- There is circumstantial evidence that the aim of this FinTech “blank check” IPO is to acquire a company in the fast-growing prepaid gift and rewards card market.
- But, this market has just entered a “post-plastic” and “post-internet” end-to-end mobile app world where it is highly uncertain who will succeed or fail.
- Most blank check IPOs are aimed at turnarounds or spin-offs in static industries. This IPO is not.
- We recommend waiting until an acquisition is announced before deciding to invest.
FinTech Acquisition Corp. (pending: FNTCU) is a special purpose acquisition company (SPAC) a/k/a/ a “blank check company” formed for the purpose of acquiring an established financial technology (“FinTech”) company.
On December 12, 2014, FinTech filed an S-1 prospectus with the SEC announcing a forthcoming listing on NASDAQ under the symbol FNTCU of 10M units at $10/share with each unit consisting of one share of common stock and one warrant. Cantor Fitzgerald is the sole bookrunner.
We speculate that the aim of the CEO of this blank check company, Daniel G. Cohen, is to preempt disruption of a Philadelphia bank called The Bancorp (NASDAQ:TBBK). Daniel G. Cohen has been Chairman of the Board of The Bancorp since it was founded by his mother in 2000, the legendary Betsy Z. Cohen.
The Bancorp is the largest bank processor of branded gift and rewards cards in the country. This business is less secure now than ever as we have entered a “post-plastic” era of gift card origination and distribution where the choice of processing bank is being reexamined.
According to a Bankrate.com report, the $130 Billion gift card market is undergoing a rapid conversion from plastic to digital cards with “Fifty-nine percent of gift cards are now offered electronically, up 18 percent from 2010.” And within digital, there is rapid shift from internet origination with email gifting and manual use to a pure end-to-end mobile phone app experience.
The digital origination of prepaid gift cards is a stampede now with Crunchbaselisting 478 mobile payment startups at this time.
The distribution side is rapidly being consolidated by the dominant plastic distributors Blackhawk Network (NASDAQ:HAWK) and privately-held InComm. Amazon.com (NASDAQ:AMZN), PayPal (NASDAQ:EBAY) and Stripe are lurking. Major brands like Target (NYSE:TGT) and Nordstrom (NYSE:JWN) are bypassing the whole supply chain by buying their own processing banks.
There are many targets for Daniel G. Cohen and FinTech Acquisition in this “post-plastic” card era. But where to aim?
We recommend waiting until this blank check IPO is filled in (note:it cannot be cashed without 75% approval of stockholders) before making any investment decision here.
Blank check IPOs are fairly rare occurrences. Generally, they are formed by former CEOs who want to exploit a turnaround or spin-off opportunity in a static industry, but don’t have access to private equity and/or want an outsized stake in the acquisition.
Because the prospectus of blank check IPOs are vague for legal reasons, investor interest usually revolves around assessing the strength of management.
However, our interest in this IPO was peaked first by the buzzy choice of “FinTech” for its name.
We said to ourselves, “What chutzpadik to issue a blank check IPO prospectus named FinTech during the very week when two FinTech IPOs had sizzling first days. For G_d’s sake, the norm for these kinds of IPOs are innocuous names like Avenue, Boulevard, or Silver Eagle.”
Who is this guy and what is his aim for this buzzy IPO?
We knew that there were two sets of FinTech companies. One is represented by a yearly list compiled by the American Banker of Top 100 FinTech companies. These are stodgy, old-line companies focused on traditional financial institutions.
These companies have brash mission statements about disrupting traditional banks and brokerage houses, even established newish FinTech companies like PayPal and Fair Isaac (NYSE:FICO). This is world of p2p, Big Data, AI, predictive analytics, algorithms and two-factor authentication.
In our opinion, the aim of this IPO is to acquire buzzy FinTech.
This is despite the fact that the acquiring CEO is a Philadelphia financier named Daniel G. Cohen, who serves as Chairman of the Board of The Bancorp, that we took at first to be a stodgy, regional bank.
The admittedly circumstantial evidence relating to the aim of this IPO are as follows:
First, the S-1 mission statement: (bold is ours)
We currently intend to concentrate our efforts in identifying businesses which provide disruptive technological innovation to the financial services industry …
This has to a first – a blank check IPO with a mission statement containing the word “disruptive.” This is not the kind of mission statement crafted by the Chair of a stodgy, regional bank.
It turns out that The Bancorp is not a stodgy, regional bank with brick-and-mortar branches, but one of the largest “branchless” banks specializing in private-label credit cards, reloadable cards and branded prepaid gifts and rewards cards.
According to a 2013 Nilson Report, The Bancorp is the nation’s largest prepaid card issuer with $30 Billion in volume. According to a Forbes article, the overall prepaid card (reloadable and gift) market hit $200 Billion in 2012, with the gift card segment alone accounting for over half of that.
Furthermore, Daniel G. Cohen does have experience in the new world of digital, mobile-centric payments. The Bancorp was an integral piece of the ill-fated Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Wallet 2.0 of the mid-2000s, servicing as “Google Wallet Virtual Card” that linked to real customer cards on servers.
But, lately Cohen chairs a bank with serious accounting, regulatory and competitive issues.
First, there was a April 2014 surprise announcement of under-reserving for commercial loan losses due to adverse loans. Then there was a June 2014 announcement that the FDIC found the bank practices in violation of the Bank Secrecy Act – namely that reloadable prepaid cards issued by The Bancorp were being used for extensive money laundering.
The FDIC issued a consent decree prohibiting the bank from entering new contracts for reloadable, prepaid cards. However, The Bancorp still could issue new non-reloadable gift and rewards cards.
Needless to say, the banks financials have taken a dive since April 2014 and its common stock is 50% off its yearly high. There are a number of class action suits pending.
But, in our opinion, the bank’s problems going forward are competitive. We have entered an “post-plastic” era of prepaid cards with new originators and more powerful distributors who are reexamining the choice of processing bank for their offerings.
For example, the two dominant distributors of plastic prepaid gift cards are Blackhawk Network and privately-held InComm. They both have been on a tear lately buying up digital originators of prepaid cards.
Blackhawk Network has bought Cardpool, CardLab, and Intelispend. Incomm has bought Giftango and Adility. So far, these distributors are retaining the bank processors of their acquisitions – a mix of The Bancorp, Metabank (NASDAQ:CASH) and Sunrise Bank.
There is also a trend of the very largest prepaid card brands – Target, Nordstrom and Walmart (NYSE:WMT) – buying their own small “branchless banks” to process their offerings?
What is Daniel G. Cohen and FinTech Acquisition going to do?
It could try to become the #3 distributor behind Blackhawk Network and InComm by first buying any remaining plastic distribution business that a large regional grocery wants to spin off similar to what Safeway (NYSE:SWY) did with its Blackhawk Network operation.
Or, it could skip distribution and focus on origination by buying a decent revenue-producing startup like CashStar that wants to go public sooner than later.
Either move might drive away current customers of The Bancorp. Saving The Bancorp from disruption might just kill it.
But, the margins are better for digital originating and distributing than bank processing. Recent Safeway spin-off and IPO Blackhawk Network now has a valuation 5 times that of The Bancorp – $1.97 billion versus $.38 billion. Becoming the #3 digital prepaid card distributor at the cost of killing The Bancorp may be the way to go. Or not.
Again, what to acquire during this wild early stage of “post-plastic” prepaid cards is highly uncertain. We recommend staying away from this blank check IPO until an acquisition is announced.