Fed Okays Green Dot Bank Charter

November 23, 2011

The Federal Reserve Board today announced it had okayed a request by Green Dot Corp. to purchase an FDIC-insured bank based in Provo, Utah.

The newly-named Green Dot Bank will focus exclusively on the general purpose prepaid card business, to the exclusion of demand deposit accounts, credit cards and other banking services. It's a risky proposition - sufficiently so to raise the concerns of one Fed Board Member: Elizabeth Duke.

Governor Duke, in a dissenting opinion appended to the Fed's approval order, raised concerns about Green Dot's singular focus on general purpose prepaid cards. By focusing exclusively on prepaid debit the new bank raises all kinds of risks, including the possibility that Green Dot's largest distribution partner might bail.

However, that partner, Walmart, has been lusting after a bank charter for years, and its minority interest in Green Dot is as close as the retailing giant has ever gotten to a bank charter. It would need a really compelling reason to bail out now.

General purpose prepaid cards are those that are branded by Visa, MasterCard, American Express or Discover, and can be used as debit cards anywhere those brands are accepted. Funds are maintained in pooled accounts at FDIC insured banks, and until now issued exclusively by a third party, a bank.

These cards have become exceeding popular; in fact, prepaid card transactions are growing at faster pace than any other type of card payment. Government agencies use the cards for benefits distributions; many employers have embrace the cards as a more efficient way to issue worker pay; budget conscicous consumers are using prepaid cards more; and so, too, are disgruntled former bank customers. (I know folks who have ditched their banks and now rely on prepaid debit exclusively.)

In 2010, Americans loaded $148.4 billion onto branded prepaid cards, a 19% increase over the previous year's total.

Green Dot is considered the largest among a handful of firms that drive prepaid card programs - from marketing and distribution to final settlement. It sells card accounts online and through retailers. Now that it has a bank of its own Green Dot can take the entire process in house, beginning with card issuance.

I'd be surprised if Green Dot didn't eventually broaden its product line to include deposit accounts. Stop by your local Walmart Money Center on a Friday and witness how Walmart has become a financial supermarket for America's unbanked and underserved. About the only thing they can't do there is place funds in savings accounts.

It's doubtful that Walmart would still be holding an interest in Green Dot if its objective was a quick market gain; the price of Green Dot shares have plummeted in excess of 54% over the past year. The price of Green Dot shares rose by 7.67% today on news of the Fed's action.

53% of adults, worldwide, are unbanked

_{-Financial Access Initiative}