OCTOBER 13, 2010, 5:34 P.M. ET Wall Street Journal digital network
2nd UPDATE: NetSpend IPO View Darkens On MetaBank Regulatory Woes
 By Lynn Cowan 
   Of DOW JONES NEWSWIRES 
 

The previously rosy outlook for this week’s IPO of prepaid debit card company NetSpend Holdings Inc. hit a hitch Wednesday on news that its preferred issuing bank must stop offering an add-on service due to regulatory violations.

NetSpend, which is scheduled to price its initial public offering Thursday and trade Friday on the Nasdaq under the symbol NTSP, was considered a strong deal by analysts and bankers.

On Wednesday, the company’s preferred debit card issuer, MetaBank, a unit of Meta Financial Group Inc. (CASH), was forced to discontinue originations in its iAdvance line of credit program, under a directive issued by the Office of Thrift Supervision.

NetSpend markets the iAdvance line of credit to users of its prepaid debit cards; NetSpend also issues about 71% of its active cards through MetaBank and owns about 5% of MetaBank’s outstanding stock.

NetSpend would not immediately comment on its relationship with MetaBank. It has scheduled a conference call for IPO investors Thursday morning, according to Scott Sweet, managing director of research firm IPOBoutique.com.

Meta Financial Chief Executive Tyler Haahr told Dow Jones that his bank will continue to issue debit cards for NetSpend, and that aspect of their business is unaffected by the iAdvance halt.

“We expect to continue to service existing customers, including NetSpend, consistent with the terms of our agreements,” Haahr said.

The iAdvance line of credit was a feature offered on MetaBank-issued prepaid debit cards at an additional charge to card holders. The line of credit operated like an overdraft agreement on a checking account, allowing consumers to make purchases beyond their prepaid limit, which they later paid back, in addition to paying a fee for the service.

A source with knowledge of NetSpend’s business said that the company’s revenue related to iAdvance was immaterial, but a NetSpend spokesman would not comment.

Along with suspending the iAdvance program at MetaBank, regulators found that MetaBank had engaged in deceptive acts or practices in connection with its iAdvance program.

In the absence of information from NetSpend, IPO analysts Wednesday reacted by cutting their ratings on the deal, which previously had high marks.

“Right now, I can’t tell people to buy this. It’s too risky,” said Ben Holmes, president of IPO research firm Morningnotes.com. Holmes said he was lowering his rating on the firm, which he previously saw as a high-demand offering.

Sweet, of research firm IPOBoutique.com, said he was concerned about business interruption for NetSpend as well as the possibility of litigation from card holders and investors who own Meta Financial shares. He lowered his rating on the IPO to neutral, two steps below his previous rating of strong buy. [Was any one paying any attention to what this company actually was doing before they bought?]

“You can bet there will be protracted litigation, not only with Meta, but NetSpend could be named as codefendent,” due to its relationship with the bank, said Sweet, who said it was the first time he dropped a rating by two notches since he founded his company in 2005.

Meta Financial’s stock cratered Wednesday. It closed at $22.25, down 33%. The news also weighed on shares of Cash America International Inc. (CSH), a payday lender that has a 8.6% stake in Meta, according to FactSet Research. Cash America closed at $33.55, down 5.7%.

MetaBank said it expects that ending its iAdvance program, as well as the potential discontinuation of its tax-related programs, will eliminate a substantial portion of its Meta Payment Systems division’s gross profit. Ending the iAdvance program may also result in higher nonpayment on outstanding iAdvance loans. The company said it couldn’t predict the effect on its results of operations or financial condition of MetaBank or parent Meta Financial.

NetSpend warns in its prospectus that any material adverse event that affects MetaBank or causes it to lose its ability to be an issuing bank for its cards would force NetSpend “to find an alternative provider of these critical banking services.” [How will consumer’s and customer’s interests be protected? All that we have heard is about these people who have been making money by deceitful practices and by misleading people, but how can they expect to keep going on and on when they are doing that to the most vulnerable people among us?]

-By Lynn Cowan, Dow Jones Newswires; 301-270-0323; lynn.cowan@dowjones.com

(Jennifer Cummings contributed to this article.)