The world is slowly but surely going cashless. When you think about the fintech innovations of the past few years that have become a part of your daily lives -- person-to-person payment apps such as Venmo, along with mobile deposits, easy card payment acceptance, and more -- you realize you probably use significantly less cash than you did just a couple of years ago.
While the headlines tend to focus on the leaders in the fintech space such as Visa, Mastercard, PayPal, Square, and others -- all of which I think are excellent long-term investments -- it's sometimes a good idea to look for some under-the-radar companies with the potential to be big winners.
This could be one of the biggest winners in the war on cash
Green Dot (GDOT -2.15%) isn't a new company. It's been around for about two decades, and it was a pioneer in the prepaid debit card industry.
For most of its history, prepaid debt cards and alternative checking accounts have served the underbanked population. However, there's reason to believe that Green Dot's growth could still be in its early stages.
Here's why. While debit and credit card payments now account for the bulk of payment transactions in the U.S., smaller day-to-day transactions are still overwhelmingly dominated by cash. However, cash is getting far less convenient to use, and that trend is likely to continue. In fact, there have been several stories in the news lately about businesses that have gone completely cashless -- restaurants, airport shops, and more.
It's easy to see why businesses might want to drop cash. There's less risk of theft or robbery in a cashless business, and there's no need to buy safes and cash registers, or to send managers on frequent trips to the bank. And yes, it's completely legal in most parts of the U.S. for a business to refuse to accept cash as a form of payment.
In short, Green Dot's products are geared toward the subset of the population most likely to still use cash. Well, over the coming years, this group will have a growing need to find cashless solutions -- and that's where Green Dot shines.
Finally, in addition to its own products, Green Dot has a large and fast-growing banking-as-a-service business. In a nutshell, if a company wants to offer a customized banking product, such as a person-to-person payment app or an instant deposit platform for its workers, Green Dot essentially uses its existing infrastructure to create it. With a list of customers that includes Apple, Walmart, Uber, Intuit, and more, it's clear that there's a lot of demand to be capitalized on.
A high-margin and efficient business at an unbelievable price
I've often referred to Synchrony Financial (SYF 0.22%) as the largest credit card company that most Americans haven't heard of.
Synchrony was formerly the credit card arm of General Electric, and it's a leader in the store credit card business. Co-branding partners include Amazon.com, Sam's Club, and Lowe's, just to name a few out of the dozens in Synchrony's portfolio.
Although Synchrony is already a big credit card operation, I think it could be just scratching the surface of its potential. There are two big reasons I feel this way. First, Synchrony is just starting to combine some of its partners into single products, such as a "home" credit card that can be used at a small network of retailers.
Second, Synchrony's CareCredit healthcare-financing product could get much larger than it is. The card offers interest-free financing terms at participating healthcare businesses, and with healthcare affordability being such a growing problem, Americans are constantly looking for ways to make their out-of-pocket healthcare costs easier to pay.
Synchrony's CareCredit product currently has a $9.5 billion loan receivables portfolio. Meanwhile, U.S. out-of-pocket healthcare spending is roughly $365 billion per year. And that doesn't include dental or veterinary spending, which is mostly out of pocket, and which the CareCredit network also extends to. In short, Synchrony has a massive addressable market opportunity and a unique product.
Synchrony is an incredibly profitable business. Its net interest margin of roughly 16% is well ahead of its peers, and its efficiency ratio would make most online banks jealous. Plus, the business is growing rapidly. Year over year, Synchrony's loan portfolio has grown by 14% and net interest income grew by 11%.
Surprisingly, Synchrony trades for a rock-bottom valuation of less than 7 times earnings. Double-digit growth, a profitable business, and bargain-basement valuation are a winning combination.