetSpend has more than 2.4 million accounts, 46% of which receive funds by direct deposit. It has more than 500 retail distributors and more than 130,000 locations that allow consumers to reload their cards.

Prepaid cards are often considered a threat to banks, as the products appeal to underbanked consumers who are fed up with the way banks handle business. Though prepaid cards are frequently criticized for their fees, the consumers who buy the cards use them to avoid the pitfalls associated with debit and credit cards, such as overdrafts and late-payment charges.

Increasingly, credit-card issuers are offering prepaid cards, sometimes with features tied to bank accounts. For example, JPMorgan Chase's (JPM) Liquid prepaid card, introduced last year, waives its $4.95 monthly fee when linked to certain checking accounts. Fifth Third Bank's (FITB) Access 360 card, also launched last year, reduces its fee to $4 from $7 for customers who link it to a Fifth Third checking account (it also lowers the fee for users who load $500 or more a month to the prepaid account).

NetSpend offers services to consumers who transact mostly in cash and may not have bank accounts, Henry says. Features such as card-to-card transfers, online bill payment and direct deposit allow prepaid card users to use many typical bank services without opening a bank account.

At NetSpend, "these folks really understand the business," Tomlinson says. "They understand the ultimate end customer."