TSYS/ NetSpend Transaction Offers Strong Signal of Prepaid’s End Game

Navigator Edition: March 2013
By: Lee Manfred

The recently announced acquisition of NetSpend by card processing giant TSYS is arguably the highest profile and most important transaction in the history of the prepaid industry.  Not only does the deal mark a dramatic change in the structure of the industry, but it is also a harbinger of an end game to the long anticipated consolidation of the prepaid industry.

TSYS paid a rich premium for NetSpend, $16 per share, roughly 30% over NetSpend’s pre-announcement price.  The $1.4 billion deal is being financed mostly with debt, and about $100 million of cash on hand and is expected to close in mid-2013.  In return, TSYS is getting a leader in GPR and payroll card issuing, which generated $351 million in 2012 revenues from its direct-to-consumer, retail, bank, and partner distribution channels.  NetSpend appears to have strong momentum, with new relationships with Intuit for tax refund cards for TurboTax customers, and with PayPal for GPR.

Figure 1:  Prepaid Industry Consolidation
Source: First Annapolis Consulting research and analysis.

Strategically, the deal is an important one for TSYS.  NetSpend enhances TSYS’s share and capabilities in the fastest-growing segment in the payments industry.  Prepaid not only accelerates TSYS’s growth trajectory, but diversifies its revenue sources beyond credit card and merchant processing.  Further, NetSpend boasts an industry-leading, prepaid-specific operating platform, which TSYS can leverage to deliver expanded services to its customer base in the U.S. and in international markets.  Perhaps most importantly, NetSpend moves TSYS from a processing-only vendor, into program management, distribution, and servicing functions.  These new value chain components represent revenue pools 3 to 4 times greater than legacy processing, an enormous opportunity for TSYS.

However, NetSpend brings TSYS into the direct-to-consumer business for the first time, and puts it in direct competition with many of its issuer clients, notably Green Dot.  TSYS’s ability to navigate these real and potential conflicts will be critical to the success of the acquisition over the long haul.  In the prepaid sector, TSYS will also need to manage industry-wide price competition, the risk of increased scrutiny from regulators, and multiple distribution partners that drive program volume. To do so, TSYS plans to manage NetSpend as a stand-alone business unit while retaining NetSpend’s management team to continue to execute its growth agenda.

With the deal, TSYS leaps immediately into a small group of scale providers in prepaid, along with American Express, JPM Chase, USBank, and Green Dot.  The vertical integration these companies bring to the table is emerging as the prime basis of competition for large and small programs alike.  This trend, combined with the rich valuation of NetSpend, suggests that industry consolidation will continue as strategic players try to enhance their capabilities across the value chain, and smaller providers take advantage of an attractive sellers market.

Finally, the deal will likely spur a number of competitive responses.  First Annapolis expects most retail banks to enter the GPR and payroll card markets in some form, if they have not already done so.  Much like the credit card business, the market will then be comprised of a handful of vertically-integrated strategic issuers/ program managers, and scores of franchise issuers that offer prepaid as an additional relationship product for consumer and business clients.  Further, we expect prepaid processors that lack broader program management capabilities (e.g., FIS, Visa, and MasterCard) to explore alternatives to enhance their customer value propositions.

For more information, please contact Lee Manfred, Partner specializing in Deposit Access and Prepaid Strategy, depositaccesspractice@firstannapolis.com

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