Green Dot Corp. is losing its luster with certain Wall Street analysts.
The reloadable prepaid debit card giant has hit a wall in expanding market share and may be overreaching in its ambition to branch into mobile payments, analysts with Nomura Equity Research suggest in a June 7 report to investors.
That view could hearten competitors and banks concerned about the outsized power of Green Dot, the industry's biggest player and a key partner to its very rivals through its powerful debit card reload network.
As of Dec. 31, Green Dot had 4.2 million active cards, the same as the previous quarter but up 23.5% from 3.4 million a year earlier, according to company releases. Gross dollar value on those cards totaled $3.77 billion in the fourth quarter, down 8.3% from $4.11 billion the previous quarter but up 41.2% from $2.67 billion a year earlier.
By comparison, rival NetSpend says it similarly saw its active card total remain flat at 2.1 million throughout most of the year, but its year-end gross dollar value rose by 7.7%, to $2.8 billion from $2.6 billion in the third quarter and by 12% from $2.5 billion a year earlier
Bill Carache and Tulu Yunus, analysts with Nomura Equity Research, warn investors that Green Dot faces potentially negative impact from new, low-cost offerings from competitors and that it relies too heavily on a handful of retailers, including Wal-Mart Stores Inc., in an industry that is diversifying. Green Dot renewed its Wal-Mart contract in May (see story).
"Larger players with greater financial resources will pressure card fees and exert significant pressure on the long-term viability of the business," the analysts wrote.
The biggest threats to Green Dot's market dominance are JPMorgan Chase & Co.'s Chase Liquid prepaid card, slated to roll out this summer (see story) and American Express Co.'s Bluebird card, available in a pilot at Wal-Mart stores where the analysts say it appears to be performing well.
Wal-Mart accounts for 64% of Green Dot's revenues, and its top four retail partners together drive 89% of new card activations, the analysts note. Such a high concentration on certain merchants could be a weak spot, the analysts said.
"Over time, we expect larger players like Amex to use their existing merchant relationships to secure favorable distribution deals or, at a minimum, make Green Dot's distribution more expensive to maintain," they said.
Competition may force Green Dot to cut the monthly fees it charges, which range from $3 to $5.95, because certain rivals that include Amex, NetSpend and Western Union charge no monthly fees, the analysts observed.
More significantly, Green Dot's active card growth has slowed over the past several quarters, suggesting that many customers use their Green Dot card once and discard it, the analysts say.
And Green Dot is running out of new territory to sell prepaid cards.
"We expect it to run out of incremental retail growth opportunities as Netspend and others continue to make inroads at more mainstream retailers (see story).
Green Dot's acquisition of Loopt Inc. also causes concern, the analysts say. The Monrovia, Calif.-based company announced the acquisition in March (see story).
"We have significant doubts about Green Dot's ability to become a major player in mobile payments, and we see the likelihood of successful integration of Loopt into Green Dot's business model as questionable at best, given intense competition from well-established players competing in the space," the analysts said.
Other observers say Green Dot could leverage Loopt to expand its services (see story).
Overall growth in the category may have reached a plateau, the analysts suggest. They estimate that approximately 17% of some 60 million underbanked consumers have a reloadable debit card, and after more than a decade it "still hasn't reached 'the masses.'"
But a couple of payments-industry analysts say Green Dot's strengths run deep in a fast-changing industry where so far it has been the savviest of players.
"Green Dot is diversifying, forming other alliances and reaching out to create new financial services offerings," Madeline Aufseeser, a senior analyst with Aite Group, tells PaymentsSource. "I'm confident the company will continue to shift its business model and will meet investor expectations."
Green Dot's heavy dependence on Wal-Mart is a problem many other prepaid card marketers would love to have, suggests Ben Jackson, a senior analyst with Mercator Advisory Group.
"Wal-Mart has tremendous reach, and it set the floor on pricing in the prepaid industry with its $3 monthly fee and $3 acquisition fee," Jackson says. "Chase Liquid is still above that."
Moreover, focusing on monthly fees is short-sighted "because it doesn't tell the full story on a card's value or its cost to the cardholder," he says.
And Green Dot's reload network is a powerful lever, serving as a way for Green Dot to earn revenues from competitors that harness it, including Amex, Jackson notes.
"Green Dot owns a bank, runs its own reload network and is its own processor. Consolidating those moving parts under one umbrella is powerful, and once all those pieces are put together and working well, it will become a huge cost advantage for Green Dot," Jackson says.
Prepaid card use is diversified among consumers, and Green Dot already has the largest footprint in a growing industry, Jackson says. "Green Dot still needs to improve its distribution channels, but they have good partners and they are working on that...there is too much going on to count them out."
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