It appears that Green Dot will take Harvest Capital's criticisms to heart. Because some of Harvest's viewpoints would ask the company to take on more risk and to roll out new credit products, the implications of this new direction present significant changes to how its audience interacts with the payments system.
In a previous entry, I reviewed Harvest Capital's critique of Green Dot. Harvest said that it wanted to re-direct the company's product strategy, alter its capital structure, and rethink some of its past acquisitions. The group also called for the removal of Steve Streit from his dual status as CEO and Board Chair, as well as the replacement of two other Directors. Harvest Capital proposed a new strategy that involved the resurrection of the MoneyPak and the extension of consumer credit.
Although Harvest's concerns were not cited as a motive for their decisions, the essence of Green Dot's investor call was that it would conform to Harvest's critique.
The decision to bring back the MoneyPak is disheartening. While the great majority of people used MoneyPak in a manner consistent with its intent, it was also a vector for "victim-assisted fraud." In July 2014, Streit testified before the U.S. Senate Committee on Aging:
As the Committee has documented, this method of reloading a card is being exploited by scammers who target seniors with confidence scams. Such scams are designed to convince the senior that they have won a prize or some other similar enticement and that the way for the senior to collect the prize is to buy a MoneyPak for a specified amount of money and then provide the secret PIN number associated with that MoneyPak to the scammer. This is the equivalent of handing a stranger your bank debit card and telling them your secret PIN....In an effort to help stop this type of scam, Green Dot has spent millions of dollars to combat victim-assisted fraud...All of these tactics have helped somewhat and the number of MoneyPak fraud disputes have declined over the recent past. However, given the "victim-assisted" nature of the fraud and our inability to completely eradicate this nefarious use of our MoneyPak PIN product, Green Dot has decided to discontinue the MoneyPak PIN method of reloading a card altogether, and instead, move fully to the "card swipe" reload process.
In November 2014, Streit told the same committee that approximately $30 million in fraudulent MoneyPak transfers occurred in the course of a year.
You can understand why shutting down MoneyPak would provoke frustration from return-seeking investors like Harvest Capital. Facilitating the transfer of cash into a payment instrument is a valuable service that millions of people are willing to pay to use.
Harvest Capital is aiming for the company regain some of the high-margin cash flows that MoneyPak used to deliver. It would be easier to illustrate that point if Green Dot provided breakouts for MoneyPak sales, but because Green Dot's filings capture MoneyPak results within its cash transfer revenue line, less can be said with certainty. But a few points can still be made: a) as a line of business, cash transfers have been an important contributor to overall profit. Between 2009 and 2014, Green Dot sold 211.9 million cash transfers. In 2014, this amounted to $179.3 million in revenues. At the time, that amounted to almost one-third of company-wide operating revenue. b) When Green Dot stepped away from the MoneyPak, they did so in the hope that people would gradually re-orient themselves to loading at the register. But register re-load didn't entirely make up for the loss of MoneyPak. In 2015, after steadily increasing at an annualized rate of 21.9 percent, the total count of cash transfers declined by 16.5 percent. A dissent to this conclusion could be that register re-load's ability to serve as a complete replacement to MoneyPak was never given enough time for a fair test, but that's pretty much a moot point now.
Now Green Dot is going to resurrect the MoneyPak, albeit in a new form that they say can be safer. A release says that the new MoneyPak will come "with mobile and web-based risk controls is designed to help us safely win back former users of the original MoneyPak product." But the company knows that MoneyPak put vulnerable consumers at risk. The language in the company's testimony to the Senate Committee on Aging suggests that they know that it created problems for seniors who fell for victim-assisted fraud. The fundamental truth is that those funds are absolutely unrecoverable once they have been activated and spent. They knew all of this with enough conviction that they decided to remove it once. Cue up "we have concerns," because a lot of people will be talking about MoneyPak all over again.
Lots of Credit
For some time, Green Dot has been building toward brokering credit and offering a secured credit card. To the extent that Green Dot mentioned those topics on Wednesday, it was only to qualify the strategy of each as prudent. Green Dot Money puts "no capital at risk," said Streit. He added that Green Dot Bank recently received regulatory approval to offer its new secured credit card product.
But it was a surprise to hear that Green Dot is going to partner with OneMain Financial. OneMain is the parent of both OneMain Financial and the recent acquirer of Springleaf Financial. Those two names are now operating as one consumer installment lender with 1,800 stores in 43 states. As explained by Streit, the relationship would consist of a co-branded prepaid card that Springleaf customers could select as the destination for their loan proceeds. Theoretically, a card loaded with the proceeds of an $8,000 loan should yield plenty of interchange and might remain open long enough to produce more fee revenue as well.
Still, I contend that a partnership with OneMain brings some risk to Green Dot's brand. Consumer installment lenders - even the ones with the most sanitized public reputations - are still a flash point for media, advocates, and regulators. Just as NetSpend has to do now because of its co-branding relationship with Ace Cash Express, Green Dot is going to have to communicate to the public that it is entirely separate from OneMain. As well, what is the chance that at least a few of those new clients will extinguish their Green Dot accounts trying to repay their debts to OneMain? I regularly review bankruptcy filings made by Springleaf. Even though the APRs are always below 36 percent, the costs are still surprising. Mainly that is because so many of the Springleaf loans come with high-cost credit insurance. Consider the details from this contract:
- Loan amount: $10,444 (of which $6,760 served to repay an existing account)
- APR: 25 percent
- Single premium credit life insurance: $315
- Single premium credit disability insurance: $1,053
- Involuntary unemployment insurance: $924
Those insurance fees, along with a title fee, were added to the principal. As a result, the proceeds from the $10,444 loan after the refinance and the cost of insurance came to only $1,295.
We also face a large known unknown in the question of which lenders will become partner affiliates on Green Dot Money. Will GDM introduce consumers to credit union-issued installment loans with patient terms and low interest rates? Or, will GDM be a lead gen machine for online non-bank installment lenders who charge interest rates of upwards of 200 percent? Online lenders are eager to find consumers with long-term payment records and working routing numbers.
Why is it the case that Green Dot is the entity that has relented to their entreaties? Maybe it is time to give NetSpend and MetaBank - the businesses that operationalized the i-advance a few years ago - some credit for firewalling online lending from prepaid cards. We won't know until we know. For now, it is a big concern. With 4.5 million active Green Dot cardholders, GDM could become a giant loan machine.
One more known unknown: how will Green Dot Money interact with customers of Santa Barbara Tax Products Group?
The odd thing about this is that it comes at a time when Green Dot is finally free of Serve. Green Dot and Amex fought a battle for big box retail prepaid card customers. Serve's low pricing and high product functionality triggered the changes that came to be known as "price compression." Serve's ability to tap Amex's balance sheet meant program managers without access to low-cost capital suddenly needed hundreds of thousands of accounts in order to stay relevant. Exit the Magic and Suze Orman cards.
It is odd, but that new freedom probably came to be because of Costco. Of the 122 million Amex card accounts then issued, approximately ten percent were Costco-branded. Amex is facing the loss of a lot of high-spend accounts, and while there has never been a statement which connects the troubles with Costco to the situation at Serve, it was not much time thereafter when Serve began to pull back on its marketing. Fast forward to today and the competition that exists between program managers in retail stores is very different. The difference between now and a year ago is made most clear if you visit a Wal-Mart or a Walgreens. These days, Green Dot's presence dwarfs all other cards. Green Dot has the "filet mignon" placings on the top half of the display. If there is still a refreshed supply of Serve cards, then they are down at the bottom of the rack.
You can see the difference in card revenues. In the last year, Green Dot has unchained itself from the shackles of price compression. Monthly fees are up to at least $5.95 (unless an exemption is met) and GoBank no longer offers pay-what-you-want on its new accounts. According to Green Dot's latest 8-k, card revenues derived from fees barely budged from 2011 to 2014; in 2015, they increased 25.6 percent.
Things are turning around for the company. When coupled with the benefits of additional leverage, shareholders can expect to see results from the increased card revenues. With less retail competition, the company is finally enjoying some power over its pricing.
I think that Green Dot should reconsider some of these new intentions - particularly its reversal on MoneyPak and its new affiliation with lenders. We do not know which lenders will ultimately partner with Green Dot Money, but until assurances are made to the contrary it is always possible that GDM will bring unstable credit to its customer base.
I have this opinion because I don't think it is at all necessary for the company to pursue these steps. Green Dot is doing well right now. There is no reason to bring back MoneyPak. It is taking risks with OneMain and Green Dot Money. Since I have been following the company, I have heard rumors of people trying to pressure Green Dot's leadership into making the kinds of decisions that put profits before consumers. Lots of people wanted Green Dot to put overdraft on their cards, for example. But Green Dot has consistently done things their own way. They have been patient for returns and protective of their customers. But now, all of this is in flux. We are at an inflection point.