Founded in 1999, California-based Green Dot Corporation
has become one of the leading providers of prepaid Discover,
MasterCard and Visa debit cards in the US. Now it has ambitious
plans to raise fresh capital with the aim of becoming a
full-service retail banking operation. Charles Davis
reports.
Go deeper with GlobalData
Having established itself as the
dominant player in the US prepaid cards market, Green Dot
Corporation’s latest moves signal much larger ambitions. It plans
to go public via an initial public offering (IPO) to fund the
purchase of a depository institution, to catapult the prepaid card
provider into the ranks of full-service retail banking
companies.
The first step in Green Dot’s plans
was made formal recently when the company announced plans to buy
Bonneville Bancorp of Provo, Utah, and its sole subsidiary – the
$34.1m-asset, single-branch Bonneville Bank – for $15.65m.
The immediate benefit of the deal
is freeing Green Dot from dependence on the bank partners that
issue the Monrovia, California-based company’s prepaid cards,
keeping a greater slice of the revenue in-house and adding a whole
new business line. Last month Green Dot announced its plan to raise
$150m through an IPO.
Green Dot currently issues its
reloadable debit cards primarily through Columbus Bank and Trust
Co, and GE Money Bank, a subsidiary of General Electric.
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By GlobalDataHowever, with the bank acquisition,
Green Dot said in its IPO prospectus that it could reduce its card
issuance costs as well as “increase the efficiency with which we
introduce and manage potential new products and services.”
The long-term play could be even
more powerful, as Bonneville’s charter positions Green Dot to usher
prepaid customers to mainstream bank accounts and even revolving
credit products, should it opt to move in that direction.
Heavyweight
status
Green Dot is a massive presence in
the US prepaid market. Founded in 1999, it has become the dominant
prepaid card marketer in the country thanks to its massive retail
distribution network.
In nearly any US grocery chain, a
shopper is greeted by a wall of prepaid Green Dot products, with
gift cards ranging from retailers to online merchants and
cataloguers. Its cards are sold at about 50,000 US retail
locations, including Wal-Mart, 7-Eleven, Walgreen and Radio Shack
stores.
Green Dot generated operating
revenue of $234.8m in fiscal 2009, a 40% increase from a year
earlier according to its Security and Exchange Commission (SEC)
filing. The company generated $234.8m in revenue and a $37.1m
profit, an 11-year high, for its fiscal year ended 31 July.
As of 31 October, there were more
than 2.4m active Green Dot cards in circulation – active being
defined as one used to make a purchase, reload or make an automated
teller machine transaction in the last 90 days.
Long-term
plans
Green Dot is not saying whether it
harbours long-term plans such as offering mainstream bank accounts
and revolving credit products – it is under an SEC-imposed quiet
period pending the IPO – but the deal has reverberated through the
US cards industry.
Owning a bank will let Green Dot
dramatically cut costs by removing the need to strike partnerships
with banks to issue its prepaid cards, effectively slicing its
revenue base with each deal. Green Dot can now issue its own cards
directly. This is even more important at a time when regulations
threaten to pinch profit margins in the prepaid industry.
The other great area of expense for
prepaid companies like Green Dot lies in processing, and by funding
itself through the IPO, the company could set itself up to acquire
technology needed to bring its processing in-house – an option it
mentioned in the IPO prospectus.
Upgrading its prepaid cards to
include features such as a built-in savings account, which Green
Dot also mentioned as a possibility in its filing, would put the
company on the path to selling traditional banking products.
Green Dot’s 4 February application
with the Federal Reserve to purchase Bonneville provides some
details about how it might leverage the bank’s charter.
In the filing, Green Dot said that
if the acquisition is approved, it would test the savings-account
feature with its prepaid cardholders, starting in the fourth
quarter.
The regulatory filing offered other
clues as to Green Dot’s commitment to retail banking. The company
said it would continue to meet Bonneville’s Community Reinvestment
Act targets for generating business in low-income markets. It said
that its prepaid products, which target underbanked consumers,
could help fulfil that mission by increasing access to the
market.
In its registration with the SEC to
offer stock through an initial public offering, Green Dot said that
buying Bonneville would “increase the efficiency” of rolling out
new products, cut the sponsorship and service fees it pays to its
third parties and reduce its exposure to potentially negative
changes that could be imposed by its issuing partners.
Converting prepaid cardholders to
other forms of payment also would help solve one of the industry’s
biggest problems: retention. Consumers often spend all the money on
a card, toss it and buy another one, possibly from a different
vendor. The company wants to find ways to get people to keep and
reuse their cards.
Wider moves in the
marketplace
In the meantime, Green Dot’s
competitors are not standing still. In January, NetSpend, Green
Dot’s chief rival, bought a 4.9% stake in one of its issuers,
MetaBank, a subsidiary of the Sioux Falls, South Dakota bank
holding company Meta Financial Group Inc.
Should Green Dot reach its stated
goal of generating $150m in the IPO, it will be ideally situated to
acquire a processing platform or a prepaid competitor, or both.
The moves come as the prepaid
industry in the US has reached new heights in terms of both market
penetration and in the number of players issuing cards.
It is a market that emerged with a handful of pioneers – Green
Dot and NetSpend among them – but now has fragmented as hundreds of
smaller prepaid programmes have launched card products in the past
few years. A well-capitalised, publicly-traded Green Dot with a
fully functional retail banking franchise could reshape that
market.
