Green Dot says that it will buy Santa Barbara Tax Products Group ("SBTPG") for a mix of cash and stock worth $320 million.
For those of you not familiar with SBTPG, the company is a long-time processor of refunds. It was once a part of Pacific Capital Bancorp. During that time, it was the division of Pacific Capital responsible for refund anticipation loans and for refund transfer checks.
Will Green Dot be involved with refund anticipation loans?
No. For a number of reasons, Streit was clear that Green Dot will not be associated with RALs. In a way, that doesn't need to be said: banks currently cannot offer RALs. But at the same time, Green Dot is a non-bank and it has hundreds of millions in cash on its balance sheet. With that much money, they would be able to offer a small RAL program. Last year, SBTPG delivered $32 billion in tax refunds. Green Dot would run through that cash quickly if it tried to make that service available during the portion of the tax season that is most sated with refund filings.
At the same time, he said that RALs would not be a part of the company at a time in the future. For one, he knows that the regulatory concerns are significant. As well, Streit sounded like he thought RALs were contradictory to how he constructs the value of his product to consumers.
Green Dot says that the RAL assets still on SBTPG's balance sheet will be distributed prior to the closing. This language appears in their filing:
The Company [SBTPG] shall cause all RALs held by the Company and its Subsidiaries to be contributed to a trust or other form of legal entity and shall cause all of the shares or interests in such trust or other entity to be distributed to the Holders, with the result that the Company [SBTPG] and its Subsidiaries shall not own any RALs or related receivables as of the Effective Time
When asked to comment on general reputation of SBTPG, Streit offered the following thoughts:
TPG is not a young company. You are right, in their heritage, they have done various products including RALs. They have not done that for some years now, and I don't think anybody has. That has been out of favor for at least three years. But whether it is in favor or not, it is not a program or product that Green Dot, given our mission and the kind of company that we are known to be, would do either way. So not a penny of TPG's earnings or revenues has anything to do with a RAL.
Will they provide refund transfers?
So this is a lot of new business for Green Dot?
Maybe, but probably less than it sounds like at first. For Green Dot, the first plus is that they pick up a high-margin business.
But the second part of the opportunity is to get more card customers and therein more interchange and card fees. This still will take some doing, though. Generally, the choice to have an in-store prepaid card is made by the preparer. Green Dot will be in a strong position to make a sales pitch, but nonetheless, they will still have to make that pitch. To the question of how many new accounts will materialize, it is important to realize that some of the SBTPG-channeled business is already happening. Green Dot says that almost half of the tax refunds that went on to its cards during the last tax season came via SBTPG.
Moreover, some of those new accounts are not worth very much. Ninety percent of the tax refund disbursements ultimately became "burn-down" accounts. When a consumer spends down the dollars on the card and then moves on, there is not much gain to a company.
But owning SBTPG makes it more likely that more EROs will direct their customers to a Green Dot card when it comes time to pick a destination for a tax refund. This means that Green Dot refund-channel customers should go up beginning in tax season 2016. There are two factors here: how many accounts are opened via SBTPG and then how many ultimately become long or longer-term Green Dot cardholders. SBTPG processed 11 million refunds. If forty percent of those refunds went on to prepaid cards, and if Green Dot managed to retain ten percent of those accounts, then their new retained customer base would grow by as many as 400,000 accounts and reasonably by about 200,000 accounts.
It also means that they are a little bit more diversified.
Streit hinted that they might use some of their cash to buy more of the small processors.
What else does SBTPG do?
SBTPG provides short-term financing to preparers. SBTPG can advance preparers funds to pay for software, to help with pre-season costs, or to smoothen in-season cash flows.
Any other news here?
There is another change coming soon. "We will soon be announcing a significant new program," said Grace Wang, CFO of Green Dot, "that we believe can have a material impact to our company's performance over time."
What is the likely response from advocates?
Advocates will now have a new reason to pay a lot of attention to Green Dot. They have acquired a company with a controversial legacy. Advocates certainly look at transfers in a much different light than RALs. There is a lot of variation in the cost of refund settlement products; those that are more expensive continue to attract the concern of advocates. But other issues could emerge: this transaction puts Green Dot much closer to the debate on certification of preparers.
How well will the corporate cultures fit together?
I believe it when Steve Streit says he wants to avoid RALs. Streit does not believe in overdraft, and it looks like he is equally certain that charging a consumer interest to advance a refund to them is wrong. But SBTPG made a healthy living on RALs and their staff was very vocal about their beliefs that it provided customers with a needed service. Stay tuned.