NetSpend Vows to Diversify Beyond Troubled MetaBank

With regulatory problems overshadowing its main issuing partner, prepaid card program manager NetSpend Holdings Inc. says it is optimistic that it will be able to form partnerships with other issuing banks.

n

NetSpend is looking at proposals from a number of regional and national banks to provide sponsorship services, chief executive Dan Henry told analysts Wednesday during NetSpend’s third-quarter earnings call. “We expect to have a pretty good group of banks,” he says, adding that the board of directors will be reviewing a bank-diversification plan at its next regular meeting.

n

This was NetSpend’s first earnings report since becoming a publicly held company last month.

n

MetaBank Financial Group Inc., parent company of MetaBank, NetSpend’s main issuing partner, revealed on Oct. 12 that the Office of Thrift Supervision had said MetaBank could not enter into third-party agreements involving credit, debit, and prepaid cards without the regulator’s 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.

n

Storm Lake, Iowa-based MetaBank issues 71% of NetSpend’s 2.1 million cards. Other NetSpend issuers are SunTrust Bank, Inter National Bank, and U.S. Bank. NetSpend lined up two additional issuers, The Bancorp Bank and H&R Block Bank as part of the new diversification drive, according to documents filed last month with the Securities and Exchange Commission.

n

Henry said NetSpend has been closely monitoring the MetaBank situation, and that there have been no further significant developments. But he added “while we believe Meta remains strong financially, our sponsor-bank diversification strategy continues.”

n

Despite the cloud hanging over MetaBank, NetSpend posted “very strong results” in the third quarter, Henry said.

n

Revenues at NetSpend increased 22% to $68.2 million in the third quarter from $56 million in the year-earlier quarter, due primarily to a 24.6% increase in the average number of active cards to 2.1 million from 1.7 million in 2009’s third quarter. The percentage of active cards with direct deposit increased to 31.7%, up from 25.9%.

n

NetSpend reported gross dollar volume of $2.4 billion during the quarter, up from $1.8 billion last year. Active cards with direct deposit accounted for 73% of GDV for the quarter.

n

However, the increase in overall revenue was offset in part by the decline in gift-card related revenue due to NetSpend’s decision in 2008 to suspend marketing of gift cards.

n

Net income for the quarter totaled $6.4 million, up 78% from $3.6 million in the year-earlier quarter. Net income included an aggregate amount of $7.4 million of net interest expense, income-tax expense, and depreciation and amortization. It also included $1.4 million in stock-based compensation expense and approximately $700,000 to repay outstanding debt.

n

Earlier this month, prepaid card program manager Green Dot Corp. reported that its active card base increased 50% to 3.3 million in the third quarter over 2.2 million a year earlier. Monrovia, Calif.-based Green Dot, which completed an IPO in July, also reported that gross dollar volume on its cards jumped 69% to $2.52 billion from $1.49 billion in 2009’s third quarter. Green Dot posted revenues of $88.9 million, an increase of 36% from $65.3 million. Net income, however, fell 14% to $8.97 million from $10.5 million because of stock-based incentives for retailers and higher commissions to Wal-Mart.