After struggling with stagnant credit
card growth in the US, Capital One is turning its attention to the
prepaid card sector with the $700 million acquisition of NetSpend
Holdings, a major retail prepaid card marketer. Capital One, the
fourth-largest issuer of Visa and MasterCard cards in the US, said
it expects the acquisition to be accretive in 2009.

Best known for its credit card operations and marketing
expertise, Capital One is aiming to tap into the increasingly
profitable prepaid market in the US, which, according to US
research consultancy Aite Group, is expected to amount to $178
billion by 2010, up from an estimated $113 billion in 2007. The
acquisition of NetSpend will also help Capital One reach the 70
million unbanked US consumers who are a prime market for prepaid
cards, and will provide Capital One with a platform to cross-sell
its other financial products.

“This transaction is financially compelling,” said Scott Grimes,
Capital One’s senior vice-president of payments. “NetSpend is
profitable today, and based on extensive due diligence, we’re
confident that the combined capabilities of both companies position
us to deliver strong profit growth in the future.”

First venture

Capital One’s first foray into the prepaid market came in
February 2007, when it linked up with NetSpend to launch a
reloadable prepaid card aimed at unbanked consumers. NetSpend has a
proprietary prepaid processing platform allowing it to support
end-to-end prepaid card programmes, and has strategic relationships
with several card issuers, electronic funds transfer networks and
retailers, including Safeway, HEB grocery stores and cheque casher
Ace America’s Cash Express.

Capital One and NetSpend will now focus on leveraging both
companies’ card marketing expertise to increase awareness among
consumers and to distribute the cards through Capital One’s
720-strong branch network and NetSpend’s retailer network of 15,000
locations and 50,000 top-up locations. “With NetSpend’s broad
network of merchant partners, this acquisition immediately adds a
powerful channel and further extends Capital One’s prepaid
solutions to the retail environment,” Grimes said.

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NetSpend’s CEO, Richard Savard, will continue to head the
prepaid business after the acquisition has been finalised in the
fourth quarter of 2007 and will assume a key executive role within
Capital One’s payments business.

Since NetSpend’s foundation in 1999, more than 2 million users
have opened accounts and over $4 billion in purchases and cash
withdrawals have been made on NetSpend cards. The company has a
high retention rate for prepaid card customers – according to
Savard, between 500,000 and 1 million customers have used a
NetSpend product in the last three months.

NetSpend has been an innovator in combining prepaid cards with
savings accounts. In 2005, it launched the National Savings
Program, under which customers can transfer funds from their
prepaid cards to a separate savings account held by Inter National

Moshe Orenbuch, an analyst at Credit Suisse First Boston, said:
“Capital One should be able to materially accelerate the growth of
this business by marketing the cards to those turned down for (or
not qualified for) a Capital One subprime card. This could be a
breakthrough product – Capital One has a significant opportunity to
establish a lead in the prepaid debit business.”

US card net income