Competing prepaid issuers may target and attract MetaBank's partners as the company deals with new regulatory restrictions.
Though the Office of Thrift Supervision restrictions do not disrupt MetaBank's current prepaid relationships, observers suggest its partners may seek to break ties if the Storm Lake, Iowa, company's issues are not quickly resolved.
On Wednesday, the OTS directed MetaBank, a subsidiary of Meta Financial Group Inc., to get the regulator's prior approval for new business partnerships — or when materially amending existing ones — and to shut down the iAdvance program that offers small lines of credit to prepaid card users.
NetSpend Holdings Inc. is the MetaBank customer that stands to be most affected by the OTS' action, as MetaBank is the biggest issuer of the Austin company's prepaid reloadable debit cards and accounted for 71% of its active cards as of June 30. NetSpend also owns a 4.9% equity stake in Meta Financial.
NetSpend was expected to have its shares listed soon on the Nasdaq Stock Market, so "the timing of this announcement is very unfortunate for them," said Gil Luria, an equities analyst who follows NetSpend's biggest competitor, Green Dot Corp., for Wedbush Securities in Los Angeles.
A spokesman for NetSpend did not 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, NetSpend could be forced to look to its other issuing banks for 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 Tuesday when Meta Financial disclosed in an SEC filing that the OTS ordered it to shut down iAdvance, which 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 it by this past Wednesday, the company said.
The agency also is requiring MetaBank to obtain prior written approval to enter new business agreements, including issuing prepaid cards.
Meta Financial did not respond to calls or e-mails for comment Thursday. A spokesman for the OTS declined to comment or provide a copy of the supervisory directive it sent to MetaBank.
The directive could also affect other companies' interest in offering short-term, small-dollar loans, which have become a more common retention tool for prepaid card players such as NetSpend and AccountNow Inc.
NetSpend, which did offer the iAdvance product, does not expect the program's discontinuation to have a material impact on its business, according to its filing.
Analysts said they did not expect MetaBank's challenges to seriously hurt other key partners, including Western Union Co. and AccountNow.
A Western Union spokesman said it does not offer iAdvance.
AccountNow did not make an executive available for an interview, but its chief executive, James Jones, said in a written statement provided to American Banker that it offered iAdvance.
"AccountNow is interested in offering products that are … considered appropriate by the applicable regulators," Jones said. "We will continue to pursue partnerships where … those conditions are satisfied."
Western Union works with two issuers for prepaid cards: MetaBank and Bancorp Bank.
Tien-Tsin Huang, an equities analyst with JPMorgan Securities Inc., said in a research note Wednesday that he does not expect Meta's 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, said Tim Sloane, the director of the prepaid advisory service at Mercator Advisory Group in Maynard, Mass. "If you had sufficient time, if your sales volumes are high and your inventory is low, you could just let that sell out," Sloane said. "Then the transition becomes less costly to you."
