The leading private investor in Green Dot says it wants to see new leadership, a new business plan that cuts expenses, and a new emphasis on issuing consumer loans. That might produce better results, but some of the downstream effects would have negative consequences. Besides, is it really right for a Johnny-come-lately activist investor to ask Steve Streit to step down? Streit didn't just found Green Dot. He pretty much invented the prepaid card in the first place.
Green Dot's Mistakes, according to Harvest Capital:
- Pulls back from MoneyPak.
- Purchased a payment processor, but because of a slow transition, still continues to process with TSYS.
- Spent $43 million to buy Loopt. "Green Dot paid $43 million for Loopt, then promptly shut down the business and to our knowledge has not used a single line of Loopt code...Green Dot effectively paid $1.43 million for each of Loopt’s 30 employees, many of which have left the Company. The founder and CEO of Loopt exited day-to-day activities almost immediately after his lock-up commitment expired."
- Produced underwhelming results from GoBank. "Pay-what-you-want pricing failed to achieve material product adoption."
- Did not adequately implement the updated MoneyCard program. "The updated MoneyCard portfolio led to a decline in Walmart revenue."
- Used equity to buy SBPTG when low-cost corporate debt financing was available.
- Never produced any meaningful results from its efforts to build a partnership with Sallie Mae.
- Given the scope of its deposit base, Green Dot Bank has not and continues to not make enough loans.
- Has not utilized float to drive margin. MetaBank can derive 314 basis points from its portfolio, says Harvest Capital, so why does Green Dot only manage to earn a 7th of that?
Perhaps it might be better to ask what Harvest Capital likes about Green Dot. Harvest says it is not an "activist investor," yet they appear to be ready to challenge management for almost everything it has chosen to implement.
What Does Harvest Capital want?
- Change the CEO. Put three new directors on the Board.
- Offer credit to prepaid card customers. "According to a Harvest Capital study, 80 percent of prepaid card users would have an interest in a credit product."
- Take on more corporate debt and buy back shares.
- Reduce expenses.
- Reverse course on MoneyPak.
- Make smarter acquisitions.
Harvest is Forsaking Patience and Integrity for Immediate Profit
Harvest Capital should recognize the dangers posed by credit. Harvest Capital seems to be saying that Green Dot should act like a retail bank with an emphasis on unsecured consumer lending. In the interest of increasing net margin on float, Harvest Capital wants the company to build out a consumer loan portfolio. In its presentation, Harvest Capital says that "We believe a gradual transition of these deposits to consumer loans would be highly impactful."
Imagining a future with more credit ignores the regulatory environment. The CFPB is yet to announce how it will banks to offer credit from prepaid accounts. Does it make sense to forge ahead and develop a product that could become illegal in only a few months? Harvest Capital thinks it does. From an operational perspective, is it really possible to offer consumer loans from a prepaid card platform, and to do so at scale? Harvest Capital is modeling a $562 million consumer loan portfolio for Green Dot. They contend that consumers want credit. That view is derived from the results of a 2015 Survey Monkey poll it orchestrated. But last time I checked, Survey Monkey is not serioius social science. But nonetheless, Harvest Capital is pointing to a 772-respondent survey that says that 4 of every 5 Green Dot customers would like credit. Think about that. If 80 percent of Green Dot's 4.5 million account holders became borrowers, it translates to an average outstanding principal balance of $150 and about $19 in interest income per loan per year.
More broadly, this ignores one of the main appeals with a prepaid card: you can't get over-spend. Since GPR was first created, account holders have said that they like the opportunity to use a payment instrument without overdraft.
Those aren't numbers that would threaten most households. But if lending is limited to consumers who have a direct deposit, as seems to be the most likely scenario, then loan average balances jump to over $800. Couple that with the likelihood that many people will incur fees and you have a situation that does generate more revenue for Green Dot, but which could simultaneously erode the financial security of many low-wealth households.
I think Streit deserves more recognition for his MoneyPak decision. It is akin to the moment when Bank of America voluntarily ceased to trigger overdrafts on non-recurring point-of-sale debit and ATM withdrawals. Green Dot decided to forego millions (and billions at Bank of America) in order to realize a greater good. Without MoneyPak, there is less fraud.
The slow approach that Green Dot has taken with its migration to in-house processing is another iteration of caution. It is exactly the kind of vision that never squares with activist investment. Yes, it is absolutely true that a lot of time has passed since Green Dot bought a processor. The motive underlying that action was to protect Green Dot's business interests. Once TSYS, bought NetSpend, Green Dot was faced with a situation where its main rival had a distinct advantage. TSYS promised that it would treat NetSpend no differently than its external clients, but instincts should tell anyone that it's foolhardy to assume too much. Patience is a virtue, though. If you still have doubts about that premise, then consider what happened at Rush. Rush was also using TSYS. To say the least, there were a few problems with their switchover.
I'll side with Harvest Capital on balance sheet construction. Green Dot has always kept millions of dollars in cash on hand while simultaneously sourcing most of its financing from equity. At the end of September, it had $688 million in cash. That was actually less than in previous periods. Equity financing and cash-rich balance sheets don't really square up with each other; an equity investor expects to be compensated for risk to a degree that goes well beyond the likely performance of cash. Put another way, who pays $17 for the return on an investment of $12? Holding cash is a hard way to meet the expectations that come with the risk of an equity investment. So Harvest's alternative - to use cash to buy back equity while simultaneously drawing on the low-cost debt that is more than available right now - is sensible. But again, it is a question of speed for Harvest: Green Dot has already said that it begin to buy back some of its equity.
I am anxious about the acquisition of Santa Barbara Tax Products Group. SBTPG is the division that once operated the RAL program at Pacific Capital Bancorp. To say the least, Green Dot and SBTPG have exhibited different approaches towards consumers. Green Dot never offered overdraft; SBTPG facilitated RALs and RACs.
But Harvest Capital has chosen a fall guy:
Since its IPO, Green Dot's stock has declined by 65%. Along the way, the Company has encountered challenges, but competition is not unique to Green Dot. In fact, the Company's closest peer, NetSpend, has consistently generated double-digit organic revenue growth with EBITDA margins around 27 percent. There is no industry-wide issue afflicting Green Dot. This is a Green Dot issue, and more specifically, a Green Dot leadership issue. While numerous personnel changes have occurred, Mr. Streit has been the constant factor linked to the Company's long-term, perpetual disappointments. By blaming exogenous industry factors, as opposed to objectively acknowledging Mr. Streit's limitations, the Board has demonstrated, we believe, a failure to act as fiduciaries to all stakeholders.
But this ignores the facts. Green Dot is still growing customers, increasing its revenues, and producing a positive cash flow. This is about "unlocking" value. At some point in time, those shares are going to be worth more. Maybe that happens organically, or maybe investors will have to wait until another corporation decides to buy Green Dot. Typically an outside acquisition nets a premium of approximately twenty to thirty percent over the price on the day of the announcement. There should be some sense at Harvest Capital that the future may be bright.
You would think that at some point in time, the person who started an industry would be eclipsed by a new star. But now that Dan Henry has departed from NetSpend, Steve Streit is not only the leading personality within in the prepaid card industry, but also its leading voice for the interests of consumers. He remains a moral voice for an industry that faces a constant uphill battle in projecting a positive image to the public. Streit did not create the Kardashian Kard, but he was there to say that not every company in the prepaid industry had the same beliefs as Ms. Kardashian. His company never attempted to compete with the i-advance.When MoneyPak become a favorite target of fraudsters, he walked away from it even though it was a large source of revenue. He has always been outspoken against putting overdraft on prepaid cards.There is a reason why he spoke for the industry in Wilmington when the CFPB rolled its proposed rule for prepaid cards.
But for the most part, Harvest Capital's new ideas would be a triumph for impatience. If it found traction among Green Dot's other investors, it would represent a great win for dice-rollers everywhere. I hope their efforts don't gain momentum. Perhaps they'll decide to sell their shares, take the losses, and move on to a new idea.