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Why Bancorp and MetaBank Should Dislike the Durbin Amendment

Adam Rust's picture

Posted March 24, 2014

Although it might seem counterintuitive, leading small bank prepaid card issuers should be praying for the day when policymakers do away with the clause in the Durbin Amendment that sets aside extra interchange for banks

with assets of less than $10 billion.

That argument is counterintuitive because as things stand now, banks like Bancorp and MetaBank can generate a higher gross margin on prepaid transactions than can a Chase or a BB&T.  Big banks have to modify their cards to fit within the strictures of Durbin. If those big guys want to maximize the interchange that they can capture, Durbin stipulates that they cannot valuable services such as online bill pay or outgoing ACH. MetaBank, Green Dot Bank and Bancorp can without worrying about a cap.

Logically, consumers appreciate functionality and notice the difference. They are inclined to Tiebout - and that has probably been one of the factors that explains why a Green Dot card can remain so popular in the face of new big bank entrances.

But what happens if the big banks are suddenly unshackled? Well, for a bank that has already established a beach head with a solid product (Chase Liquid), then the difference is minor. But for a big bank that has heretofore been absent from this space, buying is an easy chance to realize a growth opportunity. Such a bank would suddenly find itself with the chance to buy an off-the-shelf market leading line of business.

But the rub, at least from the perspective of a potential buyer, is that the shelf of prepaid issuers is thin. The prepaid issuance marketplace is increasingly becoming something of an oligopoly. It is dominated by only a handful of banks. Indeed, was it not for the relatively under-the-radar status of prepaid, I doubt that it would be long before Justice would be having concerns about industry concentration. Prepaid issuance must have a Herfindahl-Hirschman Index of close to 1750 by now.

Ah-ha! Maybe that is the holdup. Under the most recent guidelines from the Department of Justice and the Federal Trade Commission, any acquistion that results in an industry HHI score above 1500 flags a review. But prepaid still gets a pass here, because DOJ-FTC rules tend to be blind to concentrations that are not defined by geography.

Currently, an acquisition of a small prepaid card issuer by a large bank is a value-destroying event. But absent of Durbin, the landscape changes. Suddenly, such an action becomes a synergy play: combine those existing contracts held by the small bank with the marketing and on-the-ground branch network of a big bank and voila - everyone wins.

Getting into prepaid in a big way means signing contracts with the right program managers. The rails have to be built out. It probably requires some good hires. Going forward there are questions about bridging across a customer mindset that differs in many ways from the typical client base. It is probably a must to develop some excellent apps. Some PMs (Rush) have robust social media infrastructure. An issuer might need to design something like that, as well. The long and short of it is that it is probably a lot easier to buy an already-made rather than trying to do a DIY.

I cannot imagine how much difference this would make in the values of a stock like the Bancorp or Green Dot. I have to believe that each would see a significant boost right away, though. It would be the same story with MetaBank and possibly with Bank of the Internet.