NetSpend Pulls Off a Successful IPO Despite MetaBank’s Problems

The storm clouds over prepaid card program manager NetSpend Holdings Inc.’s IPO caused by regulatory problems at MetaBank, the prepaid card program manager’s main issuing partner, cleared Monday, enabling NetSpend to go through with the stock offering at the mid-point of its projected price range. And on Tuesday afternoon, NetSpend’s shares were trading 18% above their opening price in their first day of listing on the NASDAQ Stock Exchange.

“I think that despite the problems with the issuer, the market obviously is still bullish on prepaid,” says Ben Jackson, a senior analyst with Maynard, Mass.-based Mercator Advisory Group Inc. A spokesperson for Austin, Texas-based NetSpend declined comment, saying the company was still in its mandated quiet period.

NetSpend sold 2.27 million shares and its current shareholders sold another 16.3 million shares at $11.00 per share. The gross was $203.9 million, with $178.9 million going to the shareholders and $25 million going to the company itself before underwriting expenses. NetSpend expected to get $10 to $12 per share, so its IPO refuted speculation that MetaBank’s problems could delay the sale further or lower NetSpend’s valuation (Digital Transactions News, Oct. 13). The company’s Oct. 14 prospectus estimated that its net proceeds would be $21.3 million at $11 per share. NetSpend plans to use the proceeds to repay borrowings and for general corporate purposes, including expansion.

NetSpend’s shares were trading at $13.04 in the late afternoon, up 18% from their $11.02 open. Shares of NetSpend rival prepaid card processor Green Dot Corp. are up about 33% since Green Dot’s July 21 IPO. Jackson says the two companies’ success on Wall Street is a result of investors becoming aware of prepaid cards’ potential to bring electronic payments to unbanked or underbanked consumers, and the cards’ utility for distributing Social Security, payroll, and other types of payments. “My assessment is people are just starting to understand it,” he says. “The cards are becoming more common.”

Meanwhile, NetSpend is taking steps to avoid getting ensnarled in the travails of its bank partners. Storm Lake, Iowa-based MetaBank, NetSpend’s preferred bank, issues 71% of NetSpend’s 2 million cards. (NetSpend’s other issuing banks are SunTrust Bank, Inter National Bank, and U.S. Bank.) MetaBank parent company Meta Financial Group Inc. revealed Oct. 12 that the Office of Thrift Supervision had placed restrictions on MetaBank’s activities. The OTS said the bank could not enter into new third-party agreements involving credit, debit, or prepaid cards without its approval and, citing alleged unfair or deceptive bank practices, banned MetaBank from issuing any new loans under its iAdvance product. IAdvance provides short-term, high-interest loans and is marketed by outside firms such as NetSpend.

NetSpend said the cessation of new iAdvance loans wouldn’t harm its business, but the OTS actions nonetheless had the effect of delaying the IPO from Oct. 14 until Monday. In the meantime, NetSpend lined up two additional issuers, The Bancorp Bank and H&R Block Bank, as part of a new diversification drive, according to a document NetSpend filed Monday with the Securities and Exchange Commission.

The filing says the need for MetaBank to get OTS approval for new third-party relationships won’t affect its existing business, but it could affect potential new distribution agreements that might bring in $1 million in annual revenue to NetSpend. MetaBank told NetSpend that the OTS would not start reviewing new distributor relationships until after it completes its review of MetaBank’s operations, which could take several months.

NetSpend now intends to move 15% of its general-purpose reloadable card volume, excluding corporate-sponsored cards, to other issuers. If forced to do so, moving all of its volume and accounts from MetaBank to one or more other issuers would cost NetSpend $2.5 million to $3.5 million, the filing says. “While we look forward to our continued relationship with MetaBank, we also believe it is prudent to have additional, active relationships in place as part of a diversification strategy,” NetSpend’s filing says.