10/5/2010 6:00 PM ET|
The next Visa and MasterCard?
JPMorgan Chase analyst Tien-tsin Huang estimates bank customers don't find prepaid cards attractive until they are getting hit with about five insufficient-funds charges per year, since prepaid cards cost about $150-$300 a year.
So who uses them? "Most of our customers make $30,000 to $50,000 a year," says Green Dot CEO and founder Steven Streit. "They are folks who are living paycheck to paycheck. They are very cash-flow sensitive and fee sensitive."
Prepaid card users may not be able to get credit cards because of low credit scores, or they may have a hard time keeping minimum balances in traditional accounts. But they need plastic for things like booking airfare or hotel rooms, and paying bills. "We are living increasingly in a cashless society," says Streit. "If you don't have MasterCard- or Visa-branded debit card, you are going to have a rough day."
Another factor boosting demand for prepaid cards is the increasing use of direct deposit to pay workers. Jackson has her paycheck deposited directly onto her NetSpend card; she estimates that half the employees on her floor at the hospital where she works have their pay deposited to a prepaid card.
The potential customer base is big. According to government studies, more than 70 million people in the U.S. are unbanked or under-banked, which means they have accounts but pay bills in other ways, such as with money orders or cash. "A large number of consumers today are living outside the financial mainstream," says Hyung Choi, head of U.S. prepaid products at Visa. Less than 20% of this group has ever used a prepaid card, says Choi. "So clearly it is early days."
Here's a closer look at the main players in this space.
Green Dot is clearly the leader in reloadable prepaid cards, with about 3.2 million active accounts. Its cards are available in about 50,000 stores across the nation. Most of these outlets -- Wal-Mart Stores (WMT, news), Walgreen (WAG, news), CVS Caremark (CVS, news), Rite Aid (RAD, news) and Sears (SHLD, news) -- are locked up in exclusive, multiyear agreements.
This is one of Green Dot's big advantages because it creates "a powerful network effect which should attract more retailers and cardholders," believes Huang at JPMorgan Chase, who has a 12-month price target of $60 on the stock. It recently traded for $47. Green Dot also has partnerships with TurboTax for tax services and with PayPal.
Besides card fees, Green Dot also gets a piece of the "interchange" fee, the part of a purchase price that merchants share with card issuers. Deutsche Bank analyst Christopher Mammone expects Green Dot revenues and earnings to grow by 30% to 35% a year over the next three years.
One problem with the stock is that a lot of investors like it, which means it is pretty fully valued; you're not getting a bargain. That's one reason JPMorgan's Huang suggests buying on dips. "It is definitely pricing in a lot of growth," agrees Nick Einhorn, an analyst with Renaissance Capital, which invests in initial public offerings. "The assumptions underlying the valuation are not unreasonable, but they have to execute. The stock is at a price where, if they disappoint, it could really take a big hit."
Critics also lament the high turnover in Green Dot's customer base. Only 38% of its customers have had cards for more than a year, which suggests it has to keep finding lots of new customers to maintain growth. Green Dot CEO Streit responds that the high turnover shouldn't be a surprise, since many customers use cards for one-time expenses. Streit says many customers who let cards lapse later use Green Dot cards again, suggesting that turnover isn't as high as it seems.
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