Overcoming concerns about a business plan devoted exclusively to the issuance and servicing of general purpose reloadable prepaid cards, the Federal Reserve Board voted on November 23, 2011 to approve Green Dot’s application to purchase Bonneville Bancorp and its wholly owned subsidiary, Bonneville Bank, a Utah state-chartered bank. The Board’s approval order can be read here.
The Board took note of a number of significant risk factors in considering Green Dot’s application to become a bank holding company. In particular, Green Dot intends to continue its singular emphasis on the issuance of bank-issued prepaid cards, with the newly-acquired bank to provide settlement services. The Board reasoned that such a monoline business gave rise to greater risks than a more diverse financial services business, and further considered the dependence of Green Dot on a single national retail chain for a major percentage of its card sales.
Offsetting these concerns, in the view of the majority of the Board, were a number of conditions attached to the approval of the application. Green Dot has committed to maintain a Tier 1 capital ratio of at least 15% for five years after closing, and the bank will refrain from issuing dividends for at least three years after closing. Further, Green Dot will maintain cash or cash equivalents on hand (either at Green Dot or the bank) in an amount equal to the funds outstanding on prepaid cards. (A similar obligation applies generally to state-licensed money transmitters, which typically must maintain a balance in “permissible investments” equal to the funds on outstanding transfers or unredeemed payment instruments.)
Governor Duke was not convinced of the efficacy of these measures and voted to deny the application. In addition to undue dependence on a single retail partner, Governor Duke cited the following risks presented by the Green Dot application:
the possibility that the technology currently employed by industry participants could become obsolete, that consumers’ demand for prepaid debit cards as an alternative to more traditional banking products and services could decline, that potential legislative or regulatory changes could reduce or eliminate the profitability of issuing prepaid debit cards, and that competition in the prepaid debit card industry may increase as a result of full-service banking organizations entering the market. In addition, the business model employed by prepaid debit card providers, including the model employed by Green Dot, involves significant exposure to operational, concentration, consumer, counterparty, settlement, and compliance risks.
In other words, there is little to like about the prospects for the prepaid industry, in Governor Duke’s view. Interestingly, Governor Duke felt that the approval conditions merely “increase[d] the ability of Green Dot to absorb losses but do not address the fundamental source of the risk posed by Green Dot’s narrow business plan.” It will be instructive to see if prepaid continues its rapid growth of recent years or whether the risks cited by Governor Duke (or other unforeseen headwinds) combine to slow its high rate of adoption as an innovative payment method. (Click here for summary information from the latest Mercator report on the strong outlook for growth in prepaid cards).