Yesterday, back-end processor TSYS and prepaid card proprietor NetSpend announced the former would buy the latter for $1.4 billion.  This is not just another acquisition.  It’s interesting because it affirms the value of the much beleaguered general purpose reloadable prepaid (GPR) card industry, it concedes value to a much maligned consumer segment – the emerging middle class (aka the underbanked) – and it signals the commodification of the financial processing business.

GPR grew out of the gift card business as a checking-account and check-cashing alternative, and had its hayday in 2010 when both Green Dot and NetSpend went public on the New York Stock Exchange and NASDAQ, respectively.  Since then it’s been downhill.  Green Dot lost over 60% of its already post-prime value last summer and NetSpend was never a Wall Street darling with its check cashing distribution partners and second fiddle position.  GPR was in the doldrums the past 12 months.  Advocates and the media considered it a (still do, probably) a rip-off.  Investors didn’t see the multiples (and they may still not). And the lines became blurred with entrants like American Express’ Bluebird (which is sold as a checking account alternative, but not FDIC insured, nor able to receive government benefits), Green Dot’s GoBank (which is an actual bank account, but marketed online) and startups Simple, Plastyc’s iBankUp and Moven.  Still, Green Dot, NetSpend, RushCard, AccountNow and others continue to sign up new customers in droves.  And TSYS paying a 30% premium to Tuesday’s trading price is but one, but a meaningful indicator that GPR has a life beyond BlueBird and Chase’ Liquid.  (And for what it’s worth, we expect GPR to grow 15% as an industry sector year-over-year).  TSYS has been in prepaid for 10 years (since acquiring Anil Aggarwal’s Clarity Systems), so isn’t a naive buyer.

While the size of the US underbanked consumer segment is generally agreed to be large, most people still believe it’s fit for charity and public policy (the missionaries), or predatory companies (the mercenaries), but not legit, mainstream business.  TSYS is neither missionary or mercenary.  They are a $4B market cap global payments processing business, (quite acquisitive, and this acquisition is the largest they have ever made) that believes this consumer segment represents an “exponential” growth opportunity for them.  (I recognize that as a hammer, everything I see looks like a nail, and this observation is entirely self-serving to my business‘ strategy).

Lest people argue the acquisition simply offers TSYS diversified distribution channels, new products and technology capability, I think the most interesting aspect of this transaction is the fact this is the first major entrée into direct-to-consumer business, not just by TSYS, but by the entire payements processing oligarchy (FIS, Fiserv, First Data, Jack Henry, etc).  I believe that this premium (which computes to about $550 per active NetSpend account) is justified by fundamentally diversifying TSYS out of the commodity business of payments and bank processing and into the higher margin retail financial services business.

It’s a small step for the underbanked, but a giant leap for payments processing.  I wouldn’t be surprised if we see FIS, Fiserv and First Data find ways to get closer to direct-to-consumer relationships.  I wouldn’t be surprised if banks think differently about this consumer segment as a result.