--Green Dot cut guidance due to increased competition in retail
channel
--Green Dot's stock closed at its lowest point since 2010
IPO
--Companies rely on retailers like Wal-Mart and 7-Eleven to sell
cards
(Adds closing share prices, in the seventh and eighth
paragraphs.)
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
such as 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
per-share earnings forecast for the year to between $1.29 and $1.32
from an earlier forecast of $1.65 to $1.70 a share.
Executives of the Monrovia, Calif.-based company said that 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," Green Dot Chairman, President and Chief
Executive Steve Streit said during a conference call Thursday.
Green Dot's shares closed down 61.2% at $9.06, its lowest point
since its initial public offering in July 2010. The stock traded
above $60 in early 2011.
NetSpend's shares closed down 6.7% at $8.70 after falling as
much as 12%.
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 disclosed 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 which is sold
in the retailer's stores and online.
A spokeswoman for American Express didn't 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 Green Dot's guidance
represents a worst-case scenario but he said he 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 under 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. In May, the
Consumer Financial Protection Bureau 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. This has led some banks to begin offering the
products, analysts said.
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 which
has recently won new distribution deals with retailers. Last month,
NetSpend said 7-Eleven would begin selling a PayPal-branded prepaid
card it disclosed in November.
A spokeswoman for NetSpend declined to comment Friday, citing
the company's quiet period ahead of its earnings announcement,
scheduled for August 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 said 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 a share,
missing analysts estimates of 38 cents, according to Thomson
Reuters.
The company is working to diversify beyond prepaid cards. In
December, it acquired a small bank-holding company in Utah for
$15.7 million 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 form partnerships with other banks because
Green Dot itself wasn't 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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