Fast-growing Green Dot has Wal-Mart as an investor. But its stock keeps falling.
FORTUNE — Not many fledgling entrepreneurs could survive the discovery that their brainchild was a flop. But Steven W. Streit, 49, had a eureka moment that turned his fortunes around. In 1999, Streit, a former adult-contemporary radio programmer, started a business called iGen in the bedroom of his Monrovia, Calif., apartment. The goal: to give teenagers a debit card loaded with prepaid cash so that they could shop online.
When the card was rolled out, kids didn’t show much interest but adults who couldn’t get checking accounts or credit bought the cards in droves, using them for such prosaic tasks as paying household bills. “I thought, ‘We have the right product, just the wrong target market,’ so we retooled,” Streit recalls.
Streit rechristened the company Green Dot (GDOT), got backing from Silicon Valley venture firm Sequoia Capital, and now is the largest provider of prepaid debit cards to the “underbanked” in America, a class estimated at 73 million people. Green Dot went public in 2010: Sequoia’s original $5.8 million stake is now worth around $270 million.
Its breakthrough came in 2005 when Wal-Mart (WMT) partnered with it for the Walmart MoneyCard, which customers load with money when they cash a paycheck or tax refund at a Wal-Mart. The retailer now accounts for 60% of Green Dot’s revenue, which hit $117 million in 2011’s first quarter, up 26% over 2010. With 4.3 million cards outstanding, it is far ahead of its closest rival, netSpend (NTSP), with 2.3 million. Wal-Mart was so impressed that it bought 9% of the company last year. Even the U.S. Treasury has started a pilot program to issue tax refunds on Green Dot cards.
Yet Green Dot is facing some strong headwinds. Competition is heating up: American Express (AXP) is introducing its own prepaid card and commercial banks are hinting they will join the fray. Although the AmEx card appears aimed at a niche market a way for people with normal checking accounts to give money to college kids, for example it is charging minimal fees. That could mean trouble for Green Dot, which charges to buy the cards and reload them, then adds a monthly maintenance fee. Now Florida’s attorney general is investigating prepaid firms to see whether they fully disclose their charges. Green Dot insists it does.
Legislative changes are another uncertainty. The Durbin Amendment tucked into the Dodd-Frank Act specifically excluded prepaid cards from its limits on how much banks can charge for processing debit card transactions, because they serve the low-income market. That could change if prepaid cards become more widely accepted.
All those doubts have had a dampening effect on Green Dot’s stock, which is selling at $27, about 24% below its IPO price of $36. That’s down from $65 just a few months ago. “There is a lot of controversy over the stock because of doubts about future growth,” says Tien-tsin Huang, a banking analyst at J.P. Morgan, who nonetheless has an overweight on the company. Streit says he welcomes new competitors because he believes they will expand the category. But the pressure may force him to conjure up yet another eureka moment.
This article is from the September 5, 2011 issue of Fortune.
