Revisiting Prepaid in the Context of Green Dot and NetSpend

Navigator Edition: September 2012
By: Nirnay Sinha

It has been two years since Green Dot and NetSpend went public after establishing themselves as early leaders in general purpose reloadable (GPR) prepaid with unique distribution advantages. Today, both companies are still leaders in a prepaid market that is increasingly competitive. As such, we take a quick look at trends and developments at Green Dot and NetSpend as well as the implications for the prepaid market.

Performance Trends

While the stocks of both companies have given investors pause, both Green Dot and NetSpend have continued to deliver meaningful revenue, generating $467 MM and $306 MM, respectively, in 2011. As indicated in the table below, Green Dot has delivered strong growth in revenue, active cards, and gross purchase volume. However, Green Dot’s operating margins have gradually declined year over year in light of continued pricing pressure as well as increased revenue share payments to distribution partners. Nonetheless, Green Dot generated over $3,800 in purchase volume and $111 in revenue per active card during 2011, increasing from $3,000 volume per card and $107 revenue in 2010. To date, Green Dot has relied on a retail distribution model highlighted by its partnership with Wal-Mart, as well as partnerships with Walgreens, CVS, Rite-Aid and others.

NetSpend, in contrast, has shown steady growth in operating revenue and gross card volume while increasing operating margins. Specifically, net income has improved by 35% from 2009 to 2011, largely driven by the growing number of customers that use direct deposit to reload their cards. NetSpend generated $5,300 in purchase volume and $145 in revenue per active card in 2011, compared to $4,700 and $131 respectively in 2010. It has been a leader in ‘meeting the underbanked consumer where they are’ and earns 60% of its revenue through alternative financial service partnerships with check cashers, payday lenders, and tax providers. The largest of these alternative services partnerships is with ACE Cash Express. In addition, NetSpend has diversified its card distribution approach through partnerships with Experian,, BET Network and others.

Figure 1: Key Metrics of Green Dot and NetSpend
2009-2012 (Millions, unless noted)

Source: Company SEC Filings and Investor Presentations

Potential Challenges to Industry Incumbents

Retail banks have historically been skittish on establishing a broad presence in the prepaid market, but the Durbin Amendment has expanded their interest as a means to replace a portion of lost debit card revenue. BB&T and Regions were amongst the first large banks to offer a GPR prepaid card and have since been joined by several others including the highly publicized product launch of “Liquid” by Chase. While it is too early to judge the latest prepaid efforts of banks, their actions alone will put pressure on pricing and other areas such as distribution/customer access. As an example, Chase’s new “Liquid” product poses a significant threat given the reach, deep pockets, and marketing muscle of Chase. Chase recently completed piloting the program and is in the process of rolling the Liquid card out across its network of 5,500 branches and 17,500 ATM locations. Coupling its physical network with its Smartphone remote deposit capabilities, Chase Liquid has the potential to provide greater access to customers for both deposits and withdrawals avoiding reload and ATM fees in the process.

Incumbents in the prepaid market will need to adapt to other threats brought upon by increased competition. American Express has invested heavily in its prepaid product suite and secured several attractive distribution arrangements. Prepaid is highly strategic to American Express as an entry product and brand building vehicle to new customer classes notably the younger demographic. Taking note of the Walmart Money Card strategy, Kroger and U.S. Bank are partners with the potential for a powerful “one-two punch” given the reach of Kroger’s distribution and the strength of the U.S. Bank franchise. The grocery channel is the most attractive channel for closed-loop gift cards and is well-positioned for open-loop success given the foot traffic and frequency of visit dynamics.

Finally, the prepaid market is not immune to the regulatory scrutiny sweeping the financial services industry. The Consumer Financial Protection Bureau recently announced an “advanced notice of proposed rulemaking”, and is seeking input on a range of topics including cardholder terms and fee structures. The implications on the industry are yet to be determined, but prepaid will certainly face more regulatory scrutiny than it has in the past if for no other reason than its growth.

Longer Term Stakeholder Implications

Irrespective of their recent stock market challenges, Green Dot and NetSpend have advantages in prepaid that others have yet to replicate and that may be the real wake up call for the industry given the number of niche specialists in the segment. To state the obvious, both Green Dot and NetSpend have built franchises that generate hundreds of millions of dollars in revenue. Behind that revenue is scale, distribution, and insights into customer and product behaviors that are extremely valuable and unique in the prepaid space. Both companies have made investments to diversify their businesses in different ways. Green Dot built a reload network, acquired Bonneville Bank (renamed Green Dot Bank) and Loopt, [a mobile services platform] while NetSpend diversified into payroll cards several years ago with the Skylight Financial transaction. Both companies are top of mind when others are seeking partnerships for program management.

You would be hard pressed to identify a market segment that was any hotter than prepaid in recent years. Venture capital and private equity investment was rampant; buyers were routinely rebuffed by potential sellers; start-ups were prevalent across the value chain; thousands attend conferences far and wide; use cases seemed like an endless stream of growth and international markets were icing on the cake. We are still bullish on prepaid as a product, but would not be the least bit surprised if there was a shake-out in the market. Payments businesses are scale-based with a long track record of consolidation over time across the value chain. While there is a spotlight on the stock market performance of Green Dot and NetSpend, the bigger story may be the implications for many other industry stakeholders as it relates to their ability to achieve scale, deliver shareholder returns, and address a new set of industry challenges.

For more information, please contact Nirnay Sinha, nirnay.sinha@firstannapolis.comJohn Grund,; or Josh Gilbert,

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