Volatile Markets Hammer Payments Stocks, But Prepaid Players Most of All

The wild trading on stock markets worldwide over the past week has left U.S. payments-industry shares battered and bruised, though they made a mild recovery Thursday morning. Worst hit are shares of prepaid card companies, though networks, processors, and money-transfer providers are feeling the pain too.

A Digital Transactions News analysis of 18 industry stocks shows that share prices plunged an average of 14.8% between the Aug. 3 market close and Wednesday’s close. With Thursday’s rebound the average loss comes to 12.4% as of mid-day.

Shares in four prepaid card sector companies were down 23.6% as of approximately noon Eastern time Thursday. Program manager Green Dot Corp. had fallen 7.6%, and two banking companies with sizable prepaid card issuing businesses, Meta Financial Corp. and The Bancorp Inc., were down 21.5% and 17%, respectively. But the worst of the lot is another program manager, NetSpend Holdings Inc., whose shares have plunged 48.1% since Aug. 3.

NetSpend is suffering travails in addition to being caught in the market downdraft. Austin, Texas-based NetSpend last week reported that second-quarter revenues and profits had increased over the year-earlier quarter, but not as much as analysts expected. NetSpend also said that it was losing three check-cashing companies as distribution partners, two because they were acquired and one because it wants to offer its own prepaid card program, according to Ben Jackson, a senior analyst at Mercator Advisory Group Inc. who follows the prepaid industry. The other bad news was that at least one investment firm downgraded its outlook for the company.

All of that canceled out any lift from NetSpend’s new business in the pipeline, including a deal with Black Entertainment Television (BET) that takes effect in December, and growth in its core business. Gross dollar volume hit $2.6 billion in the second quarter versus $2.3 billion a year earlier, and the number of active cards with direct deposit jumped 25% to 771,000.

“I think they can make the case that it’s a temporary issue,” says Jackson. “They got caught up … there was this whole market swing, this chaos.” But he adds that NetSpend would benefit by diversifying its distribution channels further “so they can make sure they can get a variety of sources, they’re not tied to any one demographic.”

Beyond NetSpend, the prepaid sector probably was vulnerable to a sell-off because it’s the newest part of the broader financial sector, which itself is under selling pressure. If nervous investors want to dump financial stocks, share of companies in the highly nuanced prepaid industry, which faces new regulations, are an easy pick, according to Jackson. “People don’t readily understand it,” he says.

In contrast to the prepaid sector, Digital Transactions News found that shares of eight card and bank processing companies were off only 8.7% in the past week. Investors have an easier time understanding transaction processors, according to Jackson. “If the economy is bad, people still have to buy things and use their cards to do so,” he says.

Share prices of the four major payment card networks are down an average of 7.1% as of noontime Thursday. American Express Co. and Discover Financial Services, whose stocks are heavily influenced by the performance of their card-issuing operations, were down 8.8% and 7.4%, respectively. MasterCard Inc. was off 7% and Visa Inc. down 5.2%.

Shares of wire-transfer leaders The Western Union Co. and MoneyGram International Inc. had dropped 10.7% and 19.5%, respectively.