Life Lessons From Five Nights at Freddy’s Game

I am not a mobile game player. I am a financial analyst who writes papers on the mobile game industry that are freely available. Up to now I have spent little time thinking about why a particular game is popular.

Monitor Screenshot from Five Nights at Freddy's

Monitor Screenshot from Five Nights at Freddy’s

But, that all changed when I first saw screenshots (see above) of the immensely popular games Five Nights at Freddy’s (FNAF) and FNAF2 by indie developer Scott Cawthon.

The basic premise of the game is that you are so desperate to find work that you begin looking at newsprint ads (a horrific event in and of itself today). You find the following:

Newsprint Ad from Five Night at Freddy's

Newsprint Ad from Five Night at Freddy’s

The job is for a night monitor at a Chuck E. Cheese style pizzeria featuring animatronic characters. You apply knowing full well that Freddy Fazbear’s Pizza had been closed due to foul smells coming from the animatronics. You also know that the pizzeria was the site where five missing children were last seen.

You get the job and your life as a monitor begins.

I choose to describe the job as monitor carefully. Your are a monitor, not a security guard that walks around. It was the specific intent of this game’s developer to have the player sit immobilized for a six hours stretch in front of a computer monitor (see above again) with clickable buttons for a network of cameras placed throughout the pizzeria.

Hmm…sitting in an office immobilized for hours at a stretch monitoring a business. That what I did for years as a general ledger accountant. That’s what securities traders, air traffic controllers, nuclear power plant engineers do.

And now with Cloud, SaaS and especially mobile, business monitoring will be added to just about every employee job description.

Life as a monitor. What’s that like? What life lesson does Five Nights at Freddy’s offer us?

Life as a monitor occasionally involves what gamers call the “jump scare.”

Jump Scare gif from FNAF, Five Nights at Freddy's

Jump Scare gif from FNAF, Five Nights at Freddy’s

Casting an even wider net, Five Nights at Freddy’s is about more than life as a monitor. It is about the mediated life of whether or not what was seen was real.

The mobile game’s heritage are the movies Rear Window and Blow Up. The player in FNAF shares the same issues as Jimmy Stewart and David Hemmings.

Below is a screenshot of a real life jump scare — the stock market Flash Crash of May 6th, 2010 where the Dow Jones stock index dropped 560 points in 4 minutes. On YouTube videos of this event, you actually can hear stock traders screaming each time the graph below added another down bar.

Flash Crash Screen of S&P 500 May 6  2010

Flash Crash Screen of S&P 500 May 6 2010

This choice to use the Flash Crash of 2010 as an example of a real life jump scare was intentional because its represented a false positive of trouble. It was due to a single trader mistakenly placing an order for 4 Billion shares instead of 4 Million shares. The market quickly recovered most of its losses later in the day.

There are two takeaways I get from comparing mobile game jump scares to real life jump scares. There are others you might have and I invite you to share them in the note to this paragraph.

The most important takeaway that I get is that we need to remind ourselves, and our game-playing kids, that game jump scares trigger a “game over” without real consequences or a need to act. The feeling accompanying a game jump scare is a quick adrenaline rush followed by relief.

A real life jump scare triggers initially a “sick to your stomach” feeling that settles into a depression until you honestly assess the possible consequences and begin to act.

The second takeaway for me is that there is a downside to the democratization of monitoring business intelligence data — jump scares (and jump-for-joys?) triggered by false signals of a business’s health.

Professionals who historically monitor business intelligence data have learned not to jump scare. Before reporting a disaster or break-out, they do something called account analysis. They look first for that $10 Million journal entry where the debits and credits are reversed. They look for that booking of a $50 Million order should have been booked as a $5 Million order.

I know that the democratization of monitoring is a net positive for business as well as for society. Democratization of just about anything is a net positive. It’s just that we need to learn to temper the impulse to jump scare when monsters first appear.

The Bancorp: Bad Moon Rising

  • The Bancorp is a Philadelphia area bank whose stock has fallen 50% in 2014 due accounting and regulatory surprises.
  • On top of that, it announced it was discontinuing its commercial lending operations and set aside a $1.2 Billion portfolio for sale with an overall 6.5% mark-to-market discount.
  • An 8-K filed on the last business day of 2014 revealed a partial sale with a mark-to-market discount of 20.2%.
  • Another 8-K filed 3 days ago revealed that the EVP of commercial loans resigned effectively immediately.
  • Until there are assurances from management as to the quality of the remaining portfolio for sale, we rate this stock a sell.

The Bancorp (NASDAQ:TBBK) is a Philadelphia area bank founded in 2000 by the pioneering banker and lawyer Betsy Z. Cohen. A few bullet points from her resume:

  • Second female law professor on the East Coast after Ruth Bader Ginsberg
  • Founded Jefferson Bank in 1974; Sold it in 1999 for $370M
  • Instrumental in financing Philly’s Walnut Street downtown revival
  • Board Member – Aetna US Healthcare, Philadelphia Museum of Art, Bryn Mawr

Since inception, the bank’s Chairman has been her son, Daniel G. Cohen. A few bullet points from his resume:

  • CEO of three publicly-held companies whose market values crashed due to CDO investments
  • CEO, IFMI, 2010-12 when market value crashed 91%
  • CEO, Alesco Financial Trust 2007-10, when market value crashed 87%
  • CEO, RAIT Financial Trust, 2006-9 when market value crashed 98%

2014 was a bad year for The Bancorp as the bank was rocked by a series of surprise accounting and regulatory disclosures resulting in a 50% drop in its stock price.

TBBK Chart

TBBK data by YCharts

First there was an April 18, 2014 8-K disclosure in conjunction with the release of its 1Q14 results that “newly identified adverse classified loans”, caused a one-time addition to its loan loss reserve of $11.8 Million. The next trading day the stock dropped 14.9% from $18.60 to $15.84.

Then there was a June 10, 2014 8-K disclosure that the FDIC found that bank was in violation of the Bank Secrecy Act — namely that reloadable prepaid cards issued by The Bancorp were being used for extensive money laundering. The next trading day the stock dropped 30.3% from $16.36 to $11.40.

On December 1, 2014, there was 8-K disclosure that CEO Betsy Z. Cohen, 72, would be retiring at the end of the year.

Her son, Daniel G. Cohen, 42, remains Chairman of the Board. Four other Board members are Board members of other companies that Daniel G. Cohen has at one time controlled.

We see a “bad moon rising” for The Bancorp in 2015. We see “trouble on the way”.

In its 3Q14 10-Q, the bank announced that was discontinuing it commercial lending operations. Based on an independent third party review, it marked down the portfolio by an additional $38.9M to a fair market carrying value of $1.2 Billion:

” In addition to $44 million in the allowance for loan losses which was net against those loans, an additional $38.9 million expense resulted from the valuation to estimated sales price, which was also net against those loans. “

Here is a 3Q14 conference call exchange, as transcribed by SA, confirming the view of $82.9M as the difference between the outstanding principal and the fair market carrying value of the portfolio at that time.

Paul Frenkiel- Chief Financial Officer

Sure. Yes, those actually are separate, so maybe the easiest, I think the way you are trying to look at it was that at the end of the second quarter we had a reserve of about $46 million. We had some activity during the quarter, so we ended up with the reserve about $44 million and $38 million was basically in addition to that.

Matthew Kelley- Sterne Agee

Got you. So we can really think about it as an $82 million write-down or 7% or 8% of the unpaid principal balance. Is that the right way to think about it?

Paul Frenkiel – Chief Financial Officer

By 38 in addition to the 44 that had accumulated over a period of many years.”

On the next to the last business day of the year, December 30, 2014, the bank issued an 8-K stating that it had sold a portion of its $1.2 Billion commercial loan portfolio:

“The sold loan portfolio had an outstanding principal balance of approximately $267.6 million, which had been adjusted on the books of the Bank to estimated fair market value in the third quarter of 2014 upon the classification of the Bank’s related commercial lending operation as a discontinued operation and the transfer of the related portfolio to “held for sale” status. As a result of the estimated fair market value adjustment, the carrying value of the portfolio, as of September 30, 2014, was $213.5 million.”

Several things about this first sale caught our eye. The first thing was the mark-to-market discount associated with this relatively small piece of the portfolio:

(267.6 – 213.5) / 267.6 = 54.1 / 267.6 = 20.2%

This was way out of line with the overall average discount of 6.5% established just two months earlier.

Second, the sale was not for cash nor to an established third-party. It was for note receivables issued by a newly created LLC with the bank itself as 49% minority partner.

We ask ourselves, “How toxic can the full portfolio really be if this is what the bank had to do to sell just a portion of it?”

Maybe, they planned on an asymmetric sequence of sales, with the very toxic piece cut out first and sold to a related party at a steep discount.

Then they would sell the remaining clean piece with a mark-to-market discount of only 3% to an established third party willing to pay cash for a clean bundle.

But if this were so, why did The Bancorp not include an explicit statement in the late December 8-K of the planned asymmetric sale sequence?

Another 8-K has been just filed by The Bancorp on January 9, 2015 reporting that Arthur Birenbaum, EVP, commercial loans has resigned, effective January 8, 2015.

Investors need to get straight answers to the following questions now or during the bank’s 4Q14 earning conference call:

  • What is the overall mark-to-market discount on the remaining $900M commercial loan portfolio?
  • Can the bank give assurances that the remaining portfolio is fairly valued in light of the 20% mark-to-market discount associated with the piece just sold?

Below is a spreadsheet summarizing our view of the accounting of the two transactions to set aside the commercial loan portfolio in 3Q14 and then to sell the first piece on December 30, 2014.

It also includes a “what if analysis?” as to future mark-downs of the remaining portfolio for sale

The Bancorp — Commercial Loan Portfolio Reclassed as Discontinued Operations – 3Q14
3Q14 12-30-14 Sale 4Q14 Pro Forma
Outstanding Loan Principal 1,282.90 267.60 1,015.30
Loan Loss Reserve at Time of Discontinuation (44.00)
Additional Mark Down at Time of Discontinuation (38.90)
Total Markdown (82.90) (54.10) (28.80)
Fair Market Carrying Value 1,200.00 213.50 986.50
Markdown as % of Principal 6.5% 20.2% 2.8%
Carrying Value as % of Principal 93.5% 79.8% 97.2%
What if Future Sale Markdown as % of Principal 6.5% 20.2% 2.8%
Principal 4Q14 Pro Forma 1,015.30 1,015.30 1,015.30
Future Sale Markdown – Gross (65.61) (205.26) (28.80)
Markdown 4Q14 Pro Forma (28.80) (28.80) (28.80)
Future Sale Markdown – Addition (36.81) (176.46) 0.00
Offset – Reduction in Capital (36.81) (176.46) 0.00
Average Capital 3Q14 377.40
Average Assets 3Q14 4574.57
Bancorp Tier I Average Ratio 8.2%
“Well Capitalized” Bank – FDIC Regulations 5.0%

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

Zynga: A Sleeping Dog in 4Q14

  • We forecast that Zynga’s 4Q14 bookings will be at the low end of guidance of around $183 million, based on App Annie revenue ranking trends.
  • QoQ revenue growth in casino games has been wiped out by QoQ declines from its tentpole game FarmVille 2: Country Escape.
  • While new releases Looney Tunes Dash! and New Words with Friends sported impressive download rankings, the monetization to date for both has lagged, possibly by design.
  • We rate Zynga a hold, optimistic that this sleeping dog will awake eventually with vigor that lasts long enough to reward patient investors.

Zynga (NASDAQ:ZNGA) is a San Francisco-based mobile game company named in honor of Zinga, the deceased dog of its founder and former CEO Mark Pincus. It’s logo is a red dog. Its headquarters is known as “The Dog House,” which it owns and has been its most impressive acquisition to date.

This article is an update to our June 2014 article for SA, Zynga is a Dog Without a Top 10 Mobile Hit.

During its 1Q14 conference call, CEO Don Mattrick narrowed the FY14 booking guidance to between $770M-$810M. We said that was attainable only if Zynga had a Top 10 mobile hit.

Well, that has not happened. YTD bookings by quarter have been $163M, $174M and $175M for a total $512M.

During its 3Q14 conference call, Mattrick narrowed guidance for 4Q14 bookings to between $183 and $213 million.

Based on App Annie revenue ranking charts, we forecast that Zynga’s 4Q booking will be at the low end of guidance of $183M and full-year booking will be around $695M, a full 12% below FY mid-range guidance of $790M.

Our advice is to let this sleeping dog lie.

If you own this stock, hold. If you don’t own stock, stay away until this dog wakes up as evidenced by a new release with a Top 25 revenue rank.

Don’t be fooled into buying based on recently-released Looney Tunes Dash! sporting a Top 10 download rank. Monetization matters and the rabbit doesn’t have it. The bunny isn’t money.

Mattrick gave 4Q14 bookings guidance of between $183 and $213 million based on the following expectations:

  • continued growth of casino slot games
  • special events driving growth of FarmVille 2: Country Escape
  • launch of New Words With Friends
  • launch of Looney Tunes Dash!

Below is a table of App Annie revenue rankings for games on iOS Apple Store USA, by far Zynga’s biggest market, by quarter beginning dates.

When you combine all casino slot games, we would say that slots revenue was up in 4Q, but that it was wiped out by the downtrend in Zygna’s tentpole game FarmVille 2: Country Escape.

2014 Quarter Ending Revenue Rank – iOS USA – Games
(Source: App Annie) Q1 Q2 Q3 Q4 Q4 vs Q3
Hit it Rich Slots 61 41 18 30 down
Wizard of Oz Slots - - - 38 up
Zynga Poker- Texas Hold ‘em 16 24 38 58 down
Duck Dynasty Slots - 155 207 378 down
NFL Showdown - - 365 346 none
FarmVille 2 Country Escape - 15 31 52 down

(click to enlarge)

However, the game has yet to crack the Top 50 in revenue rank.

(click to enlarge)

Below is the download rank chart for New Words with Friends. Notice the impressive early Top 5 download ranking during the period before December 2, 2014 when the game was totally free without ads or freemium elements.

(click to enlarge)

Here is the revenue rank chart which began with a December 2, 2014 update that added freemium elements. Monetization has been poor to say the least.

(click to enlarge)

In sum, we rate Zynga a hold, optimistic that this sleeping dog will awake eventually with vigor that lasts long enough to reward patient investors.

There are a few things that might awake this dog: (1) a release from recent acquisition NaturalMotion that is a hit; (2) better monetization from casino slot games, possibly with redeemable perks at Vegas gaming establishments; (3) reconsideration by CEO of real money gaming; (4) purchase of company that makes Trivia Crack.

Kabam’s IPO Plans Are Kaput

Summary

  • Kabam is a mobile game startup with IPO aspirations and a reportedly $1 billion-plus valuation.
  • In early December, the CEO delayed IPO plans, blaming generally unfavorable conditions for a mobile game company IPO.
  • We show that the real reason for the delay was the disastrous performance of two of three new releases based on hit movie IP.
  • Kabam’s failures raise questions as to the sustainability of its headcount, its ability to produce hits based on movie IP and whether any mobile game company should do an IPO.

We are just a couple days into the New Year and already we have our first scratch – Kabam – from lists of technology companies most likely to do a 2015 IPO.

Kabam is a San Francisco-based mobile gaming company that had a track record of licensing movie IP (intellectual property) and producing top 25 revenue-ranking mobile games. But two new, highly-anticipated games based on The Hunger Games and The Lord of the Rings movie IP have had disastrous releases as evidenced by sub-200 App Annie revenue rankings.

As a result, Kabam’s plans for an IPO are kaput for now.

Kabam CEO Kevin Chou confirmed this day in a December 10, 2014 interview with the NYT. But, he blamed the delay on a generally poor environment for mobile game company IPOs created by the Zynga (NASDAQ:ZNGA) and King (NYSE:KING) post-IPO debacles.

In this article, we present App Annie revenue ranking charts of recent releases from Kabam showing terrible gamer response to two of its three most recent releases. In our opinion, this is the real reason for Kabam’s IPO postponement.

We wish to state at the outset that our definition of “plans to do an IPO” aredirect quotes from CEO Chou stating Kabam has plans to do an IPO. This is in contrast to a strict definition — filing an S-1, which Kabam has never done, as has been point out to us by the company.

We feel that of SA followers, and the investing world in general, are comfortable with the first definition and not the second. There are plenty of articles on SA talking about companies with “plans for an IPO” where a S-1 has never been filed. Uber and Airbnb are the most prominent.

If you are uncomfortable with our definition, please read no further.

So first, we want to present URLs where there is a direct quote from CEO Chou of IPO plans.

We start with a Bloomberg video interview way back in October 15 2013. Pay attention to segment 2:11 – 2:45

Interviewer: Are you thinking about an IPO”

Kevin Chou: “We are.”

Next a Wall Street Journal interview on February 17, 2014

“WSJ: You have said previously that you are considering an initial public offering. Any updates?

Chou: We had another very serious discussion about an IPO in our board meeting in January. Our revenue is growing rapidly and we have been profitable since 2012. We have over $70 million of cash in our bank account. We are at the scale, where we can actively consider an IPO. But we also want to do it when the time is right, and we don’t have a definitive timeframe yet.”

Finally, a Newslook video interview given around the time of the Alibaba investment in August 2014. Pay attention to segment 3:30-3:53

Chou: ” You know it could be as early as 2015″

In early 2014 interviews, CEO Chou was justified in saying that the an plans for a Kabam IPO would be unwise due to Zynga and King’s performance.

But even then, part of the blame was attributable to a 2014 revenue fade of its most successful game The Hobbit: Kingdom of Middle-earth, based on an IP license from Warner Bros. (a division of Time Warner (NYSE:TWX)).

Below is an App Annie revenue ranking chart of The Hobbit game, showing the game’s Top 10 revenue ranking in 2013 and the fade throughout 2014 to a Top 30 position today.

(click to enlarge)

The relation between revenue dollars and revenue rank is a severe power function. We have estimated that a #10 ranking game is associated with an annualized revenue run rate of around $250M worldwide where as #25 rank is associated with an annualized run rate of around $90M worldwide.

The power function ratchets up at #5. We estimate that the top 5 revenue ranking games worldwide today have an annualized run rate of between $800M and $1,500M – Clash of Clans (Supercell), Candy Crush Saga, Puzzles and Dragons (GungHo Online), Game of War-Fire Age (Machine Zone), andMonster Strike (Mixi).

In mid-2014, Kabam announced a series of IP licensing deals with Warner Bros., Lions Gate (NYSE:LGF) and Disney’s (NYSE:DIS) Marvel Division.

The company reportedly built up its headcount to 850 employees worldwide with 400 in San Francisco, 350 developers in its Beijing studio headed by co-founder Mike Li, and 85 developers in its Vancouver studio.

It accepted a $120M strategic investment from Alibaba that reportedly valued the company at more than $1B. This was on top of $125M in venture capital money raised previously from the likes of Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Ventures, Intel (NASDAQ:INTC) Capital, Warner Bros., MGM and a number of other venture capital companies.

The company even purchased for $18M, spread out over 15 years, for the rights to place “KABAM” on the football field of The University of California at Berkeley, the CEO’s alma mater. (A startup kiss of death?).

In May 2014, Kabam announced a deal with Lions Gate to make a game based on The Hunger Games movie franchise starring Jennifer Lawrence.

This game would be developed by its 300-person Beijing studio, headed by co-founder Michael Li. It was this studio that developed Kingdom of Camelot, Kabam’s first big hit, released in March 2012.

The Hunger Games game was released on November 5, 2014 and the results have been disastrous despite the fact that the movie has been a hit.

(click to enlarge)

In June 2014, Kabam announced a licensing deal with Warner Bros. to make another game based on The Lord of the Rings IP.

This game was released on October 15, 2014 and again the results have been disastrous despite the fact that movie has been a huge hit:

(click to enlarge)

Finally, In July 2014, Kabam announced that its Vancouver studio was at work on a game based on licensed IP from Disney’s Marvel Entertainment Division. On December 10, 2014, the Marvel-based game was released.

Only the Marvel game has performed decently with a current App Annie revenue rank of #33:

(click to enlarge)

Kabam still might recover in 2015 with scheduled releases of another Marvel-based game and a game based on Mad Max IP licensed from Warner Bros.

But, Kabam’s recent failures raise several questions for us pertaining to Kabam specifically and to the mobile game industry generally:

  1. Can Kabam afford to maintain its 850 headcount, especially the 300 headcount at its Beijing studio responsible for the poorly-received The Hunger Games game?
  2. Are the recent the poor results the specific fault of Kabam or the fact that basing games on hit movie IP is no longer a valid strategy?
  3. Given the dual difficulty of producing and sustaining a Top 10 revenue-ranking mobile game, might there be a better alternative for financing and providing investor liquidity than IPOs?

FinTech Acquisition “Blank Check” IPO: Buzzy Name, Fuzzy Aim

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Summary
  • There is circumstantial evidence that the aim of this FinTech “blank check” IPO is to acquire a company in the fast-growing prepaid gift and rewards card market.
  • But, this market has just entered a “post-plastic” and “post-internet” end-to-end mobile app world where it is highly uncertain who will succeed or fail.
  • Most blank check IPOs are aimed at turnarounds or spin-offs in static industries. This IPO is not.
  • We recommend waiting until an acquisition is announced before deciding to invest.

FinTech Acquisition Corp. (pending: FNTCU) is a special purpose acquisition company (SPAC) a/k/a/ a “blank check company” formed for the purpose of acquiring an established financial technology (“FinTech”) company.

On December 12, 2014, FinTech filed an S-1 prospectus with the SEC announcing a forthcoming listing on NASDAQ under the symbol FNTCU of 10M units at $10/share with each unit consisting of one share of common stock and one warrant. Cantor Fitzgerald is the sole bookrunner.

We speculate that the aim of the CEO of this blank check company, Daniel G. Cohen, is to preempt disruption of a Philadelphia bank called The Bancorp (NASDAQ:TBBK). Daniel G. Cohen has been Chairman of the Board of The Bancorp since it was founded by his mother in 2000, the legendary Betsy Z. Cohen.

The Bancorp is the largest bank processor of branded gift and rewards cards in the country. This business is less secure now than ever as we have entered a “post-plastic” era of gift card origination and distribution where the choice of processing bank is being reexamined.

According to a Bankrate.com report, the $130 Billion gift card market is undergoing a rapid conversion from plastic to digital cards with “Fifty-nine percent of gift cards are now offered electronically, up 18 percent from 2010.” And within digital, there is rapid shift from internet origination with email gifting and manual use to a pure end-to-end mobile phone app experience.

The digital origination of prepaid gift cards is a stampede now with Crunchbaselisting 478 mobile payment startups at this time.

The distribution side is rapidly being consolidated by the dominant plastic distributors Blackhawk Network (NASDAQ:HAWK) and privately-held InComm. Amazon.com (NASDAQ:AMZN), PayPal (NASDAQ:EBAY) and Stripe are lurking. Major brands like Target (NYSE:TGT) and Nordstrom (NYSE:JWN) are bypassing the whole supply chain by buying their own processing banks.

There are many targets for Daniel G. Cohen and FinTech Acquisition in this “post-plastic” card era. But where to aim?

We recommend waiting until this blank check IPO is filled in (note:it cannot be cashed without 75% approval of stockholders) before making any investment decision here.

Blank check IPOs are fairly rare occurrences. Generally, they are formed by former CEOs who want to exploit a turnaround or spin-off opportunity in a static industry, but don’t have access to private equity and/or want an outsized stake in the acquisition.

Because the prospectus of blank check IPOs are vague for legal reasons, investor interest usually revolves around assessing the strength of management.

However, our interest in this IPO was peaked first by the buzzy choice of “FinTech” for its name.

We said to ourselves, “What chutzpadik to issue a blank check IPO prospectus named FinTech during the very week when two FinTech IPOs had sizzling first days. For G_d’s sake, the norm for these kinds of IPOs are innocuous names like Avenue, Boulevard, or Silver Eagle.”

Who is this guy and what is his aim for this buzzy IPO?

We knew that there were two sets of FinTech companies. One is represented by a yearly list compiled by the American Banker of Top 100 FinTech companies. These are stodgy, old-line companies focused on traditional financial institutions.

The FinTech companies that peak our interest are the new, buzzy, ones. You can find lists of these companies on sites such as Quora and Crunchbase.

These companies have brash mission statements about disrupting traditional banks and brokerage houses, even established newish FinTech companies like PayPal and Fair Isaac (NYSE:FICO). This is world of p2p, Big Data, AI, predictive analytics, algorithms and two-factor authentication.

In our opinion, the aim of this IPO is to acquire buzzy FinTech.

This is despite the fact that the acquiring CEO is a Philadelphia financier named Daniel G. Cohen, who serves as Chairman of the Board of The Bancorp, that we took at first to be a stodgy, regional bank.

The admittedly circumstantial evidence relating to the aim of this IPO are as follows:

First, the S-1 mission statement: (bold is ours)

We currently intend to concentrate our efforts in identifying businesses which provide disruptive technological innovation to the financial services industry …

This has to a first – a blank check IPO with a mission statement containing the word “disruptive.” This is not the kind of mission statement crafted by the Chair of a stodgy, regional bank.

It turns out that The Bancorp is not a stodgy, regional bank with brick-and-mortar branches, but one of the largest “branchless” banks specializing in private-label credit cards, reloadable cards and branded prepaid gifts and rewards cards.

According to a 2013 Nilson Report, The Bancorp is the nation’s largest prepaid card issuer with $30 Billion in volume. According to a Forbes article, the overall prepaid card (reloadable and gift) market hit $200 Billion in 2012, with the gift card segment alone accounting for over half of that.

Furthermore, Daniel G. Cohen does have experience in the new world of digital, mobile-centric payments. The Bancorp was an integral piece of the ill-fated Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Wallet 2.0 of the mid-2000s, servicing as “Google Wallet Virtual Card” that linked to real customer cards on servers.

But, lately Cohen chairs a bank with serious accounting, regulatory and competitive issues.

First, there was a April 2014 surprise announcement of under-reserving for commercial loan losses due to adverse loans. Then there was a June 2014 announcement that the FDIC found the bank practices in violation of the Bank Secrecy Act – namely that reloadable prepaid cards issued by The Bancorp were being used for extensive money laundering.

The FDIC issued a consent decree prohibiting the bank from entering new contracts for reloadable, prepaid cards. However, The Bancorp still could issue new non-reloadable gift and rewards cards.

Needless to say, the banks financials have taken a dive since April 2014 and its common stock is 50% off its yearly high. There are a number of class action suits pending.

But, in our opinion, the bank’s problems going forward are competitive. We have entered an “post-plastic” era of prepaid cards with new originators and more powerful distributors who are reexamining the choice of processing bank for their offerings.

For example, the two dominant distributors of plastic prepaid gift cards are Blackhawk Network and privately-held InComm. They both have been on a tear lately buying up digital originators of prepaid cards.

Blackhawk Network has bought Cardpool, CardLab, and Intelispend. Incomm has bought Giftango and Adility. So far, these distributors are retaining the bank processors of their acquisitions – a mix of The Bancorp, Metabank (NASDAQ:CASH) and Sunrise Bank.

There is also a trend of the very largest prepaid card brands – Target, Nordstrom and Walmart (NYSE:WMT) – buying their own small “branchless banks” to process their offerings?

What is Daniel G. Cohen and FinTech Acquisition going to do?

It could try to become the #3 distributor behind Blackhawk Network and InComm by first buying any remaining plastic distribution business that a large regional grocery wants to spin off similar to what Safeway (NYSE:SWY) did with its Blackhawk Network operation.

Or, it could skip distribution and focus on origination by buying a decent revenue-producing startup like CashStar that wants to go public sooner than later.

Either move might drive away current customers of The Bancorp. Saving The Bancorp from disruption might just kill it.

But, the margins are better for digital originating and distributing than bank processing. Recent Safeway spin-off and IPO Blackhawk Network now has a valuation 5 times that of The Bancorp – $1.97 billion versus $.38 billion. Becoming the #3 digital prepaid card distributor at the cost of killing The Bancorp may be the way to go. Or not.

Again, what to acquire during this wild early stage of “post-plastic” prepaid cards is highly uncertain. We recommend staying away from this blank check IPO until an acquisition is announced.