By Andrew R. Johnson
Green Dot Corp.'s (GDOT) share price was slashed by more than half on Friday, while NetSpend Holdings Inc. (NTSP) sank nearly 10% as investors tempered their growth expectations for the burgeoning prepaid-card industry a day after Green Dot significantly lowered financial guidance for the year due to increased competition.
Prepaid-card products have proliferated in recent years as more companies try to win a piece of a market that is expected to grow by several hundred billions of dollars in the coming years.
Traditionally sold by alternative financial-services companies like Green Dot, NetSpend and Western Union Co. (WU), the market has recently attracted a slew of mainstream lenders, including J.P. Morgan Chase & Co. (JPM), U.S. Bancorp (USB) and American Express Co. (AXP), as they look for additional revenue sources amid fee limits on other products.
Green Dot--which relies heavily on retail partners including Wal-Mart Stores Inc. (WMT), 7-Eleven and other stores to sell its cards--surprised analysts late Thursday by cutting its adjusted earnings forecast for the year to between $1.29 and $1.32 per share from an earlier forecast of $1.65 to $1.70 per share.
The Monrovia, Calif.-based company's executives said they expect more retail partners, including some that currently have exclusive contracts with Green Dot, to introduce competing products in the coming months and next year, and that some competitors were becoming more aggressive in offering upfront payments to retailers to get their cards on store shelves.
"We see a greater level of uncertainty going forward in our business as our market and the prepaid industry in general continues to evolve," Steve Streit, chairman, president and chief executive officer of Green Dot, said during a conference call Thursday.
Green Dot's shares fell more than 60% Friday, hitting a new 52-week low, while NetSpend was down as much as 12%. The results of both companies have been closely watched since their initial public offerings in 2010 given the increasing number of companies that have rolled out competing products.
Green Dot's shares were down 58.4% at $9.71, and NetSpend's shares were down 8.8% at $8.50 in recent trading.
American Express, which has traditionally pitched credit cards to affluent customers, has been particularly active in releasing prepaid products as it tries to broaden its customer base. The company announced a new prepaid card last summer, and has since struck distribution deals with Target Corp. (TGT), Office Depot Inc. (ODP) and Barnes & Noble Inc. (BKS).
It also has been testing the sale of a prepaid card marketed under the name "bluebird" in some Wal-Mart stores, news of which caused Green Dot's shares to drop in March. Green Dot is the exclusive manager of Wal-Mart's prepaid MoneyCard, which is issued by a bank subsidiary of General Electric Co. (GE) and is sold in the retailer's stores and online.
A spokeswoman for American Express did not have an immediate comment Friday.
Wal-Mart, which owns a small stake in Green Dot, accounted for 62% of Green Dot's operating revenue during the second quarter, Green Dot said Thursday.
In an interview Friday, Mr. Streit said its guidance represents a worst-case scenario but expects "many of our retailers will have multiple products."
"We want to give the market early warning that we're unsure of the future," he added. "We think that's the right thing to let the market know."
Prepaid cards work like a normal debit card, typically baring the logo of Visa Inc. (V) or MasterCard Inc. (MA), making them usable at stores and online. However, they aren't attached to a checking account and aren't subject to the same consumer-protection requirements as traditional debit and credit cards.
They typically carry monthly maintenance fees and can come with upfront purchase fees. They also may charge customers for making out-of-network ATM transactions and other activities. The Consumer Financial Protection Bureau in May said it was seeking comments on potential new disclosure requirements for prepaid-card fees and other product features.
Most prepaid cards also aren't subject to the Durbin amendment, a provision of 2010's Dodd-Frank financial overhaul legislation that cut in half the fees merchants pay each time a consumer swipes a debit card. That has led some banks to begin offering the products, analysts say.
J.P. Morgan Chase, the largest U.S. bank by assets, has begun selling a prepaid card in all its 5,500 branches, it said earlier this month.
Several analysts downgraded Green Dot's stock Friday, with some applying their more dour outlook to NetSpend, which has traditionally been Green Dot's biggest direct competitor and has recently won new distribution deals with retailers. Last month NetSpend said 7-Eleven would begin selling a PayPal-branded prepaid card it announced in November.
A spokeswoman for NetSpend declined to comment Friday, citing the company's quiet period ahead of its earnings announcement, scheduled for Aug. 2.
Signs that competitors are "willing to pay retailers significant sums for shelf space" could have "widespread ramifications for the industry if they do prove to be correct," Sanjay Sakhrani, an analyst with Keefe, Bruyette & Woods, wrote in a research note Friday, downgrading both Green Dot and NetSpend to market perform from outperform.
"We believe [Green Dot's] results will breed uncertainty around the sector," Mr. Sakhrani added.
U.S. consumers are expected to load $353.8 billion onto "network-branded" prepaid cards, or those that carry the logo of a card brand such as Visa or MasterCard, in 2014, up from $148.4 billion in 2010, according to Mercator Advisory Group.
That estimate may be too optimistic, though, given weak economic conditions and fragmentation in the market amid a flood of new entrants, said Ben Jackson, senior analyst in the prepaid advisory service at Mercator.
"We are in the process of taking a hard look at whether or not we think that that forecast needs to be revised," Jackson said. "We sort of made some assumptions about the way things were going that we're not entirely sure are going to hold."
Green Dot says its underlying business metrics remain healthy.
The company activated 1.98 million new cards in the second quarter, up 9% from a year earlier. The amount of money loaded onto its cards and special-reload products increased 10% to $4 billion.
Green Dot reported adjusted earnings of 35 cents per share, missing analysts estimates of 38 cents, according to Thomson Reuters.
The company is working to diversify beyond prepaid cards. It acquired a small bank holding company in Utah for $15.7 million in December after receiving regulatory approval for the deal.
The move allows Green Dot to begin issuing its own cards, potentially cutting down on fees paid to outside partners; previously it had to partner with other banks because Green Dot itself was not a bank. The deal also allows Green Dot to introduce additional financial products, such as checking accounts, which is currently in the works.
"We need to be a company that has multiple products," Mr. Streit said. "The ability to innovate and increase our product [list] was always one of the driving forces" behind the bank acquisition.
Write to Andrew R. Johnson at firstname.lastname@example.org
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