Prepaid Skepticism Creates An Opening: Street Whispers

NEW YORK (TheStreet) -- Skepticism over growth in prepaid financial services has created an opportunity for investors to take another look at the sector.

Prepaid financial services refers to prepaid cards consumers use as they would a credit or debit card. With prepaid cards, however, they store a fixed amount of funds on the card, which can then be reloaded.

Publicly-traded companies showing the highest prepaid usage volumes are Green Dot Corp (GDOT) and NetSpend Holdings (NTSP), according to Tim Sloane, director at consulting firm Mercator Advisory Group who follows the prepaid industry.

Another way to get exposure to prepaid market growth is through The Bancorp, Inc (TBBK)--a bank that takes credit risk for several providers of prepaid cards.

Analysts who follow the prepaid industry turned cautious following a surprise July 26 announcement by Green Dot in which the company lowered earnings and revenue guidance, citing conversations with retailers who they fear will soon be offering competing products.

In downgrading both Green Dot and NetSpend July 27, Keefe Bruyette & Woods analyst Sanjay Sakhrani wrote that Green Dot "management's comments appear to imply that competition has expanded and may have even become somewhat irrational." He singled out American Express (AXP) as "potentially...willing to pay retailers significant sums for shelf space and lowering upfront fees."

There is no question the prepaid industry is increasingly competitive, with everyone from JPMorgan Chase (JPM) to Western Union (WU) to eBay (EBAY)'s PayPal elbowing for attention.

Still, Mercator believes the market is "far from saturated," according to Sloane. He argues companies that offer prepaid products spend so much time talking about their focus on the "unbanked and underserved"--possibly as a public relations push--that many investors may not see the much larger potential in prepaid products.

"American Express, despite what they might say, is not a brand that's going after the unbanked and underserved," Sloane said.

American Express had no immediate response.

Sloane argues that "upmarket" customers are finding all kinds of uses for prepaid cards that companies are just beginning to understand.

"Teen card, budgeting card, eating out card--there's a million use cases for it that the customer is figuring out."

Sloane believes Green Dot made the right move from a transparency perspective in warning investors about new competition for its retail products, but he hardly sees the company as out of options.

"There's ample opportunity to grow the market as long as they continue to innovate," he says.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.