There is a $36 billion opportunity few seem able to crack.
It is the 17 million adults without bank accounts, part of 51 million considered "underbanked," according to the FDIC. If you would like a great Seeking Alpha take on the phenomenon, I can recommend John M. Mason's piece from earlier today that identifies Green Dot (GDOT) and Netspend (NTSP) as the market leaders in the prepaid debit card market.
You'd think Green Dot would have it made. Wal-Mart (WMT) has been working closely with Green Dot on prepaid cards that are an alternative to its own check cashing services, which usually cost $3/check. Hip-hop entrepreneur Russell Simmons has also been working with Green Dot on a prepaid card dubbed the RushCard.
But this has, so far, proven a sinkhole for investors. From a high of over $63/share in early 2011, Green Dot has fallen pretty steadily to its current level of $12.45/share. Revenue peaked in the fourth quarter of last year, and while a look at its balance sheet -- stacked up on a yearly basis -- appears attractive, the company has lately been surrounded by plaintiffs' attorneys following a July earnings warning.
Netspend has been going in the other direction. That's because it's working directly with check cashing houses like those owned by check cashers First Cash Financial Services (FCFS) and EZ Pawn (EZPW), which the underbanked seem to trust.
What do the expensive check cashers have that the higher-class bank cards don't? Presence in the community. Both of these companies have a lot of offices, many quite large, in the poorer communities near where I live.
Of those two, First Cash Financial Services has been doing the best. The stock seems, at first glance, to be very up and down -- both companies are down over the last six months, but First Cash Financial Services is up almost 25% the last three months.
The margins in serving the underbanked are enormous, and those who try to crack the market are bound to be dismissed as profiteers. But at the heart of the word "profiteer" is, after all, the word "profit."
First Cash Financial Services has nearly doubled in size over the last five years, and rocks an operating margin of nearly 25% on revenues that, for the most recent year, exceeded $500 million with spectacular operating cash flow and no debt. If you do want to step into this market, ignore the hype and go with the people who know it best.