Regulatory oversight of the prepaid card industry is becoming increasingly important as banks and program managers expand their financial services offerings. Institutions that provide prepaid cards and related lending products face growing scrutiny over consumer protection, compliance practices, and the risks associated with short-term credit. Regulatory enforcement actions can have consequences that extend beyond individual banks to their business partners and the broader payments industry.
The MetaBank regulatory order issued by the Office of Thrift Supervision raises significant questions about the relationship between banking supervision and prepaid card operations. The directive restricts MetaBank’s ability to enter new business arrangements without regulatory approval and requires changes to its short-term lending activities. Its implications are particularly important for prepaid card providers that depend on issuing banks to support their programs.
OTS Issues Supervisory Directive Against MetaBank
On October 6, 2010, the Office of Thrift Supervision (OTS)issued a Supervisory Directive to MetaBank that requires MetaBankto obtain written approval from the OTS before entering into newbusiness.Meta says the OTS determined the bank had”engaged inunfair or deceptive acts or practices” in its iAdvance short-termloan program and ordered the bank to stop making iAdvance loans byOctober 13, 2010.
Regulatory Scrutiny Sends Warning to Prepaid Industry
The scope of the OTS order against Meta should put theindustry on notice that the regulators – even the one that isscheduled to be merged into another agency within the next year orso – are watching.
NetSpend IPO Proceeds Despite MetaBank Concerns
The timing of the order was interesting because it came onthe eve of NetSpend Holdings Inc.’s initial public offering ofstock. NetSpend says that MetaBank issued about 71 percent of itsactive cards. Despite the timing of the order and rumors, NetSpendcompany sold its stock on October 18 for $11 a share, which was inthe middle of its planned range of $10 to $12. This shows thetroubles didn’t scare investors away.
Prepaid Card Issuers Face New Business Opportunities
The OTS order has created an opportunity for banks thatare interested in getting into the prepaid business. NetSpend hasalready said that it would seek to diversify its group of issuers,and other program managers are likely to do the same.
The MetaBank regulatory order demonstrates how supervisory actions against individual financial institutions can affect the broader prepaid card industry. Restrictions on lending activities and new business arrangements create operational challenges for banks while raising concerns among program managers that depend on their services.
NetSpend’s successful initial public offering suggests that investors remain confident in the prepaid market despite the regulatory uncertainty. However, the company’s reliance on MetaBank highlights the risks of concentrating card issuance with a single banking partner and the potential advantages of diversifying issuer relationships.
The MetaBank regulatory order also creates opportunities for other banks seeking to enter or expand within the prepaid sector. As program managers reassess their partnerships, regulatory compliance, issuer diversification, and operational stability are likely to become increasingly important considerations.
