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.
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
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.