Green Dot Corp. made banking history Wednesday after nearly two years of trying.
The Federal Reserve Board approved the Monrovia, Calif., company's application to purchase Bonneville Bancorp in Provo, Utah. The vote was 4-1 in favor; it was the first time the central bank has allowed a prepaid card marketer to buy a bank.
To address concerns raised by the unprecedented deal, Green Dot promised that its banking unit would maintain a Tier 1 leverage ratio of 15% for five years and withhold dividends for three years. The banking unit's primary source of deposits would be funds from cards purchased by consumers, and Green Dot would balance them with equal levels of cash.
Green Dot markets and sells prepaid cards that people can buy at supermarkets, drug stores and other retailers. Prepaid cards can be used like traditional debit cards, but do not require consumers to have checking accounts. The company wanted its own bank to end its dependence on the bank partners that issue its prepaid cards.
Fed Gov. Elizabeth A. Duke dissented on grounds that the deal is too risky despite the safeguards required by the order.
"I have concerns about business plans that focus narrowly on one or a few products," she wrote in her dissent. "The prepaid debit card industry is subject to various risks, including the possibility that the technology currently employed by industry participants could become obsolete, that consumers' demand for prepaid debit cards … could decline, that potential legislative or regulatory changes could reduce or eliminate the profitability of issuing prepaid debit cards, and that competition in the prepaid debit card industry may increase."
Green Dot's dominant partner is Wal-Mart Stores Inc., which is also a shareholder and relies on Green Dot to help run its own prepaid cards. Duke's dissent did not name Wal-Mart, but raised concerns that Green Dot "relies on a single retail partner for a large majority of its revenues" and would be hurt if that relationship ended.
Green Dot has said that Wal-Mart would not play a role in operating Bonneville should the deal get approved. The retailer tried several times over to get its own banking charter, but eventually abandoned that effort in the face of fierce resistance from bankers and regulators.
The 11-page order, issued Wednesday, appeared to nod to Duke's concerns. "A business plan that focuses on a narrow business activity and depends on a limited number of key business partners carries significantly greater risks than a business plan that employs broad diversification of activities and counterparties," the order says.
However, a 15% leverage ratio is "well in excess" of what regulators deem well capitalized, the dividend and funding measures are prudent and Green Dot has hired managers with "significant experience" in banking and cards, the order says.
Green Dot chief executive Steve Streit said in an emailed statement, "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 customers."
Prepaid cards are largely marketed to low-income and immigrant consumers, who do not have or do not regularly use banking accounts. They have largely been the domain of nonbank financial institutions, including Green Dot and Wal-Mart. But in the wake of the financial crisis and regulations affecting the revenue banks earn from checking accounts, some traditional financial institutions are increasingly trying to offer prepaid cards to some of their customers.
Green Dot's Visa Inc. and MasterCard Inc.-branded cards are currently issued by Synovus Bank.
Green Dot charges $5.95 a month for its cards, though users can waive the fee based on their deposit and spending behavior.
Green Dot originally applied to purchase Bonneville in February 2010. The deal may not be completed for 15 days, the order says.
Green Dot announced late Wednesday that affiliates of Sequoia Capital, as part of an agreement with the Fed, would take steps to reduce their voting power in Green Dot. The Sequoia affiliates will exchange Class B common shares for newly created Series A preferred shares, swapping 1,000 shares of Class B for each of the new shares. The move will reduce their aggregate voting power to 10% of Green Dot's outstanding capital stock, from 51%. More details will be supplied in an upcoming 8-K filing with the Securities and Exchange Commission, Green Dot says.