The stated intentions of Green Dot Bank to meet its obligations under the Community Reinvestment Act demonstrate the inability of the 1977 law to adapt to changes in today's banking system.
As a condition for the Federal Reserve's approval of Green Dot's application to buy Bonneville
Bancorp, the prepaid card firm had to indicate how it would implement a CRA plan. The Fed published their approval last week in this document.
Any bank or thrift must come up with a plan for CRA. The CRA compels banks or thrifts to make sure that they are meeting credit, investment, and bank services needs in the local areas that surround their branches. The Fed establishes the expectation, but Green Dot develops the plan.
The Fed put some weight in the legacy CRA performance at Bonneville Bancorp. In its most recent exam, Bonneville earned a "satisfactory." Green Dot Bank says that they will continue to lend locally in Provo. They also indicated that they would develop a strategic plan for their CRA within the next six months.
The fact that it is incumbent upon Green Dot to devise their CRA program is entirely consistent with normal CRA procedures. The CRA leaves it up to the bank or thrift to devise their method of implementation. The Federal Reserve or any other regulator never says you need to make subprime loans or small business loans to people that have no money.
Going back to the issue of fit, it is becoming crystal clear that the old approach no longer fits with current and emerging bank branch practices. Some of the top deposit-holding institutions in the United States have only one bank branch. USAA serves 6.4 million members from one branch in San Antonio. ING holds $82 billion in deposits at one branch in New Castle County, Delaware.
The mono-branch model is the exception in traditional banking. In prepaid, it is the norm. Major prepaid card issuers take deposits from consumers that live across a far broader geographic spectrum than the branch networks of those banks. Bancorp Bank has one branch in Delaware. Bonneville Bank (Green Dot Bank in less than two weeks) has one branch in Provo, Utah. With 12 and 25 branches, respectively, MetaBank and Urban Trust Bank have giant branch networks within prepaid.
There is also the issue of consumer preference. A prepaid card, by its nature, is not a vehicle for credit. Prepaid is about paying first and buying later. The cards do not offer credit. This is a dilemma for the CRA, because it primary difference-maker has been to enhance the flow of credit. Nonetheless, CRA still talks about investment and services. This would suggest that there is a place for any prepaid bank to make grants in low-income communities. Another potential interpretation could be investments in financial literacy program.
It is impossible to argue that Green Dot's core customer base is anything but the specific community meant for the CRA and it is obvious that their service to those households is going to rise as the banks raise their fees for checking. The current trend among the "branched-banks" is to gradually wean their low-income consumers off of their rolls. When banks establish a minimum monthly balance for free checking, the first group of people to exit are going to be low-wealth households. If those people still want access to the formal payments system, then a prepaid card is their next stop.
Green Dot may go beyond the traditional CRA box and choose to offer services to low-and-moderate-income consumers and communities everywhere in the United States. That would match with the reality of where their users are located. Most of Green Dot's cardholders are low-income households.
Can you imagine trying to justify the logic that the CRA needs of Green Dot card holders are best served by making mortgage loans in Provo, Utah?