11/29/2011 04:53 pm ET

Fee-Dependent Prepaid Card Maker Moves Into Banking

In the latest signal that the economic crisis has fundamentally changed the way Americans handle their money, the largest provider of prepaid debit cards is now buying a bank.

GreenDot Corp. got the go-ahead last week from the Federal Reserve Board to purchase Bonneville Bancorp in Provo, Utah, for $15.7 million, marking the first time a prepaid card company has won approval to buy a bank. The deal is expected to close next week, after the mandatory 15-day waiting period has ended.

GreenDot's purchase underscores the massive revenue growth and increased use of prepaid cards, which are typically used by Americans who have limited access to traditional checking accounts with debit cards. Though banking customers have been outraged over recently announced fees on debit cards, there's been little focus on prepaid-card fees, which can often exceed traditional banking fees. GreenDot's reloadable prepaid MasterCard and Visa cards, which are sold in more than 57,000 retail locations, cost as much as $4.95 to buy and $5.95 per month to use.

The Monrovia, Calif.-based company is planning to use the acquisition to develop new kinds of online bank accounts, including a low-cost simple checking account, Steve Streit, the company's CEO, said in a phone interview Tuesday. The idea would be to give workers a place to deposit their paycheck: "We have always thought that there was a compelling need for a low cost, simple account where you can get wages," Streit said. "That process has not changed much over last 100 years."

Streit said the original Bonneville Bank location, which is near Brigham Young University, would remain open, although he said he did not know whether it would change names. He said there are no plans to open more branches.

Economic pressure in the last years have put an increasing number of people on the margins of traditional banking. And for many, instant liquidity -- cash in hand -- is far more important than the bells and whistles of a friendly branch banking experience, where it can take between 24 and 72 hours for a check to clear, said Arjan Schutte, a managing partner at Core Innovation Capital, a venture capital fund based in New York City that invests in financial service companies. He added that these new channels for handling money could be appealing to consumers who aren't well served by traditional retail banks.

As more Americans lose access to traditional banks, GreenDot has seen business thrive. Third quarter revenue was up 30 percent to $115.4 million from the same period in 2010. That mirrors the steep revenue growth in the prepaid card industry overall: General purpose prepaid cards saw 33 percent revenue growth in 2010 from 2009, according to a newly released market report from Core Innovation Capital and Center for Financial Services Innovation, a think tank focused on financial service innovation for so-called underbanked consumers. The increase was second only to the rise of online payday lenders -- high-interest short-term loans accessible only through the Internet -- which saw 35 percent growth, according to Core's report.

Prepaid cards are just one development in a growing ecosystem of alternative consumer financial products aimed at Americans who do not have or use traditional bank accounts. Last year, according to the Core report, there was more than $450 billion in total volume of funds borrowed, dollars transacted or deposits held by underbanked consumers. According to the report, there are at least 60 million consumers who fall into this category.

The report also showed that these same consumers paid $45 billion in fees and interest last year, more than half of which came from credit-related products. Fees from prepaid cards made up around $1 billion of that total -- significant growth over fees generated from prepaids in 2009, which amounted to $800 million, according to data from Core Innovation Capital.

The bank purchase could raise the hackles of some legislators who have not looked kindly on the merging of retail merchandisers and banking. GreenDot is partly owned by Walmart -- which has tried several times unsuccessfully to get a banking charter -- and helps run the retailer's Money Card. But Greendot CEO Streit said Walmart would not play a role in operating the bank and that the Money Card would still be issued by the Connecticut-based GE Money Bank.

For customers, GreenDot's acquisition of the bank may not make the experience of using one of its prepaid cards substantially different, for now, but it adds more ways for the company to market a variety of new kinds of prepaid cards, said Schutte.

The Federal Reserve Board voted 4 to 1 to approve the purchase, with one board governor dissenting. In her dissent, Fed Gov. Elizabeth Duke said that the deal was too risky and based on too narrow of a market.

"I have concerns about business plans that focus narrowly on one or a few products," she wrote in her dissent. "The prepaid debit card industry is subject to various risks, including the possibility that the technology currently employed by industry participants could become obsolete, that consumers' demand for prepaid debit cards ... 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."