Two weeks before Christmas, green Dot, the prepaid card company, closed on its acquisition of the $36 million-asset Bonneville Bancorp in Provo, Utah.
The regulatory nod that allowed the deal to go forward marked the first time the Federal Reserve Board has allowed a prepaid card company to buy a bank. It also marked a culmination of Green Dot founder Steve Streit's rocky, years-long effort to move from the profitable fringes of banking into the mainstream.
"My first reaction was the shock of it. I was quite emotional about it," says Streit, the former radio disc jockey who shepherded Green Dot from its startup days. Along the way, he forged a crucial partnership with Wal-Mart, took his firm public and, finally, won the company an opportunity to run its own bank.
Green Dot is headquartered in Monrovia, Calif., a quaint town 20 miles outside of Los Angeles and adjacent to Pasadena, where Streit moved two decades ago when he was working for a local radio station. The former program director at radio station KBIG-FM 104.3 in Los Angeles is still "an amazing talker," says D.A. Davidson analyst John Kraft.
And what Streit mainly talks about these days is the credibility he believes Green Dot has earned for itself and its 4.2 million active cardholders. "Our customers are mainstream America. Firefighters and police officers, teachers, administrative assistants," he says. "These are folks who maybe would like to use a bank but they can't, for different reasons."
Green Dot typically charges $5 for a card and a $5.95 monthly fee that is waived if the consumer loads $1,000 or makes 30 purchases a month. There is no fee to reload the card via direct deposit, but it can cost up to $4.95 to do so at a retailer. Out-of-network ATM withdrawals cost $2.50.
In granting a bank charter to Green Dot, the Fed has bestowed respectability on a form of financial services that many have regarded as only one rung up from check-cashers and pawn shops. It is part of an effort, some analysts say, to bring financial services for some 60 million underbanked Americans-the poor, the young or immigrants who do not regularly use traditional bank accounts-under the umbrella of banking regulators.
Many consumer advocates are urging the new Consumer Financial Protection Bureau to step up oversight of the prepaid business, arguing that the cards can carry high, often opaque fees, and generally lack the protection against loss or fraud that traditional debit cards offer.
In approving Green Dot's bank application, the Fed said it had consulted with Florida's Attorney General Pam Bondi, who launched an investigation in May into five prepaid card companies, including Green Dot, for possibly deceptive and unfair business practices. Green Dot has agreed to improve its disclosures in ways that "address the matters raised by the Florida AG's office," the Fed said.
Green Dot has no plans to offer credit products or other lending features on cards issued out of its bank, Streit says. But it will likely try to find a way to use its combination of businesses to find new sources of revenue. Though the economic downturn spurred an explosion in demand for prepaid options, analysts warn that the business will get tougher as competition forces issuers to lower their monthly maintenance fees.
"Part of the Green Dot's reasons for purchasing a bank would be to counteract competitors lowering prices," says Leonard DeProspo, an analyst at Janney Montgomery Scott. "It helps them reduce costs a little bit and offers flexibility."
Green Dot has agreed to maintain a Tier 1 leverage ratio of 15 percent for five years, withhold dividend payments for three years and restrict ownership by any one entity to 10 percent. It also agreed to maintain cash equal to the new bank's insured deposits, which are generated from prepaid cards bought by consumers.
But the overarching task for Streit will be selling more of Green Dot's products and services to the underbanked, while submitting to the watchful eyes of bank regulators.