NetSpend evolves from scrappy startup to major revenue contributor for TSYS

Prepaid card marketing business NetSpend, which has affiliations with Visa and MasterCard, was purchased by Columbus-based TSYS in 2013 for $1.4 billion. --
Prepaid card marketing business NetSpend, which has affiliations with Visa and MasterCard, was purchased by Columbus-based TSYS in 2013 for $1.4 billion. -- Image courtesy of TSYS

It’s been just over three years since global credit-card and payment processor TSYS completed the then-largest acquisition in the company’s 30-year history, paying $1.4 billion for an Austin, Texas-based high-tech firm specializing in prepaid cards marketed to consumers.

Of course, that purchase of NetSpend Holdings has been overshadowed somewhat this year by the $2.35 billion buyout of Hauppauge, N.Y.-based TransFirst, a privately owned firm that serves merchants across the U.S. When that deal closed in early April, it then became the highest price tag spent by TSYS on another company.

While TSYS management has supreme confidence that its investment in TransFirst will yield great dividends in the coming years, NetSpend is already paying off nicely. The $162.6 million in revenue it reported in the most recent April-June second quarter was an all-time high for the scrappy outfit founded in 1999.

“We’re full family now, man. They’re not going to get rid of us. We’ve moved in, and it’s been great,” joked Chuck Harris, the president of NetSpend since 2010, who also was folded into TSYS management after the acquisition, becoming a senior executive vice president.

“We run a very different business, and I think that’s sometimes lost in all the conversations,” he said in a recent interview. “I think it was a bold move for TSYS to acquire a company like ours. We’re a consumer-facing company. We’re a tech- and a software-type company, and Austin-based and that sort of thing. Given all of that, I think the assimilation has gone really well.”

Harris, who heads a business line that remains in the Texas capital with about 600 employees, depending on seasonal fluctuations such as tax season, said his operation has generally been given great autonomy by TSYS Chairman and Chief Executive Officer Troy Woods to do its job and grow sales.

“That’s one of the reasons I give TSYS high marks on the acquisition is we’ve integrated the right things and left alone the right things,” said Harris, a graduate of the University of Texas-Austin. “So we’re able to build products and service our customers and react and remain nimble and market responsive and haven’t had to introduce a lot of complexity to that, which I think has helped us. Growing up as a small entrepreneurial company, those were the things that made us successful and will continue to make us successful. So we’ve been pretty much left alone.”

Following the second-quarter earnings report by TSYS, Woods in a conference call ticked off a list of recent developments for NetSpend that included the signing of a 10-year contract with prepaid card distributor Blackhawk and an extension with pharmacy operator CVS. New three-year agreements also were inked with JCPenney and The Gap.

“These new and growing partnerships are the manifestation of NetSpend's goal to meet consumers where they work and shop to provide them with a great solution fulfilling their financial needs,” Woods said.

TSYS Chief Financial Officer Paul Todd also talked of NetSpend’s “strong performance,” with revenue growth that included double-digit gains in three of the prepaid card specialist’s four distribution channels.

“This shows the results of a diversified distribution model where we continue to win new business, as well as expand and extend our existing relationships,” he said.

NetSpend’s cards find their ways into the hands of people that it calls the “self-banked,” meaning they may not have access to a financial institution due to previous financial difficulties or simply don’t want an account. Some may have a bank account but still use the “general purpose reloadable” cards for other needs. That includes small businesses, which NetSpend began targeting with a product this year and believes will be fruitful.

“We call our customers self-banked because they’ve made a self-determination and said, ‘I’m going to control my financial life. I’m going to get a product that helps me organize that and control that and manage that in a better way,’” said Harris. “So we try to build products for that consumer.”

Growth for NetSpend, the executive said, will come in many forms, including the younger millennial generation that expects customization from products and services they use. There also are the so-called “jobs of the future,” he said, in which more and more people will freelance their skills and need access to prepaid cards and accounts that can be managed even by mobile phone, which the Texas operation has been doing for several years.

Then there’s the potential for pumping up revenue considerably at some point by marketing and distributing NetSpend products in other nations. Thus far, it has done business only in the U.S. Harris said the infrastructure and networking roots already planted by TSYS elsewhere would smooth the entrance of the prepaid player into a foreign market. The first steps outside the U.S. could come within the next 12 months or so, he acknowledged.

“We would start with a distribution partner that makes sense for us, if you think about how we distribute through grocery and retail,” he said. “We’ve got a few distribution partners that we’re looking at that have a presence outside the U.S.”

Building on what NetSpend is already contributing to the bottom line of its parent company TSYS will be interesting, considering it already delivers well over half a billion dollars to the global card processor.

Specifically, for all of 2015, NetSpend’s revenue totaled $580.4 million, which was up from $482.7 million in 2014. That was growth of just over 20 percent.

The numbers have gotten so large that the federal Consumer Financial Protection Bureau has been crafting new and revised regulations surrounding the prepaid industry, to make certain those people using the financial products aren’t harmed in any way. The final rules are expected to be published sometime in September.

“I think it’s validation of our product and our marketing and our industry, and in a lot of ways it’s positive that we have a regulator now,” said Harris, noting that many of the new rules have already been addressed by NetSpend, putting them in compliance.

“We had to start very small and grow and build this thing,” he said of NetSpend’s journey from upstart to an affiliation with the company the size of TSYS, which is headquartered in downtown Columbus. “The idea that we’re successful now and we’re big enough and relevant enough that the government feels the need to regulate us … in some ways does sort of validate our business and gives us a playing field to play on.”