Steel City Capital Investments – Green Dot: Wal-Mart’s banking partner
The following segment is excerpted from this fund letter.
Green Dot (GDOT)
Green Dot is a collection of old school money access/money movement operations as well as new school “FinTech” offerings. He is perhaps best known as the banking partner behind Wal-Mart’s (NYSE: WMT) MoneyCard prepaid debit card. Prepaid debt is one of the less sexy financial service offerings out there, and I also suspect there’s a certain snobbery among the investor class that its primary customers sit on a lower socioeconomic echelon. I think these factors contribute to today’s opportunity.
One of the emerging trends in the FinTech space is the integration of banking and payment services by consumer-facing businesses. The idea is that by integrating these services, businesses can collect more data on spending habits, foster more “sticky” customer relationship/brand loyalty, and ultimately drive more sales. At the same time, these consumer-facing companies are unable or unwilling to develop these platforms on their own. This would require, among other things, 1) a specific degree of technological expertise and 2) ownership and control of a banking institution. The latter of the two factors – having a bank charter – is a significant barrier to “going it alone”. Owning a bank requires costly and time-consuming compliance (AML/KYC, etc.) and ongoing regulatory oversight. Over the years, a long list of familiar names with financial services ambitions (including Wal-Mart) have either tried and failed or proactively decided against owning and operating a bank. This is where someone like GDOT comes in, providing the technical know-how and offering the use of their bank charter without the headaches of becoming a regulated bank. In industry parlance, this has become known as “Banking-as-a-Service” or BaaS, for short.
GDOT’s relationship with Wal-Mart has shifted more toward BaaS than “just” prepaid debit, with Wal-Mart last year converting all of their existing prepaid accounts to demand deposit accounts intended to operate similarly. way than a traditional bank account. MoneyCard now comes with an app and various features such as overdraft protection, prepayment, and cashback on Wal-Mart purchases. Beyond Wal-Mart, GDOT has expanded its BaaS offerings with other major brands. Another interesting use case is its partnership with Intuit’s QuickBooks. When you open a new QuickBooks business account, you have the option of opening a QuickBooks-branded business checking account at the same time, which is back-end powered by GDOT. There is plenty of room for GDOT to work with other consumer-facing companies to integrate payments and other banking services into their platforms. I recognize that GDOT is far from the only “player” in the arena, but the mere fact that they have already bagged a number of large customers on the BaaS side (Intuit (NASDAQ: INTU)/QuickBooks, Apple (NASDAQ:AAPL)/Apple Cash, Uber (NYSE: UBER)/Uber Checking) at least suggests that their capabilities and offerings have been thoroughly reviewed.
In terms of valuation, GDOT is currently trading at around $30. The company is free cash flow positive, has ~$3.00/share of excess cash at the holding company level, and another ~$1.50/share of excess capital in Green Dot Bank. In early 2021, the midpoint of Adj. EPS guidance was $2.10. I like to start here because it was a relatively clean figure that assumed no benefit from another round of stimulus payments or the extension of unemployment benefits (both of which provided a tailwind income). From this level, there are a number of drivers that should drive profits higher in the coming years, including:
- The internalization of certain card processing which, by 2023, should add $0.30 to $0.35 to EPS;
- Repricing certain early BaaS contracts outside of a fixed fee structure that would allow GDOT to participate in a portion of the upside associated with account balance and expense growth;
- New white-label BaaS contracts with consumer-facing companies;
- Potential growth of Go2Bank, the company’s own “neobank” offer; and
- Increased profitability of Green Dot Bank.
This last driver – increasing the profitability of the company’s bank – did not catch the attention of investors. In 2019, GDOT Bank earned net interest income of $33 million on average assets of $1.6 billion. As we enter a new round of tightening, the bank’s asset balance has more than doubled to $3.9 billion, helped by stimulus and unemployment benefits. Without making heroic assumptions about interest rates, the larger asset balance alone should benefit interest income. Additionally, the bank could gain Fed approval to expand into additional lending products (i.e. credit cards) that would have a dual benefit of 1) increasing interest income and 2) generate credit-related interchange fees (which are higher than the debit interchange rates from which the company generates a significant part of its turnover). I have no doubt that the management team of GDOT and the activist involved in the business looks at this.
All told, there’s likely a reasonable path for EPS to hit $3.00+ in the coming years, putting stocks well below a 10x P/E multiple. The company is currently led by industry veteran Dan Henry. Henry previously ran and sold GDOT’s main competitor, NetSpend. He was recently joined in the business by George Gresham, who was appointed as Chief Financial Officer and COO and joined the board of GDOT. Gresham was Henry’s chief financial officer at NetSpend at the time of his sale and received a compensation package at GDOT that would pay handsomely if the shares were to materially reprice. Where if the company were to be sold… which could very well be possible due to the involvement of activists.
TL; DR? GDOT is cheap and there is a catalyst.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.