Green Dot is leaning on banking-as-a-service with partners like Uber as neobanks flush with VC cash threaten its prepaid card business
- Green Dot is the bank behind offerings like Walmart's MoneyCard and new TailFin accelerator, and ride-hailing giant Uber's checking account.
- Becoming a bank requires a bank charter and heavy regulations, so non-banks like retailers and fintechs that want to add bank-like products are turning to partner banks instead. We talked to Green Dot execs to learn more about how it has been approaching those deals.
- Green Dot offers its own banking products, but with steep competition from neobanks, it is focused on growing its banking-as-a-service business.
- The bank is set to report third-quarter earnings on Nov. 7. Its shares plunged the previous quarter when it slashed its outlook, citing heavy competition that was hurting older business lines.
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It seems everyone wants to be a bank these days, or at least do bank-like things. There are the obvious players like challenger banks, digital wealth managers, and payment processors.
Then, there are some less-expected entrants, like ride-hailing giant Uber, or global retail chain Walmart.
Green Dot, a bank known for its prepaid debit cards, has seen that long-standing business come under pressure - and its execs have blamed a loss of active accounts on a rush of VC cash into digital banks. Now, it's leaning more on partnerships with companies that want to offer their own bank-like services without the hassle of actually being a bank.
Becoming a bank requires a bank charter, which can be issued by states, or by the US Office of the Comptroller of the Currency (OCC) for national charters. The process can take a year or more, according to the Federal Reserve.
In 2018, the OCC announced a special fintech charter. It was rolled out, but no fintechs applied. And in October, a New York federal district court ruled that the OCC doesn't have authority to grant national bank charters to fintechs. The OCC plans to appeal the ruling, according to Finextra.
Instead, non-banks looking to enter the finance ecosystem have been teaming up with so-called banking as a service (BaaS) providers, also called partner banks. For Uber and Walmart, that partner bank is Green Dot.
"If you are one of these large tech companies that want to build your own banking product, Green Dot is typically at the top of your list of places to go," Dov Marmor, general manager & head of banking as a service at Green Dot told Business Insider.
Green Dot last week announced its partnership with Uber for the ride-hailing company's new Uber Money suite. Uber Money will include a digital wallet, a debit account and card, and also give drivers immediate access to their earnings after each ride.
"Our partners are in the driver's seat from a product-creation perspective," said Marmor. Green Dot partners like Uber will have an idea, and then it is up to the bank to make sure that it is feasible from a regulatory perspective.
Green Dot's compliance and marketing teams review for general regulatory compliance as well as "Unfair or Deceptive Acts or Practices" (UDAAP) requirements, which were established with the Dodd-Frank Wall Street reform law in 2010.
"We take all of that into account, and act as a guide for the partners in terms of creating their vision, but in a way that works for the regulators as well," Marmor said.
Green Dot provides the infrastructure to support the product once it is compliant. Its core banking services include card issuance, payments processing, and fraud monitoring, all offered to partners through a series of APIs.
"It allows companies that are not banks, like Uber, Apple, Intuit, et cetera, to create their own financial products but not have to go through the multi-year process of building the underlying infrastructure and regulatory structure in order to support those," Marmor said.
Competitive pressures
Green Dot's stock price plunged in August after its second-quarter earnings came out and it lowered its revenue and profit expectations for 2019. In addition to its BaaS business line, Green Dot has a direct-to-consumer business. In July, the bank launched a branchless bank account with an unlimited cash back debit card.
It's in the card and bank account businesses where Green Dot is feeling the competitive pressures of neobanks.
"One of the challenges we've had since March or April of 2019, was the neobanks and others who began marketing free bank accounts and spending quite a bit of money to do that," Green Dot CEO Steven Streit told Business Insider.
"That impacted our total number of active accounts, which caused us to lower guidance throughout the year, and that harmed the stock price," Streit said.
The company is set to report third-quarter earnings on Nov. 7.
Neobanks like Chime and N26, which just launched in the US this year, offer branchless banking services free to customers. In order to offer FDIC-insured bank accounts, Chime and N26 have partnered with The Bancorp Bank and Axos Bank, respectively.
"From a business model point of view, operating a real bank account at scale is not free - it's expensive. It does not occur in nature. You have to build it," Streit said. "Many of the free models by design are losing a tremendous amount of money as they try to scale with the marketing, and finding those customers."
Total VC funding for neobanks hit $2.5 billion in August, already surpassing 2018's record $2.3 billion. However, without offering credit products or charging customers for banking services, the path to profitability isn't always clear.
"It's a model that if it works, can be very powerful. If it doesn't work, then you'll have private equity lose a tremendous amount of money," said Streit.
To be sure, Streit recognized the upsides of competition.
"The rising tide floats all boats," he said. "If you have five or 10 companies advertising, 'Hey, it's a smarter thing to go online to get a bank account than it is to go into a branch to get a bank account,' well that benefits Green Dot because we're in that market."
reTAIL meets FINtech
Green Dot announced two deals with Walmart last week. The first is a fintech accelerator joint venture, called TailFin Labs.
"It's a hybrid of the words retail and fintech," Streit said. Walmart came up with the name, he said.
The accelerator, which is 80% owned by Walmart, will combine the tech and operating capabilities of Green Dot with Walmart's retail network to create and distribute new financial products.
Green Dot didn't share any specific details on planned products.
"They have the customer base, and Green Dot has the technology and operating platform, and together we hope that we can invent some cool stuff," Streit said.
Green Dot also announced a seven-year extension of its existing partnership on the Walmart MoneyCard.
"There's always a concern from investors as to whether or not Walmart will renew. Certainly, they can use anybody," Streit said.
Launched in 2006, the MoneyCard offers direct deposit, online bill pay, and cash back on Walmart purchases. There is also an incentivization for savings, called Prize Savings, where each dollar a customer saves in a virtual "vault" earns an entry to a monthly cash prize of up to $1,000.
"It's a full-fledged bank account that you can use to manage your finances," said Streit. Since its launch, the MoneyCard has become the largest retailer-exclusive pre-paid account program in the US, according to a statement.
Banking-as-a-service
BaaS has grown in popularity as smaller banks seek new revenue opportunities. Green Dot entered the BaaS space after several years building its prepaid debit card business.
"The largest business lines from a pure dollar perspective are still the legacy prepaid and money movement businesses," said Marmor. "They've just been around for 20 years, but the big growth engine and where we're investing a lot in the future of the company is in this banking as a service platform."
In addition to Uber and Walmart, Green Dot's other partners include Apple Pay Cash, Wealthfront, and Stash.
The Bancorp Bank has similar high-profile partnerships with neobanks Chime and Varo, as well as PayPal and Venmo. Small business lender BlueVine just launched banking services, also in partnership with Bancorp. New startups often partner with smaller banks, like digital startup bank Rho's partnership with Evolve Bank & Trust.
The service side of banking is even becoming a focus for some of the most high-profile Wall Street banks. Goldman Sachs' new chief technology officer recently told Business Insider that he wants to make it as easy as possible for third-party developers to interact with the bank - and will be treating them as among Goldman's "most valued customers."
"I would say that being a bank, without question, is the hardest thing we do," said Green Dot's Streit. "When I talk to my CEO peers at fintechs and they say 'oh yeah, we're going to become a bank,' I just don't think they understand the gravity of what that means, and how difficult that can be and how changing that could be to an organization."
Running a bank requires a staff that can understand and manage internal and external audits, reporting requirements, and surprise exams from regulators.
"A lot of entrepreneurs at fintech startups and can have abrasive attitudes or difficult attitudes or they want what they want when they want it. That works in a startup. It does not work in a bank," Streit said. "You have to have respect for risk management and internal audit. It's an acquired taste."