Green Dot's Bank Deal Could Bring It CFPB Relief

Green Dot Corp. got the green light to jump into traditional banking at exactly the right time.

The prepaid debit card company, which agreed to buy Bonneville Bancorp in February 2010, finally won the Federal Reserve Board's blessing last week. That decision marked the first time the Fed has allowed a prepaid card marketer to buy a bank, and opens a rare door for a nonbank financial services company to gain a banking charter.

By purchasing Provo, Utah-based Bonneville, Green Dot will be putting itself under the scrutiny of traditional banking regulators. But it may escape the increased oversight of the Consumer Financial Protection Bureau.

Though the bureau is expected to eventually supervise the prepaid market, it "might be a little easier on" Green Dot, since the company will also have to comply with Fed rules, says Larry Berlin, a vice president and research analyst for First Analysis Securities Corp.

"What a regulator hates the most is something that's unregulated," Berlin says. Once Green Dot falls under the aegis of existing banking regulators, "other entities won't be as anxious to regulate them," he says.

The Monrovia, Calif., company expects to close its $15.7-million deal for Bonneville by mid-December. Once its conversion to a bank holding company is complete, Green Dot will be regulated by the San Francisco Fed and the Utah Department of Financial Institutions, according to a company spokeswoman.

During an interview on Monday, Green Dot chief executive Steve Streit would not discuss regulatory matters.

The financial services industry is bracing for increased regulation of consumer products, when and if the CFPB gets fully up and running. While bankers have long opposed the agency, they hope that its immediate focus will turn to nonbank or "alternative" financial services companies, including check-cashers, payday lenders and prepaid card providers.

Earlier this month, consumer advocates urged the consumer watchdog agency to step up its oversight of the prepaid card industry, which typically markets its cards to low-income consumers who do not have or do not typically use bank accounts.

But even if the CFPB is overseeing the prepaid industry as a whole, "they might be a little easier on" Green Dot, since the company will also have to comply with Fed rules, says Berlin.

Green Dot will have to comply with CFPB rules in the short term, or if the bureau eventually creates broad rules regulating the prepaid industry. But in the long term, it is likely to gain even more distance from direct bureau oversight. If and when a director is confirmed by the Senate, the CFPB will have direct oversight of all nonbanks, but will only be able to directly regulate banks that have more than $10 billion of assets. Green Dot, which had $352 million in assets at the end of September, falls well below that threshold.

The Fed's approval also gives Green Dot extra insulation from recent regulations capping so-called debit interchange fees. The Durbin amendment to the Dodd-Frank financial reform law slashed the fees banks can collect from merchants every time customers pay with their debit cards.

Most prepaid cards, including those marketed by Green Dot, are exempt from the Durbin fee caps. Green Dot's acquisition of the $42 million-asset Bonneville was in process before the Durbin amendment was written - but in its wake, Green Dot will now qualify for a second exemption: the fee caps do not apply to banks with less than $10 billion in assets.

"It makes a big deal to the prepaid guys because a big chunk of revenue" comes from interchange fees, says John Kraft, a senior vice president with D.A. Davidson & Co. "However you can position yourself to be exempt from the Durbin amendment is the goal."

The Fed's long-awaited decision offers several other benefits for Green Dot, which will now have more scope to develop new products and compete with traditional banks. And soon the company can avoid the costs and risks associated with relying on partners to issue its prepaid cards. For example, rival prepaid marketer NetSpend Corp. was forced to seek new bank partners after its primary partner, MetaBank, came under regulatory scrutiny.

In an emailed statement on Tuesday, NetSpend CEO Dan Henry called the regulatory approval for Green Dot's bank "very positive for the prepaid industry." The company would not comment further on whether it plans to follow Green Dot's lead and look to buy a bank.

Streit said Green Dot has been working to expand its product set as it prepares to become a bank holding company.

"Clearly we're hard at work and have been pursuing for some time ways to serve other segments," in addition to the company's current prepaid card users, Streit says. "Maybe the biggest reason for getting the bank was to give us more flexibility on the innovation front."

He would not discuss details of any development plans.

Some banks are increasingly following Green Dot's lead and introducing prepaid cards, in an effort to attract or keep customers who cannot afford or do not want to pay fees for checking accounts or related products. Now analysts are predicting that Green Dot could push back the other way.

Green Dot's new products could "look something like a branchless checking account," Wedbush Securities analyst Gil Luria predicts. "The distinction between a prepaid account and a checking account is a marketing distinction. Both are FDIC-insured transactional accounts."

The Bonneville deal will not change one popular product that Green Dot currently helps run, through its substantial partnership with Wal-Mart Stores Inc. Green Dot helps run the retailer's prepaid cards, and Streit says that the company has an agreement with Wal-Mart and card issuer GE through May 2015.

Green Dot has "no plans to issue a Wal-Mart card out of Bonneville," he says.

Wal-Mart cards accounted for 62% of the company's revenue in the third quarter of 2011, according to a First Analysis note last week.