This acquisition certainly benefits TSYS. TSYS now has a productthat directly engages consumers, has two new products to offermerchants, a GPR solution and a reload network, and has two newproducts to offer banks, GPR and payroll cards. This is also greatnews for NetSpend since these new channels and business partnersTSYS brings to the table will protect NetSpend from the issuescreated by increased pricing pressures.
GPR programs operate on thin margins and it is increasinglyimportant that GPR programs have multiple products and services tooffer consumers. Call it a graduated business opportunity or a stepup sale, it is increasingly important that GPR programs have morerevenue streams than simply those associated with the GPR programin order to compensate for the issues driven by the combination ofthin margins and pricing pressures.
When pricing pressures or regulations cause a situation where thefee income from a GPR transaction (onboarding, ATM fee, supportcalls, etc.) is less than the costs associated with executing thattransaction (free ATM access, free account opening, etc.), programprofitability becomes dependent on external factors. Without anadditional product to sell, a fee negative portfolio must recoverthe loss through the behavior of some percentage of cardholdersthat are income positive. This should be disconcerting to theprogram 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 neededto maintain portfolio profitability.
A more sustainable solution is to have additional products and/orservices associated with the GPR product that makes the overallenterprise profitable. These products might be directly associatedwith the cardholder, such as a checking account, savings account orcredit line, or it might be income associated with bringing the GPRproduct 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 PrepaidFinancial Services Program Profitability” Mercator evaluates therevenue earned on portfolios of different sizes and fee structuresafter the costs associated with executing the card transactions areaccounted for (card issuance, fulfillment, ATM & POStransaction fees, etc) in a pro forma model. We used the consumerbehavior 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 ofPhiladelphia entitled “Consumers’ Use of Prepaid Cards: ATransaction-Based Analysis.” The result of this pro forma model inthe report highlight both the thin margins associated with GPRproducts and the issues that arise when a portfolio moves to a feenegative model and profitability becomes dependent on the behaviorof just a few.
In the conference call held Tuesday night discussing theacquisition of NetSpend, Philip W. Tomlinson, chairman of the boardand chief executive officer of TSYS, made it clear that NetSpendwill continue to operate as a standalone business and will bebranded as “NetSpend, a TSYS Company.” And so the challenge, as itis with most acquisitions, is the balancing act of enabling theacquired company to continue its growth, while also integratingthat companies assets into the acquiring companies infrastructureto increase the growth opportunities for both entities. It willclearly be in both NetSpend’s and TSYS’s best interests to find newrevenue streams derived from NetSpend’s leading position in themarket. These new revenue streams will further fortify the baseNetSpend product while also establishing new products that TSYS cansell to its installed base, especially the NetSpend products (GPRand payroll cards) so that banks can more easily enter the prepaidmarket.
One challenge in this area was highlighted in the Mercator surveyof 311 banks conducted for the ABA entitled “Prepaid Cards: A Survey of Bank Attitudes, AdoptionRates, and Deployment Plans.” Many banks have an expectationthat prepaid products will be integrated to existing tellerterminals, ATMs, and compliance solutions. This is a level ofintegration that is not necessarily congruent with a hands-offpolicy since TSYS will need to establish several key integrationpoints into the NetSpend platform and these integrations will needto reach deep into the platforms operation and process structure,especially for those banks that expect prepaid will integrate tothe banks existing compliance process.
TSYS should be congratulated for its foresight in acquiring acompany that brings TSYS front and center with the consumer, sinceconsumer choice is driving the payments market today. TSYScompetitors will need to make a decision about getting into theprepaid market quickly since there are only two players ofsignificant size remaining!