By Andrew R. Johnson
Green Dot Corp.'s (GDOT) share price was slashed by more than
half on Friday, while NetSpend Holdings Inc. (NTSP) sank nearly 10%
as investors tempered their growth expectations for the burgeoning
prepaid-card industry a day after Green Dot significantly lowered
financial guidance for the year due to increased competition.
Prepaid-card products have proliferated in recent years as more
companies try to win a piece of a market that is expected to grow
by several hundred billions of dollars in the coming years.
Traditionally sold by alternative financial-services companies
like Green Dot, NetSpend and Western Union Co. (WU), the market has
recently attracted a slew of mainstream lenders, including J.P.
Morgan Chase & Co. (JPM), U.S. Bancorp (USB) and American
Express Co. (AXP), as they look for additional revenue sources amid
fee limits on other products.
Green Dot--which relies heavily on retail partners including
Wal-Mart Stores Inc. (WMT), 7-Eleven and other stores to sell its
cards--surprised analysts late Thursday by cutting its adjusted
earnings forecast for the year to between $1.29 and $1.32 per share
from an earlier forecast of $1.65 to $1.70 per share.
The Monrovia, Calif.-based company's executives said they expect
more retail partners, including some that currently have exclusive
contracts with Green Dot, to introduce competing products in the
coming months and next year, and that some competitors were
becoming more aggressive in offering upfront payments to retailers
to get their cards on store shelves.
"We see a greater level of uncertainty going forward in our
business as our market and the prepaid industry in general
continues to evolve," Steve Streit, chairman, president and chief
executive officer of Green Dot, said during a conference call
Thursday.
Green Dot's shares fell more than 60% Friday, hitting a new
52-week low, while NetSpend was down as much as 12%. The results of
both companies have been closely watched since their initial public
offerings in 2010 given the increasing number of companies that
have rolled out competing products.
Green Dot's shares were down 58.4% at $9.71, and NetSpend's
shares were down 8.8% at $8.50 in recent trading.
American Express, which has traditionally pitched credit cards
to affluent customers, has been particularly active in releasing
prepaid products as it tries to broaden its customer base. The
company announced a new prepaid card last summer, and has since
struck distribution deals with Target Corp. (TGT), Office Depot
Inc. (ODP) and Barnes & Noble Inc. (BKS).
It also has been testing the sale of a prepaid card marketed
under the name "bluebird" in some Wal-Mart stores, news of which
caused Green Dot's shares to drop in March. Green Dot is the
exclusive manager of Wal-Mart's prepaid MoneyCard, which is issued
by a bank subsidiary of General Electric Co. (GE) and is sold in
the retailer's stores and online.
A spokeswoman for American Express did not have an immediate
comment Friday.
Wal-Mart, which owns a small stake in Green Dot, accounted for
62% of Green Dot's operating revenue during the second quarter,
Green Dot said Thursday.
In an interview Friday, Mr. Streit said its guidance represents
a worst-case scenario but expects "many of our retailers will have
multiple products."
"We want to give the market early warning that we're unsure of
the future," he added. "We think that's the right thing to let the
market know."
Prepaid cards work like a normal debit card, typically baring
the logo of Visa Inc. (V) or MasterCard Inc. (MA), making them
usable at stores and online. However, they aren't attached to a
checking account and aren't subject to the same consumer-protection
requirements as traditional debit and credit cards.
They typically carry monthly maintenance fees and can come with
upfront purchase fees. They also may charge customers for making
out-of-network ATM transactions and other activities. The Consumer
Financial Protection Bureau in May said it was seeking comments on
potential new disclosure requirements for prepaid-card fees and
other product features.
Most prepaid cards also aren't subject to the Durbin amendment,
a provision of 2010's Dodd-Frank financial overhaul legislation
that cut in half the fees merchants pay each time a consumer swipes
a debit card. That has led some banks to begin offering the
products, analysts say.
J.P. Morgan Chase, the largest U.S. bank by assets, has begun
selling a prepaid card in all its 5,500 branches, it said earlier
this month.
Several analysts downgraded Green Dot's stock Friday, with some
applying their more dour outlook to NetSpend, which has
traditionally been Green Dot's biggest direct competitor and has
recently won new distribution deals with retailers. Last month
NetSpend said 7-Eleven would begin selling a PayPal-branded prepaid
card it announced in November.
A spokeswoman for NetSpend declined to comment Friday, citing
the company's quiet period ahead of its earnings announcement,
scheduled for Aug. 2.
Signs that competitors are "willing to pay retailers significant
sums for shelf space" could have "widespread ramifications for the
industry if they do prove to be correct," Sanjay Sakhrani, an
analyst with Keefe, Bruyette & Woods, wrote in a research note
Friday, downgrading both Green Dot and NetSpend to market perform
from outperform.
"We believe [Green Dot's] results will breed uncertainty around
the sector," Mr. Sakhrani added.
U.S. consumers are expected to load $353.8 billion onto
"network-branded" prepaid cards, or those that carry the logo of a
card brand such as Visa or MasterCard, in 2014, up from $148.4
billion in 2010, according to Mercator Advisory Group.
That estimate may be too optimistic, though, given weak economic
conditions and fragmentation in the market amid a flood of new
entrants, said Ben Jackson, senior analyst in the prepaid advisory
service at Mercator.
"We are in the process of taking a hard look at whether or not
we think that that forecast needs to be revised," Jackson said. "We
sort of made some assumptions about the way things were going that
we're not entirely sure are going to hold."
Green Dot says its underlying business metrics remain
healthy.
The company activated 1.98 million new cards in the second
quarter, up 9% from a year earlier. The amount of money loaded onto
its cards and special-reload products increased 10% to $4
billion.
Green Dot reported adjusted earnings of 35 cents per share,
missing analysts estimates of 38 cents, according to Thomson
Reuters.
The company is working to diversify beyond prepaid cards. It
acquired a small bank holding company in Utah for $15.7 million in
December after receiving regulatory approval for the deal.
The move allows Green Dot to begin issuing its own cards,
potentially cutting down on fees paid to outside partners;
previously it had to partner with other banks because Green Dot
itself was not a bank. The deal also allows Green Dot to introduce
additional financial products, such as checking accounts, which is
currently in the works.
"We need to be a company that has multiple products," Mr. Streit
said. "The ability to innovate and increase our product [list] was
always one of the driving forces" behind the bank acquisition.
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com
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