Oddly, Green Dot (NYSE: GDOT ) spent the last year trying to counteract large competition from American Express (NYSE: AMX ) at top customer Wal-Mart Stores (NYSE: WMT ) only to end up more entangled with the top retailer. While the largest provider of prepaid debit cards has successfully survived the onslaught of new prepaid competitors, Green Dot hasn't progressed at all in de-linking itself from Wal-Mart.
The biggest excitement from Green Dot remains the promising mobile banking product called GoBank. Now, after a year of opening the product for beta testing and approaching six months after opening the product for all banking customers, the company has provided limited data points on the progress. Though the stock has surged this last year, investors are back into a situation of being reliant on Wal-Mart again -- the very issue that led to the stock being crushed in 2012 when it collapsed from more than $30 to less than $10.
Surviving the competitive onslaught
The measure that competitors took a bite out of Green Dot's growth is best identified by the flat active-card growth over last year. The un-banked market segment is supposed to represent a growth opportunity that didn't materialize via active account growth. Instead, American Express and others absorbed all of the industry growth. On a better note, the key metrics signalling the quality of accounts including cash transfers, gross dollars volume, and purchase volume all generated decent growth despite the lack of active-card growth.
Green Dot added 27,000 distribution locations recently to reach 80,000 locations, but it hasn't yet produced any additional active accounts. The company does expect this to lead to double-digit growth in 2014. The good news is that the heavy-use, reloading customers are migrating toward Green Dot. The amount of direct deposit cards increased by 45% compared to last year.
In addition, cash transfers surged 9% to 11.4 million, and both the gross numbers to purchase volumes hit around 9% growth. These strong figures only led to a 4% increase in revenue, and because of higher expenses, net income had a slight decline.
Again, without active-card growth or meaningful contribution from GoBank revenue, the company isn't going to see any substantial growth even while holding off competitors.
Relinking with Wal-Mart
About a year after the annoucement of the Bluebird prepaid card from American Express, Green Dot upped the relationship with Wal-Mart. During the third quarter, Wal-Mart accounted for 63% of revenue, and the two companies agreed to an expanded suite of prepaid debit cards.
The portfolio of reloadable, prepaid debit cards now includes a total of nine cards that range from three levels of Wal-Mart MoneyCard branded products including basic, plus, and preferred levels. Each level offers a different type of service and fees for a different set of uses. Also the portfolio now includes six products in the affinity category, including NFL team cards, NASCAR, and AARP to name a few.
Though the company added around 27,000 retail locations recently to reach more than 80,000 total locations, it still appears that Wal-Mart dominates the category. This deal appears to further link Green Dot with Wal-Mart regardless of the other initiatives, and it subjects investors to the downside potential witnessed last year.
Green Dot continues to expand retail locations and create new product opportunities with GoBank and check-cashing stores, yet the new deal with Wal-Mart appears to tie the company in with the massive retailer even more closely. It's possible Wal-Mart is the ideal location to sell and reload prepaid debit cards, making all of the expansion into other retailers irrelevant. In that scenario, the key will be the GoBank development that targets a more affluent, mobile customer that wouldn't use the prepaid cards.
The good news is the American Express prepaid cards are only a threat at the margin. History suggests the new Serve card with the American Express logo won't translate well to the un-banked segment.
Regardless, investors buying today are subject to the risk of being tied into one major customer with no near-term resolution to that issue. Long term, these other initiatives should eventually alleviate this risk, but for now, the company is too tied into Wal-Mart.
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