Green Dot Makes New Investments in Face of Growing Competition

Green Dot Corp. is making investments to expand its existing relationships and create new partnerships to get its products in front of consumers. These moves are designed to both address the rising competition in the prepaid industry and diversify its operations as a financial institution.

Green Dot is facing mounting pressure from new entrants in the prepaid business, most notably from American Express, which offers its Bluebird prepaid card exclusively at Walmart stores, and offers its Serve prepaid digital wallet as a plastic card, a standalone mobile app and through the wireless carrier-backed Isis mobile wallet.

The Pasadena, Calif.-based prepaid card issuer is fighting back by adding six new cards to its lineup of and 27,000 new retailer locations to its distribution network. This drove up its fourth-quarter operating expenses by 16% year-over-year, but that investment will pay off, founder and CEO Steve Streit said in a Feb. 3 interview with PaymentsSource.

"You don't issue a card on Monday and get the lifetime revenue of that client on Tuesday," he says. "My mind has been hell-bent on the long term. We're focused on serving customers for decades, not any one quarter."

Launching new prepaid cards requires investments in technology and product development, as well as expenses to cover the manual labor involved in printing, shipping and distributing the cards to stores.

One such effort is Green Dot's push to offer its general purpose reloadable cards at check cashing stores. "We're trying to go market-by-market to build scale" and provide consumers with the ability to load funds from checks onto prepaid debit cards as an alternative to cash.

Green Dot has fueled this strategy with its Dec. 2011 acquisition of Bonneville Bancorp (now called Green Dot Bank) and subsequent launch of its mobile checking account, GoBank. Owning a bank comes with the added expenses of compliance costs and capital requirements, but also provides more flexibility to try to new things, Streit says.

"We like the ability to invest in new products…we couldn't do that if we weren't a bank," he says.

One of Green Dot's experiments is GoBank's pricing model, which lets consumers pick their monthly fee ranging from $0 to $9, a practice Streit likens to paying a gratuity. He wouldn't disclose if any GoBank users actually pay $9, nor would he disclose the average fee that consumers pay, but he says the model helps promote GoBank's image as a modern checking account developed by and for a younger, tech-savvy demographic.

"Everything is written by twenty-somethings, for twenty-somethings," he says, adding "People like the experience of voluntarily tipping."

The GoBank user base is mainly adults age 18-34, with more consumers using the Android version of the app over the iOS edition. And despite marketing efforts that have featured GoBank on Lifetime's fashion reality show "Project Runway," more men use GoBank than women, Streit says.

The company has kept marketing of Green Dot's prepaid cards and GoBank's checking accounts separate, and doesn't do crossover promotions because the target audiences are different for each product.

For example, Streit says the demographic of students at two-year community colleges may already be familiar with Green Dot's brand and use its prepaid cards, while students at four-year schools are more interested in checking accounts, so the company promotes GoBank on university campuses that have Barnes & Noble College locations.

While Green Dot aspires to serve both segments of college students, it's not planning to issue debit cards that double as student identification cards. "It's a technology play for people that specialize in education," Streit says.

Prepaid card companies such as UniRush have expressed enthusiasm about expanding into payroll debit cards, but Streit was more restrained. Payroll cards' fee structures have come under fire as being overly burdensome on workers, so any company that enters that category must "have fees that are appropriate for the consumer base," he says.

Fee disclosures across the entire prepaid industry are being scrutinized, with increased oversight from the Consumer Financial Protection Bureau and proposed legislation by Sen. Mark Warner (D.-Va.). The text of the "Prepaid Card Disclosure Act of 2014," mandates fee disclosures in an "easily understood table, clearly and conspicuously displayed to the consumer prior to purchase."

Streit says he's proud of Green Dot's record for making its fees clear to consumers and says the various regulations being proposed won't hurt its business.