Green Dot (NYSE: GDOT) is the latest fallen angel in the fintech sector (See RPAY, PSFE) whose shares, zenith to nadir, have tumbled 90%. The company was an early mover in providing financial services to the underbanked in the U.S. when they began offering prepaid debit cards through drug stores 25-years ago. GDOT built out their own transaction processing network and acted as a card issuer, like American Express (NYSE: AXP). Client attrition and slower business dynamics eventually hindered the company’s growth trajectory.
Let’s start at the beginning.
The underbanked market in the U.S is estimated at 15% to 20% of the population, translating to approximately 50 million to 65 million consumers. Green Dot was established to bridge the gap between these cash-based consumers and access to digital products and services that required electronic payments, such as e-commerce and remote payments for cell and cable services. Enter Green Dot where consumers could exchange cash at a participating retailer’s point-of-sale (PoS) for a pre-paid debit card which was co-branded by Visa/Mastercard. Voila, for an activation fee (cash-to-card) and a per-use, PoS transaction fee, the now previously excluded consumer base from the modern economy is now a full-fledged participant at over four million U.S. retail locations.
Green Dot was the first to market with scale for this type of service. It built out a nationwide card activation network of drug stores, which expanded to grocery and other non-discretionary retail locations. Today, the activation network has grown to 90k locations and 3.5 million active accounts. Walmart became a transformational retail partner in 2006 along with other notable partnerships such as CVS and Dollar General.
Green Dot has evolved into a sophisticated enterprise generating $1.5 billion in revenue from three segments: Consumer Services, which includes the traditional Green Dot prepaid debit card and Go2 Bank, constituting the majority of corporate profitability; B2B Services, targeting the 25 million small U.S. businesses (with approximately five employees) for banking-as-a-service, and offering flexible payroll services such as earned wage access; and Money Movement, facilitated through the extensive Green Dot network and tax refund services.
What went wrong?
Shifts in consumer behavior at physical retail stores, e-commerce sites, along with increased competition, have led to mixed results. Further, its 2022 dispute with Uber and subsequent non-renewal of banking-as-a-service partnerships have been a drag on revenue, and the company’s lack of technological standardization has resulted in operational inefficiencies.
Reason to be optimistic?
We observe a multi-year turnaround opportunity and believe that, in the longer term, the Green Dot network possesses unique service capabilities that may be attractive to larger processors. The company has successfully built an impressive ecosystem of distribution partners to sell its consumer and business-oriented services to those in need of basic financial services. Its digital-first, mobile-oriented approach has proven effective. We wouldn’t be surprised to see Green Dot get acquired by a large processor or exit the public markets in a take-private transaction.
