When a company that gets 70 percent of its revenues from Wal-Mart announces that it is going to buy a small state-chartered bank, it seems relevant to wonder what the real impact of this acquisition might be. After all, it is possible that this new bank will expand to meet all kinds of banking needs through Wal-Mart’s stores.

Since 1996, WoodForest National Bank has had small bank branches in a number of Wal-Mart stores.  The branches offer basic checking, individual retirement accounts, savings accounts, and certificates of deposits.  Checking accounts come with a MasterCard ATM card. Consumers with a ChexSystems record can still get a “second chance” checking account, while regular consumers have a choice of free checking or Choice checking.  The latter has a balance requirement.  The Wal-Mart stores also offer a chance for consumers to get the GoDirect/DirectExpress card.  GoDirect is an ideal prepaid card that can store government payments. GoDirect cards are issued by Comerica.

They do not offer mortgages in the stores, and the mortgages that they offer through their national headquarters in Woodlands, Texas are limited to refinance loans.

The Wal-Marts still have a bifurcated set of financial services. When you check out, you will see Green Dot prepaid cards. These cards do come with fees, although Wal-Mart has negotiated lower fees with Green Dot for those cards.  There are monthly fees, cash checking fees, and a few other costs.

This two-headed approach could soon change.  Green Dot announced an intention at the end of February to buy Bonneville Bank for $15.65 million. Bonneville is a small bank. It has only 10 employees and equity capital of just $6 million. Its greatest asset is probably its Utah charter.

Green Dot would appear to have big plans for Bonneville. Green Dot has already said that they will put another $10 million in capital reserves into Bonneville.  Given that Bonneville already has a 31 percent tier-one capital ratio, they will be sitting on a lot of (more…)

The latest financial innovation, where consumers can access short-term high cost credit through an online portal using their next direct deposit as collateral, is still so brand new that only a few financial institutions are offering it. That should not mean that this is a small issue. If anything, “direct deposit payday” is probably the Next thing that you need to worry about.

Earlier, I discussed MetaBank and my concerns over Green Dot. That isn’t the only place that this is happening. The Big Banks are doing it, and so are venture capital firms through products like ThinkCash and Elastic.

There are a set of new high-cost credit products out there, and most didn’t exist even two years ago. Three big banks (Fifth Third, US Bank, and Wells Fargo) have gotten into this game with short-term loans. There is a uniform 10 percent fee on all of their products.  The loan terms are generally about 35 days.

MetaBank, through its marketing partners, offers an i-advance card where consumers can borrower $20 for $2.50.  They have until their next direct deposit to pay it off.

Today, I see that Urban Trust Bank is offering short-term loans with Elastic.  It’s “a new twist on emergency cash.” That is a nice way of describing roughly the same thing.  Like the bank loans, they impose a few on each $20 loan increment.  At Think Cash, that fee is slightly higher – it costs $2.50 to borrow $20. You can hold the funds until your next direct deposit. Elastic’s only distinction is that they require everyone to pay at least 10 percent of their loan off before the next period. Otherwise, the remainder can “roll over.” That might be worse. This low minimum payment means that consumers can develop high balances that trigger new rounds of 12.5 percent fees. Annualized over the maximum term, this is a loan with an apr of at least 130 percent.

Elastic is part of the ThinkCash chain. I’m intrigued by ThinkCash. They are owned by Sequoia Capital, a Menlo Park venture capital firm.  Sequoia’s other investments include PayPal, Bill Point, Xoom, and Green Dot. The last appears to be building out its own network.  Green Dot should be a point of policy interest right now, as they have an application in with the Federal Reserve Bank of San Francisco to buy Bonneville Bank of Provo, Utah.  There’s no indication that Green Dot will develop a credit product, but then again, would the regulators stop them if they decided to do so?

It only takes two steps to hop from Green Dot to payday.

Green Dot, a prepaid debit card firm, has reached an agreement to purchase Bonneville Bank for $15.65 million, pending approval from the Federal Reserve. Bonneville is a small bank. With just 10 employees and only $6 million in equity capital, the price seems very generous.

My fear is that Green Dot will use the power of a charter to add a line of credit on to its prepaid card platform.  They would only be doing what others, namely MetaBank/NetSpend, have already done.  MetaBank’s i-advance card product offers debt to consumers that connect their direct deposit features to their prepaid card. The fees are very high.  I have said it before, but I believe that this is the beginning of a new iteration of payday lending.

Will Green Dot follow suit? To date, the question remains unresolved. Green Dot’s publicly released data on their acquisition of Bonneville Bank makes no explicit mention of adding consumer debt onto prepaid debit cards.

I found it easy to connect the dots between Green Dot and payday lending, though. Green Dot’s application indicates that Sequoia Capital is one of its lead investors. Sequoia is based in Menlo Park, California.  They have several specialties, one of which is their Financial division. Sequoia was an early investor in PayPal. Currently, their holdings include not just Green Dot but also Xoom (money transfers), BillPoint (payments), and ThinkCash. ThinkCash, according to Sequoia:

ThinkCash is the leading online provider of short term consumer credit. ThinkCash provides emergency cash loans to consumers via three lending brands: Elastic, ThinkCash and PayDay One.

Will Sequoia’s role in payday lending at Think Cash put any pressure on what happens at Green Dot? Hard to know. Certainly, the expertise to apply payday through an online platform is right there. The people are in place.  Green Dot will have the customers.

I have read Green Dot’s application.  There is no mention of providing credit.  Will that remain the case down the line? It is too bad that the approval system doesn’t have a means for getting this question answered. Once the application is approved, the public will not have much input over how private equity-owned banks treat the unbanked.

I want to add one more decent option for consumers looking to find a better prepaid debit card.  Advent Financial, through a relatiosnhip with Bancorp Bank, is offering the Advent Financial Card. This card is a low-fee, highly flexible product.

Fees

First off, I like that there is no monthly fee just to have a card. I have seen this for between $4.95 and $9.95 at competitors. The card’s fees seem to be driven by use – it does cost money to make an ATM withdrawal or to get a balance inquiry.

Other fees are also better.  Losing your card costs $7.95, not $50 or even $60 as might be the case with a Rush Card or an i-advance card.

Reaction

There are “ideal” products in many different financial services categories. In tax prep, where national chains charge as much as $305 for a basic return, VITA provides free tax work.  There are other instances, but hey, this is a blog, so I’ll move quickly. It would be great if everyone flocked to this card, and left the higher cost cards. Will they? I am not so sure. People tend to stick with what they know. There are already billions of dollars of deposits on other cards. Will those consumers drop their cards with high monthly fees and move over to Advent? It will be interesting to come back to Advent in 12 months.

Advent might change, too.  Advent was developed by former H&R Block CEO Mark Ernst. He subsequently sold his 70 percent stake in the company to NovaStar Financial. If you remember sub-prime lending or Herb Greenberg, then you might remember Novastar.  In a former life, NovaStar was one of the nation’s most aggressive Alt-A lenders. NovaStar’s shares sold for $105.80 in the first quarter of 2007. They were regularly paying dividends of more than 11 percent. By the end of 2008, their shares were selling for 22 cents and they reported a book value of negative $787 million.

Now they are reconstituted as a company with two subsidiaries – an appraisal service and a prepaid card provider.  I’m not ready to say that Advent is perfect. I’m more than ready to believe that NovaStar’s management could take this company in a new and less promising direction. I still like the Direct product from Treasury.

If prepaid cards from NetSpend and Green Dot are not the answer for serving the unbanked, it begs the question “what would be a better solution in their place?”

There are two places to answer this question. First, it is worth considering the existing alternatives for the unbanked. Then, it is worth asking what we should have, but don’t.

Prepaid cards are a very important product. Their growth reflects the need for many people that want to access the payments system, but that are not served adequately by mainstream banks. Green Dot reports that their revenues and operating income are surging as more and more consumers move into this space.

GreenDot is operating a very profitable business with high margins. Figures for 2010 represent an annualized estimate of business, based upon proceeds reported by Green Dot from their first quarter of FY 2010. All numbers are in millions of dollars.

Indeed, the entire prepaid space is growing. It is expected that $118.5 billion will be loaded onto prepaid cards by 2012, up from just over $8 billion in 2008.  Wait – the number is even higher. A previous estimator by the Mercator Group now reports that loads will reach $525 billion by 2012. It is an incredible shift in how people are accessing the payments system.

This speaks to the need for more attention. The Community Reinvestment Act is supposed to make sure that the banking needs of low-income consumers are met by our banks. Yet, CRA exams never touch upon prepaid card products at most of the banks that are offering these services.

Banks should be more involved. The use of these cards is exploding, in an era when financial transactions have grown to encompass more and more of our economy. The number of bank branches in low-income communities is actually declining.

So, what would be a better outcome? Well, there are already some valid options out there. Treasury, through a relationship with Comerica Bank, has developed the Treasury Go Direct card. It is a low-cost product. Problem is, this card is largely limited (more…)