Last week, Green Dot revealed its intention to offer two new credit products, contingent upon getting the go-ahead from regulators. Steve Streit, Green Dot's CEO and founder, offered concrete details that speak directly to already-voiced concerns from consumer advocates, but given the audience, his comments were mainly directed at justifying the idea to Wall Street on its potential as a business proposition.
"We wouldn't do payday loans for sure....but that aside, there's two kinds of products we're envisioning. One is a secured credit card, which we think we have a fabulous opportunity to do if we're able to do it. And the reason is - by the way I should say the product is not new. It's been around as long as anyone on this call has been around. And it's a great product for people who are new to credit or trying to rehabilitate their credit to have a credit card with training wheels."
I have often thought that a secured card could be a fit for a program manager. It is the how that matters. The right process creates a Jersey barrier between secured and spend, so that using credit is an intentional choice. Putting the products on separate pieces of plastic is important, and a secured card will undoubtedly be designed in that framework. That being said, I never thought that Green Dot would be the PM to do that. If I had to make a guess, it would have been NetSpend or Rush. Green Dot has been vocal about their hesitancy to move beyond spend. Streit often says that overdraft is not in their DNA. Given that, he deserves the benefit of the doubt on his promise to not make secured a payday-lite product. As well, some of the statements he made later on in the investor call suggest that the details will bear him out.
Streit believes that Green Dot can execute on secured. His analysis is that there are two problems: liquidity and convenience.
I think he is right to say that the failure of secured cards to go to scale is a function of the difficulty people have in being able to set aside a deposit. Tens of millions of people are living paycheck-to-paycheck. Having bad credit is often a function of not having enough money. That is really the problem with any kind of unsecured high-cost credit; just the fact that people can't get good credit doesn't justify offering bad credit. A lot of folks just don't have enough money. They won't have enough in a month, just as they don't have enough today. A payday loan isn't going to get them "over-the-hump." It is just going to make the hill that much steeper. Given all that, I would have to agree with Streit. There are a lot of people that cannot set aside three or four hundred dollars. Green Dot offering a secured card will not make that any different.
But his other point was that there are barriers to actualizing an account. A lot of consumers will be uncertain about the process of putting that deposit on to a card. Even a secured card offered by a bank with local branches is going to represent some problems. Is a teller likely to walk someone through the process of opening a secured line? I would expect that there would be a lot of confusion. But if you already have a Green Dot prepaid card, then the process of adding another account is much easier.
"The barrier to that product," he said, "really hitting it large on the mass scene, is it's hard for low- and moderate-income Americans who are prone to use that kind of a product, to deposit the cash into the bank. In the case of Green Dot, we have 100,000 retail locations, where you can deposit cash by swiping your card. And our consumers and folks in our demographic who are familiar with our products and services know how to do that, right? So the opportunity [is] for us to help people get on the map with their credit score [and] have a safe product that they can't fail at."
Secondly, he said that the company was looking into offered an unsecured line of credit. As with the secured card, he thinks he has a position to play to advantage. In this case, though, he isn't banking on convenience. Rather, he said that their analytics (big data) give them inputs from which to make inferential underwriting decisions. "We have some really cool data on 25 million Americans who have used our bank over the years," he said. At the end of the last quarter, Green Dot has 4.7 million active card accounts. Given that, it appears that Green Dot will be reaching out to a lot of people who do not currently have a card.
Streit added that their unsecured line would not have late fees, over-the-limit fees, or overdraft fees. From the perspective of a consumer advocate, those features would be a plus. At the moment prior, Green Dot doesn't have regulatory approval. If they do get it, and he mentioned that such talks were currently happening, then it will be important to hold Streit to those promises.
The morning after, the haters had their day on Wall Street. The company's shares dropped almost 25 percent before 10 am. But realistically, that fall is probably not driven by the possibility of two new product lines. Instead, the analysts seem to have drawn the conclusion that working with Wal-Mart is no longer a good idea. Business inside Wal-Mart is only about half as profitable for Green Dot compared to elsewhere. In fact, returns are now so low that it hardly justifies the risk of equity investment.