Prepaid Companies Pressured by Competition from Amex and Banks

Increasing competition from large banks is likely to put pressure on prepaid card marketers like Green Dot Corp. and NetSpend Holdings Inc., though the companies still have growth potential, analysts said in separate reports published on Friday.

NetSpend's shares rose as much as 6.5% after Wedbush Securities analyst Gil Luria upgraded his rating of the Austin, Texas, company to "outperform" from "neutral."

Results from a consumer survey by Wedbush show that the market for reloadable prepaid cards, which function like a debit card but are typically targeted at low-income consumers that lack traditional bank accounts, is less than 30% penetrated, Luria wrote.

That should also help Green Dot, a NetSpend competitor that sells its cards mostly through retailers, including Wal-Mart Stores Inc., CVS Caremark Corp. and Walgreen Co., according to Luria, who also has an "outperform" rating on Green Dot's stock.

However, Goldman Sachs Group Inc. analyst John Williams lowered his earnings estimates for NetSpend for 2011 through 2013, citing pending card regulation, new competition and the July launch of the Consumer Financial Protection Bureau, which is expected to focus on the fees that prepaid cards carry.

Williams now expects NetSpend to earn 44 cents per share in 2011, 66 cents per share in 2012 and 87 cents per share in 2013, down from previous estimates of 50 cents, 75 cents and 98 cents, respectively.

Both Green Dot and NetSpend are targets of an investigation by Florida Attorney General Pam Bondi over possible hidden fees.

American Express Co. announced a prepaid card June 14 that carries few of the fees that most prepaid cards have. Both analysts said this new card competes with NetSpend and Green Dot. Luria, though, said the Amex card lacks features that Green Dot's and NetSpend's products have, such as FDIC insurance and the ability to make direct deposits to the card account.

Analysts expect large banks such as Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. to offer their own general-purpose prepaid cards, though "until the large banks open branches in neighborhoods where the key demographic for this product lives, they will not impair Green Dot's ability to grow," Luria wrote.

NetSpend's shares were up about 3.4% at $8.57 mid-morning on Friday. Green Dot's shares were down about 0.7% at $33.96.

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