Why Green Dot Is Letting Customers Name Their Price

PASADENA, Calif. — Green Dot, the pioneering prepaid card company, looked like it might become road kill last summer.

Walmart, the retail giant through which Green Dot had built much of its success, was on the verge of announcing a partnership with rival American Express. At the same time, fees charged on prepaid cards were tumbling. On a single day in July, after Green Dot (GDOT) reduced its earnings projections, the company's share price tumbled 60%. The price has since regained about half of that lost value.

"I guess what you learn is that as long as you're not dead, you can survive anything," laughs Steven Streit, Green Dot's founder and chief executive officer. "Because that was a bad day."

Green Dot has tried to turn the page with the launch of GoBank, a mobile banking account designed to appeal to a more upscale, tech-savvy crowd than its prepaid cards do.

Intriguingly, the new product allows customers to pay what they want — anywhere from nothing to $9 per month — mimicking an idea championed by the rock band Radiohead.

GoBank is currently in beta testing. Green Dot plans to release it nationally in May or June.

Streit recently spoke with American Banker about pay-what-you-want pricing, the recent sale of one of Green Dot's top competitors, and whether the prepaid card and the checking account are converging into a single product.

Below is an edited transcript of the interview.

American Banker: This pay-what-you-want concept is an interesting twist. What percentage of GoBank users at this point are paying?

That's an easy one to answer, because we locked the fee bar at zero for the pilot. And the reason is for the beta we knew it wouldn't be predictive. The people who rush to get an invitation for beta are going to be payment professionals. So it's not really a representative sample of the broad usage base that you'll get.

How did you decide to use the pay-what-you-want model?

Part of it is because people like you ask the question. It creates a memorable component of the bank's strategy. The analogy I used is: Why did the Cadillac have fins? It didn't help with the aerodynamics. It didn't have any mechanics. The answer is: because it looked cool. It caused people at a red light to go, 'what is that?'

The pay-what-you-want — it's something that we think speaks to a generation of bank users today. It certainly carries some risk of the revenue model, but we'll see how that bears out.

So is it purely a marketing thing?

We have research that shows we'll get X dollars a month on average. And the younger the customer — male and younger — the less you're going to pay. And the more you happen to be a female, and happen to be over 25, the more you're going to pay us. And we'll see how all settles in.

Skeptics may say: this will work for bands that have an emotional connection with their fans. But customers of banks tend to have different relationships.

Maybe, but here's the thing. In my mind we've already gotten a benefit out of it. We've got 300 million media impressions. But to your point, if we were wholly reliant on the monthly fee to be profitable, or to stop a loss, that would be more concerning.

One of your top competitors, NetSpend (NTSP), was recently acquired by Total System Services (TSS). What does that mean for Green Dot?

I think that's a net positive for us, because it sets a real valuation on what smart people are willing to pay for a company like this. So in that regard I think it's been helpful to our investors, and it's been helpful to better understand our opportunity segment. In terms of the competitive thing, I think it's neither good nor bad nor in between.

Shortly after the NetSpend acquisition was announced, Green Dot extended its payments processing relationship with Total System. But you've also spoken publicly about developing your own payments processing platform internally. Are you still working on that project?

We are, but at the same time, part of running a bank is to be constantly risk-averse. Which as an entrepreneur who started the company, you don't start off that way. But as you become a bigger company, you begin to weigh equal doses of opportunity to risk. And I didn't like the cliff that we had on rolling out our own systems, and I wanted to give us a lot of buffer to slowly and thoughtfully prepare for mistakes and redo the discussion. And I just felt our current agreement didn't have enough in it to give me that comfort.

Give me your thoughts about the convergence of prepaid and checking products. Are we at a point now where the two are close to becoming indistinguishable?

What does it take to process a prepaid card, to take a call at a call center, to respond to a balance inquiry on a mobile app? Those ingredients, including the way they're regulated as a transactional account, are not that much different whether you call it a checking account or call it a prepaid card or something else. So in that regard the convergence would be there.

I don't think there'll be a marketing convergence, because people buy the products because they view them very, very differently. And the closest analogy I can give you would be the mobile phone industry, where you have a phone that you can buy at Walmart as a straight-talk, prepaid phone that is $40 a month, quit when you want. Or you can buy it as a post-paid phone on Verizon with a three-year contract at $150 a month. The phone's the same, the towers are the same, the regulations the same, the FCC disclosures are the same. What's not the same is the marketing wrapper that's put around that mobile phone.

If you're a prepaid customer, the Green Dot prepaid card speaks to you in a way that vibrates with your consumer need and preference. The messages about control, the messages about cash, the messages about the predictability of not having an unexplained or unexpected overdraft fee. These are things that appeal to people looking to that segment of product.