http://www.therxforum.com/showthread.php?t=507650
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With yesterday's $700 million purchase of NetSpend, Capital One has become the latest large US bank to mark its ambition in the prepaid space by acquiring a start-up. The transaction places the former credit card monoline in a strong position within the prepaid cards sector in the US; as Moshe Orenbuch of Credit Suisse comments (see attached), the NetSpend product is one of the most attractive in the market.
Established in 1999, NetSpend is among the largest of non-bank prepaid card issuers in the US, having issued over 5 million cards accounting for $4 billion in transactions. It currently boasts 1.5 million active customers and its cards are sold online and at 15,000 physical distribution points.
Speaking at the preliminary meeting of Prepaid International Forum in February, Roy Sosa, the Co-Founder and President of NetSpend, said the secret to his company’s success was to treat prepaid customers as well as regular bank customers. While other issuers claim to do as much, for NetSpend customers the philosophy has practical manifestations, not least fee-free overdraft facilities for loyal customers and interest payments on positive balances.
NetSpend has been providing Capital One with marketing and technical advice since February of this year as the latter looks to expand into prepaid.
Clearly, Capital One was so impressed by Sosa and his colleagues that it decided to pay a price Orenbuch describes as “high” relative to earnings in order to buy the operation and leap-frog rivals in the nascent prepaid space. Such a move fits in with an emerging strategy at the bank to develop consumer banking activities separate to the current account. Earlier this year Capital One unveiled a debit card product that could be linked to any checking account, breaking the historical link between such accounts and debit cards.
It will be interesting to see if the NetSpend philosophy can survive being absorbed into a business such as Capital One. While in possession of one of the more advanced credit scoring systems in the industry, the bank may be unwilling to extend credit in the form of overdrafts to a customer segment already bringing chaos to the sub-prime mortgage industry.
Regardless, the acquisition - following Citigroup’s purchase of the independent Ecount prepaid card business in March - reveals the seriousness with which the biggest banks in the US now view the prepaid segment. Similar transactions will follow.
