SEC Filing Proves Costly for Debit Card Company

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Green Dot Corp. created the prepaid debit card a decade ago, but the Monrovia company is still a new public company in a relatively young corner of the financial services industry.

The potential for volatility was borne out last week after disclosures in Green Dot’s annual 10K filing with the Securities and Exchange Commission triggered a trading frenzy that lopped nearly 10 percent off the company’s nearly $2 billion market cap over two days.

Shares closed at $47.17 on March 2, down $6.86 or 13 percent for the week, making the stock the second biggest loser on the LABJ Stock Index. (See page 20.) Shares recovered slightly later in the week, but it’s telling that up to a half of the public float is estimated to be in short positions.

Green Dot, which counts Wal-Mart Stores Inc. as a minority stakeholder, primarily markets to low-income consumers who lack bank accounts or much access to credit. Despite increasing competition, the company is considered the market leader, benefiting from partnerships with Intuit Inc.’s TurboTax software and an upcoming IRS pilot project that allows taxpayers to get their refunds on Green Dot cards.

However, in its 10K filing, the company said that its recovery rate for some overdrawn accounts had sharply fallen, an issue since overdraft fees are a key revenue source. The company also noted that new federal regulations require retailers, a key sales channel for Green Dot, to display its cards separately from less costly gift cards, which may cut sales.

Gil Luria, a Wedbush Securities equity analyst who has been bullish on the stock since Green Dot went public last July, believes investors over-reacted to the disclosures, which he considers minor and immaterial to the company’s growth prospects.

“This is still a very new company on the market and investors still don’t understand all the ins and outs,” Luria said.

Still, the recovery rate issue spooked investors.

Among Green Dot’s revenue sources are fees when a card is activated, when it is used and when money is added. The company also assesses monthly maintenance fees.

Those monthly fees can be applied even when a card’s balance reaches zero and is not recharged, which commonly happens with cardholders who receive their card as a gift. A negative balance will often cause users to abandon the card. That lowers the company’s recovery rate for overdrawn accounts – the issue noted in the 10k filing that triggered last week’s selloff.

Luria, who has a $68 price target on shares, noted that executives don’t necessarily expect to retain many cardholders gained from promotions.

“If some of them stick around, even better,” he said.

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