In the conference call, Green Dot founder and Chief Executive Officer Steve Streit said two main pressures may impact Green Dot's future revenues: increased competition and tighter fraud controls the company instituted.
According to a SeekingAlpha.com transcript of the conference call, Streit said, "We see a greater level of uncertainty going forward in our business as our market and the prepaid industry in general continues to evolve."
Streit expected its retailer partners would start carrying the prepaid card products of Green Dot's competitors, with some retailers making the move in late 2012. He said previous experience showed that when retailers started to sell Green Dot competitors' prepaid cards, the company experienced decreased revenue growth year-over-year via those retailers.
Though Streit pointed out that Green Dot's history in this area is not enough to make an accurate prediction of what will happen, Green Dot wanted to take a cautious approach and disclose how sales might be affected.
Streit said Green Dot tightened fraud controls on its GPR cards in the first and second quarters of 2012. "These new controls are designed to enhance security measures through tighter customer identification protocols and more sophisticated back-end monitoring of accounts," he said.
Streit noted that while the tighter fraud controls increased card security, they also had a negative impact on approval rates; the controls prevented more cardholders from activating the cards after purchasing them or using the cards to make purchases after they had been activated. Streit estimated the tighter fraud controls would reduce Green Dot's growth rate by between 5 and 10 percent.
Streit characterized the reforecast of its financial outlook as Green Dot's reaction to the natural evolution of the industry and the uncertainty that change brings. "Frankly, we don't know how this will all play out, and therefore, we think it's most appropriate to take a conservative view," he said.
In the wake of the reforecast, two law firms filed class-action lawsuits on behalf of Green Dot investors. The firms – the Law Offices of Howard G. Smith and Glancy, Binkow & Goldberg LLP – allege Green Dot violated federal securities laws by offering false and misleading earnings forecasts before the July 26 reforecast.
Ed Lawrence, Director of Auriemma Consulting Group, said the reforecast, while it took a toll on Green Dot's stock, is evidence of larger trends at play. He said more competition is flowing into the prepaid card sector as retail banks eye prepaid cards as a source of revenue to offset losses caused by the Durbin Amendment to the 2010 Dodd-Frank Act, which imposed price caps on debit card interchange.
Many prepaid cards are exempt from Durbin regulation and allow issuers to enjoy "full interchange" revenues, Lawrence said. Additionally, banks with already diverse portfolios can afford to undercut prepaid card providers like Green Dot and Netspend Holdings Inc. on cardholder fees.
Added to the increased competition from banks are the new regulatory burdens Green Dot must face as a bank itself. In late 2011, Green Dot concluded its purchase of Bonneville Bancorp (now Green Dot Bank). "Once you become a bank, you're regulated a little differently," Lawrence said, which may account for why Green Dot tightened its fraud controls.
The more stringent fraud controls may reduce Green Dot's profits over the short term, but reduce overall fraud, which will help the company in the long term, according to Lawrence.
He sees other positive aspects to the reforecast. Streit discussed the deal the company signed with UniRush LLC to be the exclusive issuer (through newly christened Green Dot Bank) of the RushCard. Just as Green Dot is consolidating its own cards under the Green Dot Bank umbrella, it is adding the cards of other providers, Lawrence said.
He stated, "RushCard probably looks at Green Dot and says, 'You know the prepaid business a lot better than other people do, so maybe we're going to move over to you.' To me, those were strategic things [Green Dot] would be looking for when they bought that bank." Instead of Green Dot having to pay bank identification number (BIN) sponsorship fees to other banks to issue its cards, now other card providers are paying BIN fees to Green Dot, Lawrence noted.
Streit also mentioned that Green Dot had entered the higher education market and will facilitate student loan disbursements on prepaid cards. Lawrence said it is a smart move, as it anchors the company in the "youth market," which will help Green Dot develop relationships with younger consumers and, as a bank, offer them other products in the future, such as credit cards, auto loans and even home mortgages.
"You are seeing the early beginnings of them becoming a full-service bank," Lawrence said. "And I think that's positive. So as those things grow and the profits grow, I think you will see a lot more confidence in the market about Green Dot."
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