TSYS’ acquisition of Netspend highlights theconfusion investors have regarding the prepaid market.
This isn’t surprising since the market is complex. A prepaidcompany’s valuation will be impacted by the consumers it targets,the channels it uses to enter the market, the role of the bank atits core, the different prepaid segments it participates in, itsproduct strategy, how it prices its products, and how the economyis performing. I suspect it is this complexity that has kept thestock price of NetSpend and Green Dot so low, and continues to doso even after the TSYS deal suggests the NetSpend stock was selling 30%below its value.
Even after TSYS provided the market a relatively concreteindication of what a prepaid stock should be valued at, the GreenDot stock remains at almost exactly the same price point it wasbefore the TSYS acquisition despite the fact that Green Dot is theundisputed leader, assuming that concept is measured by dollarvolume and active prepaid cards. But actually there may be goodreason for this discrepancy, since Green Dot and NetSpend – andBluebird, and Liquid, and Western Union, and Regions, and justabout every other prepaid participant – have far more differencesthan they do similarities.
Green Dot is not like NetSpend. Green Dot is a bank and the GreenDot strategy is to use that bank as a core asset as it rolls outproducts. It is a mistake to compare the GoBank product to NetSpend- that would be similar to comparing a sports car to a SUV. Theymay both be vehicles, but they are designed to accomplish anentirely different mission for an entirely different set ofconsumers.
The challenge for Green Dot is to articulate that difference toinvestors that are unaware of the complexities of this market.Green Dot must find a way to educate investors regarding thedifferences of a bank versus a prepaid program manager. Perhaps thebiggest difference is a revenue model based on transactions versusthe lifetime value of a client. Another is the opportunity tooperate a bank without the fixed capital required to operatebranches and ATM networks while still having more retail outletsthan any other bank in America.
When investors understand the prepaid market they will no longerwonder why TSYS bought the second largest prepaid company and notthe first – it’s all about the bank.
