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January 28
Green Dot Corp. and banks probably could use each other's help more than ever.
Banks are increasingly considering prepaid cards to regain revenue they stand to lose from pending debit card rules. Green Dot, which markets prepaid cards, is trying to deepen its relationship with end-users at a time when analysts are critical of the growth in its direct-to-consumer business.
So it makes sense that a handful of banks have approached the Monrovia, Calif., company about starting programs to offer their customers prepaid cards.
While he declined to name them, Steve Streit, Green Dot's chairman, president and chief executive, said that potential deals could involve the banks marketing prepaid cards under their own brand name and using Green Dot for program management functions, such as call center services and account processing.
"It makes sense for some of them to outsource that so they can get efficiency and scale," Streit said in an interview Thursday after Green Dot reported fourth-quarter results. He said that discussions are in various stages and he does not have estimates for how big any of the programs would be.
Green Dot, meanwhile, is under pressure to demonstrate it can sustain growth.
On Friday, Thomas McCrohan, an analyst who follows Green Dot for Janney Montgomery Scott LLC, downgraded Green Dot's shares to "sell" from "neutral" over fear that some accounts could become unprofitable because of competitive pressure on the monthly maintenance fees it charges.
Green Dot said in its fourth-quarter report Thursday that the number of prepaid cards consumers activated in the quarter rose just 10% from a year earlier. In the third quarter, activations climbed 37%.
Green Dot said the activations tell only part of the story — its long-term customers, who reuse its cards rather than activate new ones, provide about 85% of its revenue even though they make up just half of its accounts.
The number of Green Dot customers using direct deposit rose 50% in the fourth quarter from a year earlier. In addition, the number of people who reloaded funds onto their cards for the first time rose 24% and purchase transactions per active card increased 16%.
Offering the cards, which would be exempt from the Federal Reserve Board's proposed caps on debit interchange, could help banks retain fee income and hold on to customers upset over new checking account fees, analysts said.
"To me it's logical for them to look for a product that could earn higher interchange than a traditional debit card and is usually serviced on a much lower-cost platform than a traditional checking account," said Bryan Derman, a partner at the payments consulting firm Glenbrook Partners in Menlo Park, Calif.
For banks, having a prepaid card option could help offset customer blowback stemming from rising account fees, Derman said, adding that large financial institutions especially could offer the cards as an alternative to a traditional checking account.
"They would want to have this at least as a fallback rather than let them walk out the door and take their business to a community bank, to a credit union or to Green Dot directly for that matter," Derman said. "These are customers you liked yesterday. The challenge is how do I continue to serve them tomorrow in a way that still works for them and still makes money for me."
Some large banks, including Bank of America Corp. and JPMorgan Chase & Co., have introduced new checking account fees and raised balance requirements and other thresholds customers must meet to have such fees waived.
Banks stand to lose $9 billion to $13 billion in revenue from the Fed's proposed caps on fees they earn from debit card transactions, according to various estimates. In December, the Fed proposed limiting the fees to 12 cents per transaction, down from an average of 44 cents, under a provision in the Dodd-Frank Act.
If the proposed rules are enacted in their current form, "that could open up opportunities for Green Dot to work with banks to target the lower-end bank customer," said Bob Napoli, a managing director at Piper Jaffray & Co. who follows Green Dot.
However, McCrohan said banks also face potential regulatory risk in the prepaid space. The new Consumer Financial Protection Bureau could look at the products, most of which carry a slew of activation and transaction fees.
