With its acquisition of prepaid card transaction processor and program manager InComm Inc., First Data Corp. is picking up one of only a few major distributors of prepaid card products, a move that hands the Denver-based processing giant a substantial stake for the first time in the crucial retail distribution channel for prepaid plastic. The deal, announced on Monday, is expected to close in the second quarter. Terms, including price, were not announced. Atlanta-based InComm, which started out in 1992 as a processor of prepaid long-distance service, supports prepaid transactions at some 145,000 merchant locations, including those of national retailers like Lowe's Cos. Inc. and Staples Inc. The company distributes and processes for gift cards and prepaid wireless cards, and handles digital music downloads and bill payments. It earned net revenues of $300 million last year on $8 billion in transactions processed. InComm also processes reloads for network-branded prepaid cards, a crucial function as national networks like Visa Inc. and MasterCard Worldwide seek ways to garner more transactions from prepaid cards by allowing cardholders to keep their cards and load more value onto them. In 2006, InComm struck a deal with MasterCard to support transactions on MasterCard's reload network, called rePower. Mark Herrington, president of First Data Prepaid Services, says the processor was attracted to InComm because of its existing merchant relationships. This asset poses a contrast with the retail reach of ValueLink, First Data's prepaid network. “We really haven't had retail distribution,” he says. “It's a minor footprint.” He cites InComm and Safeway Inc.'s Blackhawk network as the two primary program managers for retail distribution. “They have the critical mass,” he notes. At the same time, First Data likes the economic appeal of prepaid products to merchants, he says. Compared to other products they could sell in the same space, merchants earn returns that are “off the charts” on displays like gift card malls, Herrington says. “InComm provides a service that is extremely high value to the merchant community, and that's the type of service First Data is interested in deploying,” he says. Indeed, InComm's merchant network will prove critical to First Data's prepaid strategy, says Red Gillen, senior banking analyst at researcher Celent LLC. “First Data is recognizing the value of the retail footprint,” he says. “[The acquisition] is a recognition of the fact that to succeed [in prepaid cards] you have to be in the retail channels where people are buying these cards.” Gillen suggest First Data might leverage its account-processing relationships with card-issuing banks along with InComm's distribution channel to allow banks to sell stored-value products in stores, most particularly to the underbanked population, often regarded as the primary market for such products. “People don't go into banks [to buy cards],” he notes. “Where people are are in gas stations, groceries, and so on.” Instead, Herrington says First Data's acquiring business, where it processes for 3.5 million merchants, could provide the means to bring InComm's service to many more small retailers than InComm could have reached on its own. “We're the acquirer, the pipe into those locations,” he says. “The connectivity we have enables us to bring this type of offering down market efficiently.” Gillen expects the First Data-InComm deal will not be the last in the prepaid business, where he says players might realize efficiencies by merging. “We're going to see a lot more consolidation in this space,” he says. “Prepaid cards have a lot of cooks in the kitchen. It's a very fragmented market.” The deal is the first major transaction in the market since Capital One Financial Corp. last year struck a deal to acquire program manager NetSpend Holdings Inc. for $700 million. That acquisition later fell apart for reasons that remain unclear, though observers speculate it might have resulted from second thoughts at Cap One about what many regarded as a hefty price tag for NetSpend (Digital Transactions News, Nov. 20, 2007). After the deal closes, InComm president and chief executive Brooks Smith will take over as head of First Data's prepaid services unit.
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