Before I dive into this topic, I have twodisclosures to make.
First, I do not own any prepaid stock. I have mutual funds, but tomy knowledge none of these have prepaid holdings. Second, I’m notgreat at predicting a winning stock. I dismissed Google when itwent public; after all there were four major competitors breathingdown Google’s neck and one had a much more capable search function(I still miss Alta Vista’s ability to find a term within X words ofanother term). But this blog post is not really about stock prices.It’s a rejection of the rationale stock analysts have givenrecently for shorting these stocks. This is my take on the majorconcern stock analysts have put forward.
The most common argument that drives a low valuation of prepaidstock is that prepaid products from banks will steal the businessfrom existing prepaid programs. While certainly some cardholdersand prospects may gravitate to a bank product, it will likely be avery small number. This concern regarding competition from banksfails to recognize the different demographics program managerstarget, the different deployment footprints the program managerssupport, and the many new use cases that are expanding the prepaidmarket well beyond the unbanked and underserved. Introducing asuccessful prepaid product today demands more than just a prepaidproduct. It needs to align with a demographic, provide the highestlevel of convenience in purchase and use, and meet a variety ofexisting and future use cases.
For example, consider the recent partnership between Green Dot andthe Rush Card. Green Dot recognizes that the Rush Card targets ademographic better than the Green Dot card. Green Dot expectsputting the Rush Card into retail distribution will be primarilyadditive to its existing sales. On the other side of the equation,Rush recognizes that the retail footprint for purchase and reloadis sufficiently critical that it will forego some income in orderto provide its cardholders better convenience and liquidity bydelivering broad retail access. Banks have been slow so far toaddress the issues associated with demographics, convenience andnew use cases.
Banks are introducing prepaid products for a variety of use cases,from turn-down solutions to new checkless checking accounts thatenable the institution to remain profitable on low-balance accountsand to deliver new services to existing account holders. But fewinstitutions are actively targeting low income demographics outsideof their branch footprint. They instead have introduced productsthat better support the customers and prospects that already walkinto their branches. For the few that have actively marketed thesesolutions to new low income prospects, such as the Regions Bank Nowprogram, they still require account holders perform these financialfunctions at the existing bank branches. This decision preventsbanks that do have appropriate products for the LMI target marketfrom directly competing with existing prepaid suppliers due to thefinancial institution’s relatively limited deployment footprint.
Deployment Footprint / Convenience
There is not a prepaid bank product in the market that can matchthe convenience and price delivered to low and moderate incomeneighborhoods by the existing retail-oriented program managers.Take for example the Mercator Advisory Group research that studiedthree zip codes in the hard hit city of Stockton, Calif. If youlive in one of these three zip codes, you have access to three Bankof America locations (ATMs and branches) or 13 Green Dot locations(ATMs and Reload Centers). It is likely that this same ratio willhold true for the neighborhoods where the people work. Anyoneholding down two or even three part-time jobs will find it mucheasier to “bank” at the convenience stores they already frequentrather than walking or driving to a bank.
Expanding Use Cases
As described in our response to the ConsumerFinancial Protection Bureau’s advance notice of proposedrulemaking, consumers are discovering new use cases for reloadableprepaid cards at a rapid rate. One broad category of innovation isusing prepaid to control spend, as with a hobby card or Fine DiningCard. While the teen products launched by banks a few years agostalled in the market, parents and teenagers are finding many newuses for reloadable cards that provide parents visibility into theteenagers spend while making it simple to provide funds. One of theearliest use cases that evolved into unique products is bill pay.When program managers recognized that some cardholders were usingthe reloadable products just to pay bills, they created bill paycards designed for that purpose. I am positive that similarinnovative packaging will occur for the other use cases cardholdershave already adopted. A good hobby card might highlight purchaseprotection while a dining card might offer discounts at nationalrestaurants. These innovations will continue to drive use ofreloadable prepaid well beyond the unbanked and underserved andmarketing and convenience will be as important, if not moreimportant, than if the product is from a bank or some other programmanager.
Perhaps the largest wildcard here is Green Dot’s decision to becomea bank and a processor. This positions Green Dot as an entirely newbusiness, one that has no parallels. On the one hand it operates ina fashion similar to that of an Internet bank but it also hasgreater retail presence than existing banks minus the same capitalinvestment. Instead, its costs for maintaining a retail presenceare transactional in nature. Each cardholder transaction has a feethat is primarily used to compensate the retail operator thatperformed the transaction on Green Dot’s behalf. Converting a largefixed cost into a variable cost has changed many a business. Thiswas the primary reason industries shifted to outsourcing; fixedcost staff became variable costs that could easily scale up anddown as business conditions warranted. It is also the primarydriver for cloud computing. While this may well be a long shot, thereturn should be huge if it succeeds.