Green Dot Bets Big on Creditworthiness of Prepaid Users

The prepaid card market is cutthroat and competitive — just ask Kim Kardashian — and sometimes requires drastic moves to push a business forward.

The traditional audience for prepaid cards is the underbanked or unbanked, many of whom are excluded from the mainstream financial services system due to their lacking credit histories. Green Dot is nevertheless pursuing this audience with a Platinum Visa secured credit card that requires an upfront cash deposit and carries a raft of fees.

Green Dot said it's targeting an estimated 108 million U.S. consumers with very low or no credit scores, enabling these customers to begin to build a credit history.

The timing of the move could be crucial for Green Dot. While the Pasadena,Calif.-based company in recent quarters has insisted its prepaid cards are still driving growth, experts say the writing has been on the wall for some time that Green Dot needs new revenue sources, and targeting subprime consumers is the likely next chapter.

A big overhang for the prepaid card industry is a set of final regulations due any day from the Consumer Financial Protection Bureau, which observers say could further crimp profits in an industry that's been facing downward pressure and consolidation for the last several years.

The move to issue a credit card suggests a deeper strategic play that began with Green Dot's 2011 purchase of a Provo, Utah-based bank. Though Green Dot Bank has subsequently buttressed the company's flagship Green Dot prepaid card brand, until now it hasn't been a major driver of revenue on its own.

Green Dot dropped a major clue last month when it boosted its board member Mary J. Dent to chief executive of its bank, reporting to Green Dot Corp. CEO Steve Streit. Dent previously held senior roles at Silicon Valley Bank and Insikt, a lender to low-income consumers.

"Going into secured credit cards provides a nice hedge against the upcoming regulatory focus on prepaid cards, and it creates a path for the credit-challenged to progress into the world of credit from prepaid," said Brian Riley, a senior analyst with Mercator Advisory Group.

But Green Dot is taking a measured approach here and isn't getting out of prepaid cards, noted Patricia Hewitt, CEO of PG Research & Advisory Services in Savannah, Ga. Green Dot likely is well prepared for the new rules, which were proposed nearly four years ago, she said.

"Prepaid card income streams have declined with market competition and it's likely there will be some market compression (with the new regulations), but I'd say Green Dot's move has less to do with prepaid cards and more to do with leveraging its bank," Hewitt said.

And Green Dot clearly plans to go beyond merely issuing secured credit cards, which have limited utility. Though the market Green Dot targets would be risky for a mainstream bank, Green Dot plans to rely on its prepaid card infrastructure to transition customers to credit.

"Green Dot is in the process of developing a graduation process for customers using a secured card," said Richard Kang, the company's senior vice president and general manager, declining to give a timeline for expanding into issuing mainstream credit cards.

"Migrating customers from a secured credit card to regular credit card is a well-established practice, and one that was a lot more common before the economic downturn in 2008," said Robert Hammer, CEO of RK Hammer, a credit card consultancy.

Discover Financial Services recently introduced a secured credit card, and most major credit card issuers have offered secured credit cards at various times, Hammer said.

One area where Green Dot has an advantage over rivals in the subprime credit arena is its existing large cash-reload retail network for prepaid cards, which Kang said enables the company to extend credit cards to consumers with no bank accounts.

"Unlike other secured card issuers, we don't require consumers to have a bank account and we can support that feature through our cash reload network," Kang said, noting that Walmart, Walgreens, CVS, 7-Eleven and Rite Aid are among the retailers that will accept Green Dot credit card deposits and monthly payments in cash (for a fee).

Participating retailers may set their own fees up to $4.95 for each payment or deposit, Kang said. Walmart, for example, has set its fee for the Green Dot Platinum Visa at $3.74.

The Green Dot Platinum Visa is available to consumers online, and those who are approved may fund the account with a minimum of $200 for a maximum initial credit line of $1,000, the company said. The card, which has no rewards, has an annual fee of $39 and a 19.99% APR.

Customers set their initial credit limit with the first deposit, by mailing a check to Green Dot at no cost or making a one-time cash deposit at a participating major retailer for a fee. Customers may make monthly payments on their account via check or ACH, Kang said.

Consumers also can get cash advances against up to 50% of their total credit line for a fee, Green Dot said.

"This is an important step for Green Dot because it leverages all the strengths of the overall company, using the bank plus our retail load network, and it's a very natural product direction for our existing and past customers," Kang said.