In Wake of NetSpend Buy, TSYS Calls Prepaid ‘Innovative Cornerstone’ for Emerging Payments (Feb. 20, 2013)

Feb. 20, 2013

In a deal that could alter the competitive landscape of the prepaid industry, payments processor TSYS yesterday announced plans to acquire GPR and payroll card provider NetSpend Corp. for $1.4 billion in cash. The purchase—characterized by TSYS as a “transformational event”—enhances the Columbus, Ga.-based firm’s role in the prepaid processing arena and makes the company a major player in the program management sphere by bringing more than 2.4 million prepaid accounts, 500 retail distributors and 130,000 reload locations under its umbrella.

“By acquiring NetSpend, TSYS expands beyond prepaid processing and into one of the fastest-growing areas of payments, program management,” said Troy Woods, TSYS president and chief operating officer, during a conference call discussing the deal, adding that the expansion increases TSYS’s market opportunity by a projected factor of eight to 10. “The annual revenue opportunity for the prepaid industry is $4 billion and is projected to double over the next four to five years,” he noted, citing figures from First Annapolis Consulting.

In addition to revenue opportunity, prepaid program management is an “innovative cornerstone” for the deployment of emerging payment technologies, such as mobile wallets and payment apps, Woods said. From a competitive standpoint, the deal diversifies and expands TSYS’s offerings, enabling the company to provide a wider range of services to its clients—primarily financial institutions, retailers and small businesses. TSYS plans to leverage those existing client relationships in the scope of its new prepaid offerings in several ways, Woods noted, such as offering retail clients the opportunity to become GPR purchase and reload locations to increase foot traffic, and providing payroll cards to corporate clients to reduce paper check costs.

But the most valuable asset TSYS gains from the deal may well be NetSpend’s established brand and robust business metrics. Since going public in 2010 after establishing itself as an early leader in the GPR prepaid industry, Austin, Texas-based NetSpend has shown steady growth in operating revenue and card volume, enjoying particular success in direct deposit loads—one of the most vital determinants of revenue from  prepaid accounts. Currently, 46 percent of NetSpend’s card accounts are enrolled in direct deposit, a steady revenue stream that helped NetSpend’s income to jump by 15 percent in 2012 and gives TSYS confidence the acquisition will bear fruit early on. The transaction is projected to be accretive within a year of the expected mid-2013 closing. TSYS will pay $16 per share for NetSpend, a 26 percent premium over NetSpend’s closing price yesterday.

NetSpend’s leadership will remain intact after the deal, with CEO Dan Henry and president Chuck Harris joining the TSYS executive team. For NetSpend, the relationship with TSYS will enhance its ability to compete in a GPR market increasingly drawing the attention of major banks and financial institutions. “The combined resources of both companies give NetSpend the ability to expand into new markets faster, leverage relationships with TSYS’s current bank clients and increase our product innovation capabilities,” Henry said during the conference call. 

The prepaid industry has seen a spate of M&A activity in the past few months. In November, U.S. Bank agreed to acquire processor and program manager FSV Payment Systems. Earlier that month, GPR distributor AccountNow Inc. announced its intention to purchase nFinanSe Inc., in a deal that closed in December.