Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Green Dot Corporation (GDOT), American Express Company (AXP): How Can This Card Company Compete?

Page 1 of 2

Green Dot Corporation (NYSE:GDOT)Mortgage banking may steal the headlines, but when it comes to growth stories in finance, it’s all about the unbanked — people who don’t have a bank account. Traditional banking companies are turning to prepaid cards in an effort to grab new customers, and new fee income.

Green Dot Corporation (NYSE:GDOT) was one of the first pre-paid debit card companies on the market, and now it’s one of the best-performing stocks in 2013, rising almost 67% so far. Green Dot Corporation (NYSE:GDOT)’s ascent came after a merger between rival NetSpend and TeleCommunication Systems, which services primarily employer-sponsored prepaid cards.

Is Green Dot Corporation (NYSE:GDOT) Wall Street’s next superstar stock, or just another bubble amid rising valuations in hyper-competitive, fast-growing industries?

The business of prepaid cards

As many as 68 million Americans live without access to a bank account for any number of reasons: lack of transportation, bad history with banks, or high fees, according to a 2011 estimate from the FDIC. Many are turning to prepaid cards as a solution.

Prepaid cards aren’t bank accounts — they’re basically a gift card you can use anywhere. Reloadable, users can add funds directly to their prepaid card at retailers who sell Green Dot Corporation (NYSE:GDOT)’s “MoneyPaks,” a code purchased for cash that can be redeemed online or over the phone to add a balance to a Green Dot Corporation (NYSE:GDOT) card.

The business is tremendously profitable. Green Dot Corporation (NYSE:GDOT)’s signature line generates substantial fee income from monthly account charges ($5.95), non-network ATM service fees ($2.50 each), and bank teller withdrawal fees ($2.50). Not to mention, direct deposits are free, but all other card loads cost $4.95. An active cardholder is a very profitable customer.

All these fees add up, but Green Dot’s fees are still lower than alternatives. Of the ten largest consumer banks, Green Dot had lower fees than eight competitors. That’s what made it so popular with low-income, unbanked Americans. But now, the competition is heating up, and Green Dot is no longer the cheapest prepaid card on the block.

Amex vies for an unlikely market

American Express Company (NYSE:AXP) is better known for serving high-income, high-net worth households with excellent credit, but in a recent partnership with Wal-Mart Stores, Inc. (NYSE:WMT) the company took aim at highly profitable prepaid cards targeted at low-income shoppers.

Known as Bluebird, American Express Company (NYSE:AXP)’s product offering is difficult to beat. It boasts the lowest fees of any prepaid card (no monthly fee), a nationwide network of ATMs, and the ability to add cash at any Wal-Mart Stores, Inc. (NYSE:WMT) location. For Wal-Mart Stores, Inc. (NYSE:WMT), this was its chance to move into the banking business, an expansion it has wanted for more than a decade. A partnership with American Express Company (NYSE:AXP) fills that void — and it keeps its core, lower-income consumer coming back to the store to top up card balances.

Banking customers who use prepaid cards are more likely to stop in a Wal-Mart Stores, Inc. (NYSE:WMT) on payday, which leads to higher customer traffic and a larger average ticket per customer.

Why Green Dot should worry

Without question, Green Dot has the largest installed base, and it has a first-mover advantage. However, the barrage of competitors knocking at the door of the prepaid market should give investors pause.

American Express Company (NYSE:AXP) is no new player in the card industry. Bluebird is going after Green Dot’s most profitable customers — those that make use of direct deposits.

Slide 11 of Green Dot’s June presentation reveals just how central direct deposit customers are to the model. The company reports that its 700,000 direct deposit users stick around for an average of 20 months, generate roughly $400 in revenue to the company ($20 per month, on average) vs. $130 in lifetime value from cash and check reloaders.

Page 1 of 2
Loading Comments...