The competitive landscape of the prepaid card industry is about to be rearranged with the declaration by Total System Services Inc. (TSYS) that it intends to acquire NetSpend Holdings Inc. for approximately $1.4 billion. TSYS executives said during the Feb. 19, 2013, conference call announcing its intent that the move allows the Austin, Texas-based transaction processor to expand its corporate and retail footprints by becoming a prepaid card program manager (PM) itself.
TSYS processes bankcard payments for eight of the top 10 financial institutions in the United States and over half of the top 20 international banks. NetSpend holds a similar place in its sphere of influence, as it is second only to Green Dot Corp. in the U.S. general purpose reloadable (GPR) prepaid card market, with approximately 2.4 million active accounts, a distribution network of 500 retailers and more than 130,000 reload locations.
By folding NetSpend into TSYS as a separate business unit, the processor said it will be able to expand and diversify its product offerings, as well as take greater advantage of the GPR card market's upward trajectory – a market that is projected to grow 20 percent each year in the next four years. Philip W. Tomlinson, Chairman of the Board and Chief Executive Officer at TSYS, called the acquisition agreement a "transformational moment" for the processor.
In the conference call, TSYS President and Chief Operating Officer M. Troy Woods noted that TSYS has been processing prepaid card payments for the last 10 years. "By acquiring NetSpend, TSYS expands beyond prepaid processing into one of the fastest growing segments – program management," he said.
According to Woods, NetSpend's PM capabilities extend to four main areas: retail, partner, direct and paycard. The largest percentage of NetSpend's business (49 percent) comes from GPR cards distributed through alternative financial service providers, such as cash advance stores and insurance lenders. The other slices of NetSpend's pie consist of the online and direct sales channel (25 percent), the corporate payroll card market (18 percent) and the traditional retail merchant channel (8 percent).
Woods added that NetSpend possesses the "most robust" GPR card reload network in the industry. By becoming a PM via NetSpend, TSYS will increase its market opportunity by a factor of eight to 10, according to Woods. "Together, we believe our market position will be formidable," he said.
During the conference call's question and answer session, Woods characterized the acquisition as "not a consolidation M&A play, but an innovation M&A play." Adam Rust, Research Director for the Community Reinvestment Association of North Carolina, takes a different view.
In a Feb. 19 Bank Talk blog post, Rust said big banks in recent years have not renewed long-standing processing deals with TSYS. Since 2006, TSYS clients Bank of America NA, JPMorgan Chase & Co. and Wells Fargo & Co. have not re-signed with TSYS, but instead consolidated services by taking processing in-house, according to Rust.
While TSYS rebounded with a new BofA contract and other deals with international banks, including Scotia Bank and Royal Bank of Scotland, Rust said "companies like TSYS are always at risk of seeing their margins compressed by the purchasing power of the big banks."
The NetSpend purchase, through which TSYS secures all of NetSpend's retail distribution relationships, could thus be seen as a bulwark against big banks gobbling up more of TSYS' business.
Ed Lawrence, Director at Auriemma Consulting Group Inc., disagrees with Rust's position. He said BofA left TSYS because it acquired affinity credit card processor MBNA Corp. He added that MBNA ran a legacy processing system, and BofA was eventually forced to evaluate how to bring its processing capabilities up to date, and chose to return to TSYS.
"So [TSYS] did lose a lot of big accounts," Lawrence said. "But they just brought the biggest one back. They beat out First Data. They beat out everybody else. And I think the reason they beat them out was because of the good relationships they had with Bank of America before the bank bought MBNA."
Lawrence characterized TSYS' acquisition as a strong move by a solid company and believes the purchase allows TSYS to get out in front of the consolidation trend, as banks look to winnow down the number of processors they use for credit, debit, prepaid and other services. Lawrence said, "They still have a very strong standing to say, 'Not only can I do your credit and your debit, but I can do your prepaid as well. And I've got one of the strongest engines in the industry.'"
Lawrence also doesn't see the acquisition as a sign of weakness from NetSpend, not with 46 percent of the company's 2.4 million accounts enabled with direct deposit. Lawrence believes that with research showing that cards are used longer when they come with direct deposit, NetSpend's portfolio looks all the better. "The Netspend accounts are more valuable because they're not dependant upon the individual reloading the card at the register or writing someone a check," he said.
Rust, however, is not altogether surprised by this acquisition development. In a Feb. 27, 2102, Talk Back blog post, Rust speculated about whether NetSpend was gearing up to be sold. He based that opinion on his reading of NetSpend's annual financial statement for 2011, where the PM disclosed in an otherwise upbeat report that the company experienced no new GPR card growth, had reduced salaries and had authorized two corporate stock buybacks to shareholders.
Rust said that, as a general rule, companies confident about future prospects reinvest stock in themselves rather than take money out. 
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