After trying for two years,
prepaid giant Green Dot has snapped up a retail bank. Its
acquisition of Utah-headquartered community lender Bonneville
Bancorp – to be rebranded as Green Dot Bank – has been approved by
the Federal Reserve Board. But, as Charles Davis reports, the deal
has conditions attached.
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The deal is
unprecedented: by a 4-1 margin, the Fed has for the first time
allowed a marketer of prepaid cards to acquire a bank. Green Dot’s
purchase of £37m ($58m) asset-strong Bonneville Bank does, however,
come with conditions. Not least of these is a pledge to maintain a
Tier 1 ratio of 15% in its bank for five years.
Green Dot must also withhold
dividends for three years, and ensure the bank’s primary source of
deposits come from funds from cards purchased by consumers.
Los Angeles-based Green Dot has
built a prepaid card juggernaut by marketing a wide array of
prepaid cards at some 55,000 retail stores, including Wal-Mart,
Walgreens, 7-Eleven, Kmart and Radio Shack.
The Bonneville deal marks a long
effort by Green Dot to free it from dependence on the bank partners
that issue its cards. The company’s Visa- and MasterCard-branded
cards are currently issued by Synovus Bank.
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By GlobalData“This acquisition will give us the
flexibility to better control our own destiny, by allowing us to
create products that best suit the needs of our current and future
customers,” says Green Dot CEO Steve Streit.
“This allows us to become a bank
truly dedicated to serving the needs of the large and growing
population of consumers who are looking for a better way to
bank.”
The majority order noted a 15%
ratio is “well in excess” of sufficient capital levels and found
that Green Dot has hired managers with much experience in banking
and cards.
The lone dissenter, Fed Governor
Elizabeth Duke, says the deal remains too risky despite the
safeguards built into the order.
“I have concerns about business
plans that focus narrowly on one or a few products. The prepaid
debit card industry is subject to risks.
“These include the possibility that
the technology currently employed by industry could become
obsolete; that consumers’ demand for prepaid debit cards could
decline’ that potential legislative or regulatory changes could
reduce the profitability of issuing prepaid debit cards; and
competition in the prepaid debit card industry may increase,” says
Duke.
Duke’s dissent noted Green Dot
“relies on a retail partner for a majority of its revenues” and
would be hurt if that relationship ended.
Retail partner Wal-Mart Stores is a
Green Dot shareholder and relies on it to operate its prepaid card
programme, so it is unlikely the bank purchase will effect the
relationship.
The green Dot
success is ironic given Wal-Mart’s own repeated attempts to land a
bank charter, an effort the retailer ultimately ditched after
high-profile opposition from bankers.
Green Dot announced that, together
with GE Capital, it has expanded the Wal-Mart MoneyCard prepaid
card product line sold at Wal-Mart locations nationwide and online.
The new products will be part of a rebrand of the full product
line, which is scheduled to roll out nationwide during the fourth
quarter.
The Wal-Mart MoneyCard programme
has added three new Green Dot products to its offerings, including
a Visa Gold MoneyCard, a MasterCard Family Edition MoneyCard and a
MasterCard Bill Pay MoneyCard.
Green Dot can use the bank to
better control pricing relationships and is well positioned to
capitalise on the fallout from debit card fees being instituted by
many of US’s largest banks in the wake of the federal interchange
rules.
Banks have been raising prices
related to their current accounts as a result of the rules, saying
that they need to offset the projected loss of more than $5bn of
annual revenue.
Green Dot’s prepaid cards are
largely exempt from the new regulations, and its focus on
underbanked consumers makes it an attractive alternative. Customers
can load money onto the prepaid cards, that are not linked to a
traditional current account, and use them like regular debit
cards.
The company said in its
third-quarter earnings report that new card activations and
increased usage by customers led it to a 30% Y-oY increase in
operating revenue, to $115m. Net income grew 48% Y-o-Y to
$13.3m.
The company said that customers
activated 1.96m of its general-purpose reloadable cards in the
third quarter, an increase of 33%, or 490,000, over the previous
year. Now Green Dot can control its own issuance agreements. In its
application to the Fed, Green Dot outlined the benefits of a bank
charter.
By issuing its own cards, Green Dot
will generate additional interchange and fee revenue and will
eliminate the risk of issuing bank partners changing business
practices or suffering losses that could impact card issuance.
By controlling the issuance, Green Dot can quickly adopt new
product features, respond to market changes, and may consolidate
parts of the fragmented prepaid card industry.
