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Seeing the Light on Green Dot

Adam Rust's picture

Posted July 27, 2010

I have seen the light, and it is shining on Green Dot.

In a number of posts, I wrote that Green Dot's claim to the contrary notwithstanding, that there was no real verifiability to the promise that they would not attach credit products to their cards. Green Dot has a presentation that it is circulating on their business plan, and it even states that there is no intention in the "initial plan" to offer credit.

I was suspicious.  The words "initial plan" seemed tentative, at best. They didn't do much to allay my fears about the makeup of their board, which does include two members with ties to payday lending.

But I've changed my mind. Yesterday, I was able to talk with Green Dot's Steven Streit and Lewis Goodwin on a video

conference line.  I came into the meeting with a concern about unsecured consumer loans and lines of credit, along with some need to clarify how Green Dot's deposit accounts are insured right now, and how they would be in the event that they are transferred to a Green Dot/Bonneville Bancorp entity.

Green Dot is waiting on the Federal Reserve to approve its application to purchase Bonneville Bancorp. The deal has been very well publicized, because Wal-Mart owns Class A shares in Green Dot.

Streit convinced me that he doesn't want any credit on those cards. His argument made sense. His consumer base is chronically short of cash. Payday lenders claim that they answer a need for emergencies. Streit said that he had surveyed his customers. They did have emergencies - two or three times per week. Perhaps they might be better off with a quick $100 loan, but more likely than not, they'll not have the additional income in the near future to satisfy that debt. That means they'll fall into a debt spiral. Their future paychecks would then be spoken for, and then he would have one less customer.

His claim to us, and perhaps his concession to the investors on his road show tour, was that he was saying "no" to high-margin, high-profit loans.

On the deposit accounts, he made sense, too. Green Dot has been complying with Regulation E by allocating deposits into "name" accounts, rather than creating one common account. If the Bonneville Bancorp is approved, then those accounts will have FDIC protection, too.

Even more, I understand why there is nothing to fear about their alliance with Wal-Mart. Someone needs to engage Wal-Mart. Wal-Mart wants to do something. Wal-Mart's financial services President, Jane Thompson, has claimed that reaching out to the unbanked "plays to our DNA," and it is hard to doubt that assertion. Green Dot is already in those stores. Knowing that credit won't be on those cards, I feel much better about this than if a MetaBank/NetSpend product was on the shelves of the world's largest retailer.

Let's recognize the wisdom of the Wal-Mart strategy. Some people said that Green Dot would take a hit because the terms of their agreement with Wal-Mart raised the give back that Green Dot provides to Wal-Mart threefold. The cost is that he gives up margin. The gain is that he locks in volume. Renewing his Wal-Mart agreement made a difference to investors, who would have felt dubious about a firm with only one year remaining on an agreement with a partner that constitutes 63 percent of its business. Now, Streit is locked in for the next few years. He's also wise to make Wal-Mart a shareholder (Wal-Mart did not buy the Class A shares), because it means that they'll not want to crush Green Dot.

Now that I can believe the claims, it makes me all the more clear about the distinction between a product like that of Green Dot, and the cards offered through NetSpend. These Green Dot cards are simpler, lower cost, and more sustainable. They're not just better than what NetSpend has to offer. They're also better than what the banks are offering. Today, Wells Fargo just sent out a note that they are going to charge $6.95, just for bill pay, on some of their accounts. To a consumer that can save only $78 per year (average savings of a Green Dot cardholder), that is a price that shuts them out of their bank. Bill pay is free with Green Dot.

Steve Streit is managing to walk a line that balances his own interests with the needs of so many unbanked households. Streit is not running a charity. Green Dot is making money on its customers. In their S-1, they reported more than $43 million in cash at the end of October 2009. The key is that they can make money not on at the expense of their customers, but through a model where revenue grows hand-in-hand with the utility that consumers derive from the product.  While Green Dot does derive income ($119 million in FY09) from card fees, its best customers avoid many of those costs and instead deliver profits to Green Dot through the interchange fees generated by their transactions.  Interchange fees are a growing portion of their overall revenue. They constituted just under 15 percent of operating revenues in FY07, but more than 27 percent for the period between August and October of 2009.

Right now, they have to give up some of that trade because their cards are issued through an outside bank. With the Bonneville acquisition, they'll get far more of the interchange. They won't get it all - Visa and Mastercard still take their share - but they will get much more.

The principle of this system, albeit it relatively low margin, is to build on common interests. If a consumer makes one transaction per day, Green Dot gives up its monthly fee. That means less "card revenue." However, it means more "interchange fee" revenue, because each one of those transactions delivers a small  revenue gain for Green Dot. Win for customer, win for Green Dot. Couple that with no unsecured credit, and you have a winner.