“U.S. Federal Court Ruling Creates ‘Virtual Monopoly’ For One Tiny Company”

by Travis Johnson, Stock Gumshoe | September 23, 2011 4:06 pm

Friday File look at teaser for Zachary Scheidt's Hedge Fund Strategist

“When this controversial law takes effect on October 1, 2011… folks who act now could get ‘hedge fund rich'”

That’s how Zachary Scheidt is launching his new service, called Hedge Fund Strategist from Taipan, a publisher in the Baltimore Agora-plex (Taipan is currently in the process of renaming itself “Insiders Strategy Group,” just to keep us all confused with yet another generic publisher name after KCI Investing renamed itself “Investing Daily”).

He’d like you to sign up as a “Charter Member” of his Hedge Fund Strategist (and yes, “Charter Member” is newsletterspeak for “we don’t have a track record yet”), but it is of course so exclusive that you can’t just subscribe (they say it’ll cost $2,100 when they offer it to new subscribers). The only way to get access to the new letter they’re teasing now is by becoming one of Taipan/Insiders Strategy Group’s lifetime members, which they call the “Millionaire’s Circle” — several publishers do this, and it seems like a good business plan for them to get guaranteed cash up front. You pay a big fee to “buy in” (usually in the range of $2,500-$5,000) and then an annual “maintenance fee” of a hundred bucks or so and you get all their newsletters (or some smaller package of “most” of their letters) for as long as they’re published. In this case, the pitch is for a $3,900 membership in the Millionaire’s Circle, and one of your benefits is the “special investment bulletin” called “This Tiny Company Could Make You Hedge Fund Rich!”

Which is a long way of leading up to my point today: let’s find out a bit more about this “tiny company” without joining the “Millionaire’s Circle,” shall we?

The basic spiel form Scheidt is that the government’s new financial regulations have created a loophole of sorts that creates a “virtual monopoly” for one company. Or, as he puts it …

“A controversial U.S. Congressional Act (backed by a federal court ruling) has just created one of the most unusual — and lucrative — investment opportunities of the past 37 years.”

And of course, it’s top-secret and you couldn’t possibly learn about it from anyone else:

“I’m very confident that folks who get in now can expect to double or even triple their investment over the next 18 months.

“Of course, most people will completely miss out on the opportunity at hand. And I can assure you, you won’t see this written about anywhere else. Nor will you hear about it from a broker or financial advisor.

“That’s because this special situation is the secretive, hidden ‘off-Wall Street’ type of investment usually reserved for hedge funds and their wealthy clientele.”

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Then he runs through a handful of examples where the gummint gave a company a “virtual monopoly” on a a market and sent a stock soaring — almost all of his examples are small biotechs who got FDA approval for a product, which is a whole different category of government regulation, but we’ll take the point: yes, for many industries a favorable government regulation or ruling can offer significant advantage to a specific company or group of companies.

So yes, that’s what Scheidt is promising:

“The tiny company I’m recommending today has the potential to be the next ‘U.S. government made’ mega-success story.

“There is one catch, however…

“Because of the rare and exotic nature of this opportunity… I must limit the number of people I can tell about it today.”

I don’t want to spoil the fun as we sort through these clues, but I’m guessing that the “rare and exotic” bit is, well, hooey. Still, rare and exotic are overrated — so what’s the company?

Zachary tells us that it’s a company that’s helping to solve the huge debt problem — not government debt, but personal and credit card debt. But first he has to tell us about “swipe fees.”

You’ve probably heard about swipe fees, because all the banks have been freaking out about the fact that they’re going to lose a lot of fee revenue thanks to crackdowns on the billions of tiny little fees they charge on credit card transactions. It all has to do with the oft-screamed-about “Durbin Amendment” to the Dodd-Frank Wall Street Reform bill. Here’s how Scheidt puts it:

“To say the Durbin Amendment is controversial would be a tremendous understatement…

“The amendment gives the Federal Reserve Board the power to put a cap on ‘swipe fees’ charged by credit card companies.

“I’m not talking about the fees consumers are charged. I’m talking about the fees merchants are charged when a consumer buys something with a credit card.

“For example, let’s say you go to the store, buy groceries and pay with a Visa credit card.

“Visa charges the grocery store a fee known as a swipe fee. In fact, Visa charges the merchant a fee on every credit card transaction… somewhere in the neighborhood of 2.5% of the transaction.

“Originally, the fee was supposed to cover fraud and network costs. But of course, Visa and MasterCard have turned the fees into a substantial source of revenue.

“In fact, according to U.S. News and World Report, the ‘swipe fee’ business has exploded to a $48 billion per year industry.

“The Durbin Amendment cuts the fee… by more than 50%!

“Bad news for Visa and MasterCard, who are going to lose billions every year, according to Fortune magazine.

“But very good news for the company I’m tracking today.

“That’s because the Durbin Amendment EXCLUDES this tiny company from the ‘swipe fee’ cap.”

So that sounds good, right? What, then, does this company do?

Prepaid debit cards.

As in, the credit cards that people use who can’t get credit — you load money onto the card, then use it just like a regular network debit card to buy stuff wherever the Visa/MC networks are accepted.

And Scheidt tells us that not only are these cards profitable for this company, but they’re doing good, too!

“These cards are a godsend for our debt-ridden nation.

“Think about it. No overdraft charges, no monthly interest payments, no massive credit card bills and no penalty fees!

“(Penalty fees from credit cards were over $20 billion in 2009 alone…)

“The cards help consumers avoid debit and penalty fees. In addition, the cards also help consumers stay within a budget.”

And he says that, as a result, they’ve got special treatment from the Feds:

“… the U.S. government has decided to make this company its ‘poster child’ for fiscal responsibility.

“So while Visa and MasterCard are watching billions slide out the door… the tiny company I’m recommending today can gobble up the ‘swipe fees’ without restriction….

“Because the government needs a hero… It needs a company it can CHAMPION in the fight against overspending. It needs a company that offers a SOLUTION to America’s crushing debt load.

“This company offers such a solution… and the government knows it. Consequently, Congress has created legislation that practically ensures this company’s success.”

The tease then tells us that this company will have a “dominant and unfair advantage” once the new rules go into effect next week (on October 1).

Then we get into the specific clues about the company being teased:

“This tiny company has its product in over 50,000 retail locations nationwide, and has signed agreements with a VIP list of major retailers, including Walgreens, 7-Eleven, Kroger and even Wal-Mart.

“In fact, Wal-Mart, the king of retail, is so high on this company it took a 5% ownership position in the company. That’s like getting the world’s largest financial seal of approval.

“It gets better…

“In addition to its retail locations, this company is striking up ‘branded relationships’ with high-profile organizations. It has already struck a deal with NASCAR and its massive fan base.

“In addition, on July 15, 2011, the company signed a deal with AARP and its 37.5 million members!”

Sounds impressive, no? We’re also told that they are integrated with PayPal, offer online bill-payment, and have “almost no overhead.”

And the “kicker” is that shares in this company have been driven down along with all the other credit card-related stocks in recent months, and the stock is down 55% and below the IPO price. Scheidt calls this a fantastic “arbitrage” situation, where a whole sector is being driven down by the Durbin Amendment but one of the stocks shouldn’t be hurt by that amendment.

So who is this mysterious “rare and exotic” company? Well, I shoveled all those clues into the Thinkolator, pressed the “debit” button and signed the little screen, and was rewarded with our answer — Scheidt is teasing …

Green Dot (GDOT)

Green Dot was one of the few successful IPOs last year, though it did fall this year — I don’t know whether the fall is because of fears about the Durbin Amendment or just a hot IPO cooling off in the face of a bad economy or other company-specific concerns, but the shares have been going down pretty much all year and are now well below where the shares IPO’d in the high-$40s (the actual IPO price was lower than that, but it was a hot ticket and it traded sharply higher immediately).

Green Dot is similar to some other financial services firms in that they’re trying to reach the “unbanked” — people who don’t have checking accounts or credit and who rely on check cashing shops, paycheck loans and similar bottom-feeders of the banking business. Their goal is to effectively set up bank accounts for these folks, but to call them “prepaid debit cards” — in effect, instead of going to a branch and setting up a checking account, you go to Wal-Mart and buy a prepaid card with cash, then you can use that card wherever credit or debit cards are accepted, or at an ATM, or to do other typical banking things like use online bill payment.

And I didn’t mention Wal-Mart just by way of example: Wal-Mart is the key competitive advantage that Green Dot has. Green Dot runs Wal-Mart’s private label prepaid card program and has exclusive rights to do that until 2015, which is why Wal-Mart owns a big chunk of GDOT stock (they got the ownership stake as part of the deal, not because they bought in to GDOT). GDOT will tell you that they have other important things that set them apart from other companies that offer prepaid cards, but Wal-Mart is really the key, it supplies GDOT with well over half of their revenue and it gives them prominent placement in the world’s largest retailer and in the big retailer that is most directly tied to their core “unbanked” demographic of the working poor and to their broader target demographic of families who make less than $75,000 a year.

So that’s both Green Dot’s biggest blessing and, assuming that they really do escape the regulatory scrutiny and fee-cutting knife of the Durbin Amendment, the largest area of concern — when you are reliant on one company for a large part of your business that’s always a risk. This has been an issue for other Wal-Mart partners, they kill themselves to become involved with the world’s largest retailer, but then they realize that Wal-Mart is the world’s largest becuase they’ve historically driven the hardest bargains. Their deal allows them to buy back Wal-Mart’s shares of GDOT on the cheap if Wal-Mart backs out of the contract that has four more years (roughly) to run, so there is at least some compensation, but it’s hard to forecast a business relationship that you’re not part of and GDOT is definitely more dependent on Wal-Mart than the other way around.

GDOT does say that they expect to be exempt from the “swipe fee” cut, which is good because a lot of their revenue comes from these and similar fees, as well as from what sound to me like pretty steep fees for buying cards, transferring money, etc., though I guess in comparison to check cashing storefronts their fees probably look tiny.

And no, it ain’t “rare” or “exotic” — the CEO and founder, Steve Streit, was featured in Fortune just a couple weeks ago, there are 13 analysts covering the stock and Goldman Sachs just upgraded them to “buy,” and the stock is of fairly decent size at about $1.5 billion in market cap. They’re telling anyone who will listen that they won’t be subject to the “Durbin Amendment” fee cuts and that they’re all set for current and expected regulatory changes … there’s one look at this issue here[1], and another here[2]. Regulation is certainly an area where it helps to be pretty big and established, which they are in comparison to some of the startup prepaid/gift card networks, so if changes keep rolling in they at least have an advantage over smaller companies … whether that gives them an advantage over Visa and Mastercard, which are pushing their own prepaid card solutions, or over banks who would also like to play a bigger role in this space, is another question.

You can see their last earnings call transcript here[3]. They’re trading at about 16X next year’s expected earnings, but there is certainly also some concern about the fact that their earnings growth may be decelerating (still growing, but not growing as quickly) with their larger size and/or with economic weakness. Lots of competitors too, including near pure-play competitor NetSpend (NTSP), which IPO’d immediately after GDOT and has done significantly worse without a tentpole contract like GDOT has with Wal-Mart, or bank hybrids like The Bancorp (TBBK), which at least one Seeking Alpha contributor thinks is cheap[4] because their prepaid business is undervalued relative to GDOT.

Definitely an interesting space, and not one that I’ve spent much time looking at so far — if you’ve got an opinion on them I’d be delighted to hear it, I find the growth rate tempting and I like their focus on building up banking services out of these retail relationships and on their proprietary reloading network, the Wal-Mart network, and their ATM access, but I worry about the commissions they have to pay to their retail partners (in stock sometimes, it appears from their income statement) and I don’t know if their good qualities are enough to justify the current valuation in an economic environment where their core customers are getting clobbered. On the fence so far myself, but I think I’ll look some more at GDOT and TBBK when I have a moment — when the market’s like this, it seems like we don’t need to hurry.

Oh, and “monopoly?” I wouldn’t think so, though I’m sure a lot will continue to be work. I think any advantage they have over competitors in that regard will come from their Wal-Mart relationship and the network effect of their growing user base and growing retail partner base, I suspect that anything that gets them an advantage in terms of fee revenue over similar competitors would be quickly adopted by competitors if it really is a loophole, though it does look, so far, like they will have an advantage over pure debit/credit cards issued by big banks.



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Endnotes:
  1. look at this issue here: http://www.sellingprepaid.com/emagazine.php?story_id=308
  2. here: http://www.digitaltransactions.net/index.php/news/story/2586
  3. last earnings call transcript here: http://seekingalpha.com/article/282983-green-dot-s-ceo-discusses-q2-2011-results-earnings-call-transcript
  4. one Seeking Alpha contributor thinks is cheap: http://seekingalpha.com/article/295184-bancorp-ceo-buys-2-million-in-stock
  5. You and I can each earn a free share of stock right now if you open an account!: https://join.robinhood.com/travisj369

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