The Convergence Of Underbanked Financial Services

In what seems to be a relatively robust IPO environment for technology companies, Blackhawk Network (HAWK) priced above its indicated range last night as demand for the Safeway owned gift card retailer/processor soars.  The deal is priced at a substantial premium to Green Dot, but a relatively material discount to NetSpend’s post acquisition announcement trading price – if you look at both Price/Revenue and Price/Earnings. Why the discrepancy?

Clearly, Green Dot has suffered recently in the markets due to challenges from a client/distribution network concentration issue that has gone the wrong way for them. The good news for Blackhawk is that they still have Safeway as a major shareholder which certainly mitigates that risk. The current deal for NetSpend, prices the Company at over 3X revenue – certainly a strong value. The enthusiasm for Blackhawk can certainly be tied to the value of TSYS deal for NetSpend and what that may portend for a future deal for Blackhawk. It may just be that the market is very excited about the prepaid card industry.

While we believe all of the above has something to do with the strong investor interest in Blackhawk , we also think that there is something more subtle that is taking place in the market that is leading sophisticated investors to enthusiastically clamor for Blackhawk. We see a battle ground in financial services taking shape for a large market of consumers that are currently underserved by traditional financial services providers, namely banks. The underbanked market has tremendous potential. Whether you believe that the market is comprised of the 34 million US households that offer a $45 billion financial services opportunity that has been suggested or you think it is somewhat smaller – there is no doubt that it is significant. As such, we see a variety of players focusing on this opportunity and positioning themselves to capture a large piece of the available pie.

Given that access to this market is one of the critical components, we see the Blackhawk’s of the world as offering a unique opportunity to effectively reach these consumers. Thus, we expect that the convergence of solutions/providers – stored value cards, prepaid cards, money transfer businesses, walk in bill pay, etc. will be the path to becoming a dominant financial services provider to this massive underserved target market of consumers. American Express has already demonstrated their strong interest in capturing this market with the launch of their Bluebird suite of services and their strategic partnership with Walmart. We are confident that over the coming years you will see continued convergence as more traditional financial services providers with significant balance sheets start to assemble their strategy and solution through the strategic acquisition of the appropriate puzzle pieces  to effectively serve this very large and interesting underbanked market.