NetSpend IPO vs Green Dot IPO – Two Approaches to Minimizing Bank Risk

Netspend IPOAs mentioned previously, NetSpend recently announced its IPO plans (following Green Dot’s announcement earlier this year). The IPO filings of each of the companies reveal two different approaches to minimize or control a major risk factor associated with being a promoter of prepaid cards – the reliance on an issuing bank.

In its registration documents, the GreenDot Corp. announced its intent to become a bank holding company. Green Dot provided the following reasons behind the move:

We believe this acquisition will increase the efficiency with which we introduce and manage potential new products and services, reduce the risk that we would be negatively impacted by changes in the business practices of the banks that issue our cards, reduce the sponsorship and service fees and other expenses that we pay to third parties, and allow us to serve our customers better and more efficiently through a more vertically integrated platform.

NetSpend faces similar risks, and appears to be heavily reliant on a single issuer – MetaBank. NetSpend concedes that its reliance on specific issuing banks is a risk factor, stating that “The loss of, or changes to, our relationships with MetaBank or our other issuing banks could adversely affect our business, results of operations and financial position” and further that

We rely on the arrangements we have with our issuing banks to provide us with critical products and services, including the FDIC-insured depository accounts tied to our GPR cards, access to the ATM networks, membership in the card associations and network organizations and other banking services. As of March 31, 2010, approximately 69% of our active cards were issued through MetaBank. MetaBank is our preferred issuing bank and has designated us as a preferred program manager for prepaid debit cards. If our relationship with MetaBank deteriorates or if we lose our position as a preferred program manager of MetaBank, it could hinder our ability to grow our business and have an adverse impact on our operating results….

To deal with the risk, NetSpend has not taken the same approach as Green Dot (that is, NetSpend has not indicated an intent to acquire or form a bank or a bank holding company). Instead, NetSpend established closer ties to their primary issuing bank, MetaBank, announcing

In January 2010, we agreed to promote MetaBank as a preferred issuing bank and MetaBank agreed to promote us as a preferred program manager. In order to further align our strategic interests with MetaBank, we also acquired approximately 4.9% of the outstanding equity interests in Meta Financial Group, Inc., MetaBank’s holding company.

Only time will tell how the two approaches work out. While NetSpend is still heavily tied to a single issuer (MetaBank), at least they will not be involved in the legislative and regulatory issues associated with operating a bank.

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