Well-funded startups, to be precise. , a company that provides banking services with a focus on pre-paid cards, saw its share price fall from the upper $40s to the high $20 after reporting its second-quarter earnings.

Subscribe to the Crunchbase Daily

What caused the firm to lose such a sharp percent of its worth? Green Dot pointed at competition from one of our most-watched startup categories, the neo-banks.

Downgrades

Green Dot did not disappoint investors by reporting underwhelming . In fact, the company beat on revenue ($278.3 million; GAAP) and earnings per share ($0.90; non-GAAP, diluted).

So what caused the firm to drop so sharply? The future. As :

Shares in the bank known for issuing prepaid debit cards fell 42% to $27.42 on Thursday after it scaled back its revenue and profit outlook for the rest of the year, citing competition from financial-tech startups that offer checking and savings accounts.

How sharp were the changes that led to such a dramatic repricing of Green Dot’s equity, and therefore the company itself? Pretty sharp, as it turns out.

You can read the company’s entire “Updated Outlook” in its earnings report , but the short version goes as follows:

• Full-year non-GAAP revenue of $1.060 billion to $1.080 billion against prior guidance of $1.114 billion to $1.134 billion. (The company employs precise revenue numbers due to the granularity of its growth.)
• Full-year adjusted EBITDA (an adjusted profit metric) of $240 million to $244 million, down from prior guidance of $255 million to $261 million.
• Full-year adjusted earnings per share (EPS) of $2.71 to $2.77, lower than the previously expected $2.82 and $2.91 in per-share adjusted EPS.

So Green Dot expects smaller revenues, lower adjusted profit, and slimmer profit-per-share. Investors reacted by hitting the “sell” button. Let’s return now to who is to blame, from the company’s perspective.

Who Is To Blame?

Companies like , , and others are at fault, it seems. According to the , Green Dot’s CEO said the following:

Several so-called neobanks flush with new rounds of venture capital [are] spending a record amount of marketing dollars to convert customers to their largely free bank account offerings. […] There’s little doubt in our minds that the increased marketing spend from so many competitors in aggregate is taking its toll on our new-customer acquisition.

Astute and regular readers of Crunchbase News should not be surprised at this result.

Continuing our coverage of neo-banks, we noted a slide in Mary Meeker’s Internet trends report showing that, among the startup cohort, customer acquisition costs (CAC) are rising. Why would CAC rise among neo-banking startups? In short because as more companies with more dollars pursue the same sorts of channels to reach the same sort of customers, the cost to acquire a marginal customer increases.

Startups are tasked with growth. So, when a number of startups target the same customers, they are going up against companies with similar charters (fast growth) and bank accounts (venture-backed).

This happens in any category where companies compete. Especially startups. The market has seen, for example, as more companies have been founded, more money invested, and the startups themselves have gone hunting for new signups in similar space.

Your Instagram feed is a good reminder about where some venture dollars go: , , and more. The list and creative marketing campaigns continue.

Regarding neo-banks, recall how much money they have raised in rapid succession. From our coverage from just two months ago:

Money is chasing the [neo-banks]. Chime has raised a , including  earlier this year. Robinhood has , including  last year. SoFi has , including $500 million this year. Acorns has , including .

To summarize, neo-banks are well-financed and in a hurry. Their hunger to buy new users and — hopefully — customers, is leading to more expensive CAC. And that’s dragging incumbent growth rates down.

The question now becomes can any of the wealthy neo-banks do what Green Dot already has: Grow, , and generate profit. (Green Dot had positive net income of nearly $35 million in Q2 2019. That’s more in net income than most neo-banks did in total revenue during Q2 2019, I’d reckon.)

Illustration: .

Follow Crunchbase News on

Acorns is a company with plenty to like. It helps round people’s purchases up, investing the difference. As I noted at the time, Americans on average haven’t saved enough money for emergency funds, let alone retirement. So, apps and services that help make saving money easier and simpler are solid in my books.

But a $700 million valuation? That was the question. I noodled a bit on the firm’s for its investment products, noting its assets under management (we could only get so close to the correct number) and prior business model that charged 25 basis points on saved funds. (Acorns now charges flat $1, $2, and $3 monthly rates depending on your goals, instead of a percentage of savings.)

After that post went out, the company reached out to link me to its CEO. We spoke earlier today, and he provided some extra context on the company’s revenue profile. So, let’s talk about what I learned.

Two Things

Acorns CEO  declined to disclose company’s current revenue but highlighted two places where the firm generates top line that I missed.

First, its “Found Money” program that provides savings for Acorns users from partner retailers and service providers, generates revenue for the startup. That’s a pretty damn good deal — Acorns gets more value into its users’ accounts while making money for itself.

And, the company’s debit card-checking account program has 300,000 pre-orders according to Kerner. As Acorns is providing the program as part of its $3 per month service, which includes its normal savings program (called “Acorns Core”) and its retirement account service (“Acorns Later”), it doesn’t look like a revenue driver at first blush. But, I , which are . (More , if you are curious.)

So how do interchange rates help Acorns? Observe how the New York Times how Chime, a neo-bank, makes money from the system:

“Chime, which has 100 employees in downtown San Francisco, makes money by collecting a fee from Visa every time its customers use Chime’s debit card to make a payment. The company has received $105 million in investments from venture capital firms.”

That’s what Acorns is doing as well, I reckon. (Acorns has raised .)

We can’t work our way to a sufficiently solid revenue figure for Acorns from the above to determine a revenue multiple range, but I can safely say that I was undershooting the company’s top line before. Which is good for Acorns and its investors, and probably its users as well, who depend on it to help them save.

Illustration Credit: