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Patrice Peyret Headshot

Green Dot vs. Kwedit: Innovation vs. Exploitation

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In a prior post , I took a shot at venture capital firms' lackadaisical interest in funding financial services innovation.

Now two recent events signal increasing activity in the sector: Green Dot Corporation's $150 million initial public offering filing and Kwedit's venture capital-backed launch.

At a high level, it's great to see payment service funding activity pick up because the sector needs newer, more consumer-friendly products. But a closer look illustrates the difference between funding innovation vs. trying to make a quick buck by exploiting a vulnerable population (and ending up as a Comedy Central punchline).

Green DotLet's start with the good. Green Dot is a major operator of prepaid card services in the US, including the Walmart MoneyCard prepaid cards and the Green Dot cash-to card network present in 50,000 retail locations. The company is backed by blue-chip venture capital firm Sequoia Capital. Disclosure: my company's Upside Visa and iBankUP products are part of the Green Dot card-reload network.

At a recent industry conference, Steve Streit, Green Dot president and CEO, described his company's intention to help under-served US consumers with simpler and lower cost payment services. No doubt the company's IPO funding will help fuel this effort.

Even if Green Dot is not the price leader in the market, its products are fair, and its distribution network is carefully calibrated to best serve mid- or low-income customers without ghettoizing them at low-end retail outlets. I look forward to Green Dot being a role model for the financial services industry.

KweditContrast this with Kwedit, a very recent (2010) start-up, with investments from Maveron Ventures (of Howard Schultz's Starbucks fame) and a number of lesser-known venture funds. Kwedit was featured on Comedy Central's Colbert Report because, as Stephen Colbert put it: "Kwedit allows kids to spend money they don't have on products that don't exist."

Kwedit offers a way for users as young as 13 to buy virtual goods and online games by promising that someone (parents?) will pay up later. If they don't pay, their online reputation takes a hit. It encourages the opposite behavior than what's recommended by financial literacy experts from Suze Orman to Dave Ramsey and Jean Chatzky: earn it before you spend it.

In a blog post dated March 5, Kwedit's CEO Danny Shader addressed Colbert by stating that his company is not targeting kids, just people ages 13 and above.

OK, so they are not evil to the point of targeting "tweens" aged 8-12 or even younger children.

The Colbert exposure did spur Kwedit to remove "Kweddy the duck" from its website pages, although the company plans to keep the mascot in its logo, according to Shader's post. Admittedly, it took longer for R.J. Reynolds to remove Joe Camel from its cigarette advertisements.

These two examples illustrate how venture funding can help promote financial service innovation... or exploitation. In my experience, real innovation wins in the long run, and I fully expect that Sequoia will make a killing on Green Dot and Maveron will loose its bet (and damage its reputation) on Kwedit. In the meantime, consumers beware.