Green Dot Wants a Bank
One more player in the prepaid card industry is using the disruption in financial markets to expand into banking. Green Dot, the vendor of prepaid cards at your local convenience store, has arranged to buy 100 percent of the voting stock of Bonneville Bank.
Bonneville Bank is a small FDIC-regulated institution in Provo, Utah. Bonneville Bank is not worth much, with only $34 million in assets. They have 10 employees. They have about $6 million in equity and about $28 million in deposits. They have one branch.
Bonneville does have one thing that Green Dot would like very much – a charter! They are Utah state-chartered institution. Green Dot would acquire a bank holding company. Their accounts would have FDIC insurance. They would be able to draw funding from the discount window. Right now, Green Dot would have to access the debt markets for additional capital, at rates that would probably exceed 8 percent. With the acquisition of a bank holding company, they’ll be able to draw funds at current costs of as low as 3/4 of one percent.
Banktalk has written about this before and before and before. Cash America, a large payday lender, recently purchased 9 percent of the shares of MetaBank. Mainstream banks are going to let this action evade their coffers, of course. M&T Bank and Bancorp Bank are putting their resources into the RushCard.
This is payday lending all over again. Wait – it is worse, because when it goes through the prepaid debit card platform, it is all the more invisible. Years ago, payday lenders were accused of “renting-a-charter.” Now, they are going one more step, and buying a charter.
Bonneville Bank is state chartered in Utah. Is it a coincidence that MetaBank is chartered in South Dakota, that Bancorp Bank is chartered in Delaware, and that Green Dot’s new bank will be chartered in Utah? No. These are states where low-regulation banking is an economic development strategy. “If your state won’t let you, try Utah!”
This makes me….enervated.
Green Dot markets prepaid debit cards. They say that their fees are simple. Perhaps. Simple, and high. It costs about $6 a month to have a green dot card. There are fees for certain transactions, or for drawing out cash at a non-ATM site, or for checking your balance information in certain locations. There are fees to reload, unless you use direct deposit.
Green Dot is missing out on the new way to make a lot of money from unbanked consumers. Right now, Green Dot only offers prepaid debit cards. “This is not a credit card,” they comment.
Their competitors are not stopping there, though. With the ability to tap bank funds by MetaBank, card providers like NetSpend are creating cards with high cost credit lines. Its a gateway product. NetSpend is only a marketer. Their cards are available through payday lenders, pawn shops, and check cashers. All the places where you don’t want a bank to be. One key to the system is direct deposit. By loading cards through direct deposit, the cards at MetaBank can tap a ready source of money to collect debt. They are all collateralized by your next paycheck direct deposit.
Sound familiar?
Green Dot may be moving into that territory with this acquisition.
We can do something about this, though. The sale of Bonneville to Green Dot must still be approved. The Federal Reserve, through its San Francisco branch, will be taking comments from concerned citizens through March 18th.
Commenter
March 18, 2010
What you're not taking into account is how the underbanked make economic decisions. You're looking at the world through YOUR eyes, and you're coming to the wrong conclusions. You assume that because someone is poor that they're also ignorant and vulnerable. Nothing could be further from the truth.
For the underbanked–most who live check to check–$6/month for a safe place to keep their money and a means to pay their bills is a bargain. Why? Because of their economic alternatives are far worse: a) cash (not safe and limits payment abilities); or b) Hundreds (sometimes thousands) of dollars a year in overdraft fees at a traditional bank. Ask yourself this: If your bank didn't charge overdraft fees (that fleece the 10% of the poor customers to the tune of billions/year), do you think your checking account would be free? No, it certainly wouldn't. Millions of cardholders happily using this product can't be wrong–you are.
You're using the same misguided logic for the micro loans as well. For you, the cost of credit is based on an interest rate. The underbanked don't make decisions that way. They compare the cost of the loans to the alternative of NOT having that extra money … a lost job b/c they can't get their car fixed, a child that doesn't get health care, or a birthday gift that never gets sent. These folks know the costs and accept it (because the alternative is far, far more expensive). Yes, the rates are higher than most traditional loans, but that's only b/c of the very high rates of default in this population.
I highly recommend that you step out of your ivory tower and go talk to the people for whom you're trying to defend. This little diatribe is way off the mark.
Comment on Green Dot Purchase of Bonneville Bank | Bank Talk
March 18, 2010
[...] Dot announced that is acquiring Bonneville Bank, a small Utah state-chartered bank with $34 million in assets. Bonneville has [...]
sdog
March 18, 2010
I can agree that overdraft fees at mainstream banks are contributing to the demand for these products. The banks are complicit in all of this.
Still, this is the same argument that was used to defend payday lending. Consumer choice should drive everything. Fine, in a world of perfect competition, with perfect information, that could be true. but the world doesn't work like it did in microeconomics 101. There are all kinds of compromises to the "assumptions."
It is also the same argument that could be made for the legalization of drugs, for child labor, and for a host of other problematic products. I don't think that people should be able to consumer meth, just because they want to, and I don't think we should have nine year olds working in textile mills, either. To me, there are plenty of instances where third parties intervene on consumer choice. The truth of the matter is that people are paying a ton of money for basic services. The line of credit, to me, is far more egregious. Prepaid debit cards could be great. Indeed, Treasury has a prepaid debit card that it offers for people that accept government payments.
The prices on these cards are high because people are so desperate. You can't rent a video without some kind of VISA/Mastercard/AMEX. That doesn't mean that it is right, or that our banking regulators should be offering all kinds of subsidies to banks so that they can make these loans. They are high risk, at a time when banks seem to be hesitant to make all kinds of low-risk loans.
sdog
March 18, 2010
Let me add another thing. What is the risk inherent in offering a prepaid debit card?
Commenter
March 18, 2010
"The prices on these cards are high because people are so desperate." Absolutely, positively a misinformed statement. And frankly, an insulting stereotype. I'd like to hear you say that to the average debit card user: a full-time-employed female mother of two that makes $43,000/yr?? She's not desperate, she's savvy. Prepaid saves her money, and she's perfectly happy with it.
And sure, let's cap the small, high-cost loans at a reasonable interest rate so lawmakers can rest easy at night feeling they saved the desperate. Meanwhile, bankruptcy goes up, lights get shut off and people lose jobs b/c they can't get to work. What financial product did they offer them as an alternative? NOTHING. Go talk to people in Ohio and ask them how they're doing now that someone saved them from the clutches of payday lending… I'm certain they won't be all that grateful for all the misguided altruism.
I'm just curious… what is your proposed solution to these two "problems?"
William Pickering
April 1, 2010
I agree with all of the comments thus far. But one I haven’t heard anyone point out is that Greendot also taps into an account, but chooses to do business the good ol’ honest way. And the fee is $4.95, or almost $5. Little off there. Should I point out that only the largest of mainstream banks actually let you have perks such as checking account balance via text (if they do at all). I’m willing to pay $5 a month for this ability.