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August 11, 2007

Capital One moves into prepaid

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

By Verdict Staff

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.

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 Bank.

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

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