Balance Shift In Debit Cards

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With a Bluebird taking flight, enthusiasm for Green Dot Corp. is plummeting to Earth.

The Monrovia company’s days as the leader in the prepaid debit card space could be coming to an end as Wal-Mart Stores Inc. launches a competing card this week from financial giant American Express Co., called Bluebird.

Green Dot will continue to sell prepaid cards through its own partnership with Wal-Mart, but last week’s announcement was seen as a huge blow. More than 60 percent of the company’s revenue come from cards sold at Wal-Mart.

To make matters worse, American Express told the Business Journal it was planning in coming weeks to release a separate prepaid card product at 7,000 CVS stores, where Green Dot has long been the primary seller of such cards.

“It’s bad,” said Andrew Jeffrey, an analyst at Suntrust Robinson Humphrey in San Francisco. “When you have the overwhelming majority of your revenue concentrated within exclusive (retailer) customers, and those customers move away from exclusivity, that’s a challenge in a business with barriers as low as this one.”

The new competition is the biggest sign so far of a potential threat that has long worried investors: the encroachment by large financial institutions into a market that Green Dot has dominated since pioneering prepaid cards more than a decade ago.

Green Dot remains the largest issuer of the reloadable cards in the country, with analysts estimating the company accounts for between 25 percent to 30 percent of market share.

But as the cards’ popularity has exploded – overall use has grown by some 20 percent annually since 2005 – excitement around Green Dot has shifted to fears of how it would survive if larger competitors started selling similar products at the same retail outlets.

Even prior to the Bluebird announcement, those fears had driven down shares on the New York Stock Exchange nearly 60 percent this year. More than $700 million in market capitalization has been wiped out this year.

The stock dropped further after the Bluebird announcement, closing down an additional 20 percent at $10.08 for the week ended Oct. 10, making it one of the biggest losers on the LABJ Stock Index (see page 30).

The low stock price, combined with rising competition, has some analysts predicting a possible sale of Green Dot, potentially to another financial institution looking to enter the market.

Green Dot Chief Executive Steven Streit was not made available for an interview. But in a statement, he downplayed direct competition between Bluebird and its own joint venture with Wal-Mart, MoneyCard.

“The Bluebird product is designed to attract a different customer segment than the customer who is attracted to the Visa and MasterCard-branded Wal-Mart MoneyCard,” he said. “We will continue working together to grow our MoneyCard business, which we believe will continue to thrive alongside this new offering.”


Growing competition

Streit, a former radio disc jockey, is credited as a pioneer of prepaid debit cards, launching what would become Green Dot in 2001 to give children and teenagers a way to shop online.

The cards are used like standard debit cards, but are not linked to bank accounts. Instead, users load money on the cards as they go.

As demand has grown beyond lower-income consumers without banking accounts, the company has taken off. It raised $164 million in an initial public offering in 2010. Last year, it reported $52 million in net income on revenue of $467 million, which was up 28 percent from the year before.

Most sales have come from retail outlets such as Wal-Mart, Walgreen Co., CVS Caremark Corp. and Rite Aid Corp. Until recently, Green Dot products were the only prepaid debit cards available at most of the locations.

Last year, American Express began rolling out its own prepaid debit card, which it has been selling in stores including Walgreens and Barnes & Noble Inc. Walgreens also began selling a PayPal-branded prepaid card created by Netspend Corp., a Green Dot rival.

This year, JPMorgan Chase & Co. also began offering a prepaid card at bank branches.

In July, Green Dot warned investors that it could begin seeing even more competition at its retail partners and slashed its earnings guidance, sending shares tumbling around 60 percent in one day.

With the announcement of Bluebird, which will be sold in nearly 4,000 Wal-Mart stores, those warnings have become reality. Bluebird will cost $5 out of the box, but users can sign up for free online or through a mobile application. The card doesn’t have a monthly maintenance fee or reload fees, though it will charge in some cases for ATM use and transfers from debit cards.

Green Dot’s Wal-Mart MoneyCard, meanwhile, costs only $3 upfront but has a $3 monthly maintenance and $3 reload fees.

Compounding the problem for Green Dot, Wal-Mart plans to display Bluebird cards more prominently during the rollout period.

Daniel Eckert, vice president of financial services for Wal-Mart, said Bluebird would be displayed at the main aisle near the front of the store, internally dubbed “action alley.” The two cards will also evenly split the checkout aisles.

But Eckert maintained that the two products were aimed at different customers, saying that Bluebird was more of an alternative to checking accounts, with services such as subaccounts and roadside assistance services. Green Dot’s MoneyCard, meanwhile, is more streamlined in its offerings.

“It addresses a different segment and a different set of needs,” he said.

Even if Green Dot remains popular with the unbanked while Bluebird gets new higher-income customers, analysts said Green Dot will inevitably take a hit in the short term. And there are questions about its ability to ward off further competition.

Jeffrey said the company won’t be able to return to the growth rate of the last few years.

“They’ll be competitive but they’ll lose share,” he said. “My sense is that this company is going to have an awfully hard time replacing the lost share. It needs to sign more distribution relationships, but it’s proven difficult.”


Fighting chance

Green Dot does have some advantages. It remains the industry leader and is a known quantity among generally low-income consumers without banking accounts, while American Express remains something of an unknown to that segment.

“AmEx is a high-end brand and doesn’t necessarily fit with the value proposition,” said Gil Luria, an analyst at Wedbush Securities Inc. in downtown Los Angeles. “I don’t think Green Dot will have a problem competing head to head, but it’s always better when you don’t have to compete.”

Laura Kelly, a senior vice president at American Express, said she did not see the brand’s high-end reputation as an impediment.

“We know for a fact our brand is aspirational,” she said.

Despite the rapid growth of the prepaid card market, whether other financial services companies jump in might depend on the success of American Express, analysts said.

One attractive option could even be buying out Green Dot itself. Speculation about that has increased now that the stock is down to around $10 from more than $30 at the beginning of the year – making the company potentially cheaper to acquire.

“I think it’s quite possible,” Luria said. “If I was a big financial institution looking to get into the prepaid reloadable space, acquiring Green Dot would be an easy, creative way to do that.”

Meanwhile, faced with the prospect of losing ground at major retailers, Green Dot is pressing to strike out into new areas. It entered into a partnership earlier this year with lender Sallie Mae to market a prepaid card to students without bank accounts and completed a $43 million acquisition of a mobile technology company, Loopt, to develop a “mobile wallet” that enables consumers to make purchases with their mobile devices at cash registers.

Whether the company can do enough to rebound from the loss of exclusive retail partners remains to be seen.

“They’re going to have to get through some choppy waters,” Luria said. “The next year or two is going to be a transition.”

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