Mercator Perspectives

TSYS Acquires NetSpend; And Then There Were Two…

TSYS announced yesterday it is acquiring Netspend for $1.4B. With this acquisition, only two large independent GPR program managers remain: UniRush and AccountNow. The remaining programs are either vertically integrated (Green Dot) or divisions of a larger enterprise (H&R Block, American Express, Western Union, Chase Liquid, and others).

This acquisition certainly benefits TSYS. TSYS now has a product that directly engages consumers, has two new products to offer merchants, a GPR solution and a reload network, and has two new products to offer banks, GPR and payroll cards. This is also great news for NetSpend since these new channels and business partners TSYS brings to the table will protect NetSpend from the issues created by increased pricing pressures.

GPR programs operate on thin margins and it is increasingly important that GPR programs have multiple products and services to offer consumers. Call it a graduated business opportunity or a step up sale, it is increasingly important that GPR programs have more revenue streams than simply those associated with the GPR program in order to compensate for the issues driven by the combination of thin margins and pricing pressures.

When pricing pressures or regulations cause a situation where the fee income from a GPR transaction (onboarding, ATM fee, support calls, etc.) is less than the costs associated with executing that transaction (free ATM access, free account opening, etc.), program profitability becomes dependent on external factors. Without an additional product to sell, a fee negative portfolio must recover the loss through the behavior of some percentage of cardholders that are income positive. This should be disconcerting to the program manager because it means that an act by competitors, legislatures, regulatory bodies, or even a shift in the economy, could alter the behavior of the income positive cardholders needed to maintain portfolio profitability.

A more sustainable solution is to have additional products and/or services associated with the GPR product that makes the overall enterprise profitable. These products might be directly associated with the cardholder, such as a checking account, savings account or credit line, or it might be income associated with bringing the GPR product to new clients that will pay for a solution, such as banks, merchants, or other companies in the case of a payroll card.

In an upcoming report entitled “New Strategies for Driving Prepaid Financial Services Program Profitability” Mercator evaluates the revenue earned on portfolios of different sizes and fee structures after the costs associated with executing the card transactions are accounted for (card issuance, fulfillment, ATM & POS transaction fees, etc) in a pro forma model. We used the consumer behavior model (active card life and transactional patterns) identified in the seminal work of Stephanie M. Wilshusen, Robert M. Hunt, and James van Opstal of the Federal Reserve Bank of Philadelphia entitled “Consumers’ Use of Prepaid Cards: A Transaction-Based Analysis.” The result of this pro forma model in the report highlight both the thin margins associated with GPR products and the issues that arise when a portfolio moves to a fee negative model and profitability becomes dependent on the behavior of just a few.

In the conference call held Tuesday night discussing the acquisition of NetSpend, Philip W. Tomlinson, chairman of the board and chief executive officer of TSYS, made it clear that NetSpend will continue to operate as a standalone business and will be branded as "NetSpend, a TSYS Company." And so the challenge, as it is with most acquisitions, is the balancing act of enabling the acquired company to continue its growth, while also integrating that companies assets into the acquiring companies infrastructure to increase the growth opportunities for both entities. It will clearly be in both NetSpend’s and TSYS’s best interests to find new revenue streams derived from NetSpend’s leading position in the market. These new revenue streams will further fortify the base NetSpend product while also establishing new products that TSYS can sell to its installed base, especially the NetSpend products (GPR and payroll cards) so that banks can more easily enter the prepaid market.

One challenge in this area was highlighted in the Mercator survey of 311 banks conducted for the ABA entitled “Prepaid Cards: A Survey of Bank Attitudes, Adoption Rates, and Deployment Plans." Many banks have an expectation that prepaid products will be integrated to existing teller terminals, ATMs, and compliance solutions. This is a level of integration that is not necessarily congruent with a hands-off policy since TSYS will need to establish several key integration points into the NetSpend platform and these integrations will need to reach deep into the platforms operation and process structure, especially for those banks that expect prepaid will integrate to the banks existing compliance process.

TSYS should be congratulated for its foresight in acquiring a company that brings TSYS front and center with the consumer, since consumer choice is driving the payments market today. TSYS competitors will need to make a decision about getting into the prepaid market quickly since there are only two players of significant size remaining!

Search Perspectives


View All