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Alternatives to High-Cost Prepaid Cards

Adam Rust's picture

Posted March 19, 2010

If prepaid cards from NetSpend and Green Dot are not the answer for serving the unbanked, it begs the question "what would be a better solution in their place?"

There are two places to answer this question. First, it is worth considering the existing alternatives for the unbanked. Then, it is worth asking what we should have, but don't.

Prepaid cards are a very important product. Their growth reflects the need for many people that want to access the payments system, but that are not served adequately by mainstream banks. Green Dot reports that their revenues and operating income are surging as more and more consumers move into this space.

GreenDot is operating a very profitable business with high margins. Figures for 2010 represent an annualized estimate of business, based upon proceeds reported by Green Dot from their first quarter of FY 2010. All numbers are in millions of dollars.

Indeed, the entire prepaid space is growing. It is expected that $118.5 billion will be loaded onto prepaid cards by 2012, up from just over $8 billion in 2008.  Wait - the number is even higher. A previous estimator by the Mercator Group now reports that loads will reach $525 billion by 2012. It is an incredible shift in how people are accessing the payments system.

This speaks to the need for more attention. The Community Reinvestment Act is supposed to make sure that the banking needs of low-income consumers are met by our banks. Yet, CRA exams never touch upon prepaid card products at most of the banks that are offering these services.

Banks should be more involved. The use of these cards is exploding, in an era when financial transactions have grown to encompass more and more of our economy. The number of bank branches in low-income communities is actually declining.

So, what would be a better outcome? Well, there are already some valid options out there. Treasury, through a relationship with Comerica Bank, has developed the Treasury Go Direct card. It is a low-cost product. Problem is, this card is largely limited

Green Dot's Fast Play

Adam Rust's picture

Posted March 18, 2010

Two things to understand about what is going on at Green Dot:

  1. In the latter part of February, Green Dot announced that they would initiate an initial public offering (IPO) to raise $150 million of equity.
  2. Green Dot announced that is acquiring Bonneville Bank, a small Utah state-chartered bank with $34 million in assets.  Bonneville has about $6 million in equity.

Now, why would you take out $150 million to buy a $6 million bank?

The answer is that Green Dot expects to need a lot of liquidity after the acquisition.  My belief (ALERT - this is


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