Cap One Extends Debit Reach with $700 Million NetSpend Deal

Capital One Financial Corp.’s decision to buy prepaid card processor NetSpend Corp. comes at a time when the network-branded prepaid card market is rapidly expanding and close on the heels of Cap One’s market-changing move into debit cards that can be held by consumers with accounts at any bank (Digital Transactions News, June 7). McLean, Va.-based Cap One announced Tuesday it is buying NetSpend Holdings Inc., NetSpend’s parent company, for $700 million in cash in a transaction expected to close in the fourth quarter.n
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With the acquisition, Cap One gains an immediate foothold in a high-growth debit market that tends to serve low-income households without bank or card accounts who are looking for alternatives to high-cost check-cashing services. NetSpend, an 8-year-old, Austin, Texas-based company, has grown significantly since shifting its strategic focus from the teen to the adult, or so-called underbanked, market five years ago. It now manages more than $3 billion in yearly transactions for more than 1.5 million holders of its MasterCard- and Visa-branded cards across the country. The company, an independent sales organization for issuers MetaBank and Inter National Bank, has agreements with major grocery chains like Safeway and Pathmark to allow cardholders to load value at a total of 50,000 stores. Consumers can buy the cards at some 15,000 locations.n
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Cap One could also benefit later on as prepaid customers become ready to take on traditional financial accounts and debit cards. Such marketing aims have been key to the strategies of Visa USA and MasterCard Worldwide in introducing prepaid products and reloading networks. Further, in June Cap One introduced a new type of debit card that allows consumers who keep their funds on deposit at any bank to tap those funds through the automated clearing house network. The new card, which is cobranded with merchants, is generally called a “decoupled” card since unlike other debit cards it isn’t necessarily linked to checking accounts held at the issuing institution. “Prepaid cards, in combination with our decoupled debit and credit card products, enable [Cap One] and our co-brand partners to provide a card option for every customer,” a Cap One spokesperson says an e-mail message.n
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Overall, the so-called open-loop prepaid market, made up of cards branded by one of the general-purpose card networks, is expected to grow from $14 billion in spending in 2005 to $44 billion in 2009, according to Mercator Advisory Group. Estimates of the size of the underbanked market vary, but Cap One and NetSpend say some 70 million U.S. citizens lack a bank account.n
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At the same time, consumer awareness of, and satisfaction with, reloadable prepaid cards is running high, according to survey results released this week by the Network Branded Prepaid Card Association, a trade group. Reloadable cards, which can be replenished with cash value at retail locations, usually carry a general-purpose-network logo. Some 88% of survey respondents who had already used a reloadable card reported a positive experience and found them useful. Across all respondents, 45% said such a card would be extremely or very useful to them. The survey, conducted online in May, canvassed 600 consumers with household income of less than $50,000; some 14% of the sample had already used a reloadable card.n
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Under the terms of the deal, NetSpend will become a subsidiary of Cap One. Richard Savard, the former American Express Co. and Federated Department Stores executive who in June 2004 took over as NetSpend’s chief executive, will continue to lead the NetSpend business and will assume a so-far unspecified executive title within Cap One’s payments business, according to Cap One.