Mercator Advisory Group expects this segment of the banking industry to double over the next few years to $672 billion in deposits. Geoff Williams of CardRatings.com says this will be “the year of prepaid credit cards,” based on increased government regulation of the space that will actually build trust.
Celebrity banks are a new wrinkle in the business, but prepaid cards have been around for a while. Two companies based in the industry went public in the last few years – Green Dot (GDOT) and NetSpend Holdings (NTSP). Neither has done especially well with investors, although Wedbush is out with a favorable report on both and they're doing well today.
The question for investors is where to play this trend.
The speculative way to play is with GDOT and NTSP, both of which are fully leveraged to the growing space.
The big uncertainty here is government. Given the wide variations not only in the total fees collected on these cards, their lack of insurance, and the types of fees charged, this seems like a perfect target for Richard Cordray's Consumer Finance Protection Bureau. A government report highlighting dangers in this industry could prove politically powerful.
But as Williams notes, such a report, and detailed regulations on what can be charged and how, may also legitimize the space. The agency is already hinting at this through its NonBank Supervision Program, detailed through an article on the agency's Web site.
So is this an area where investors should hope the government is here to help? Or would we be better served by an unregulated prepaid card market? I think the latter, and I won't put money to work in this area until we get one.
Feel free to disagree.