DALLAS — Green Dot Corp., one of the oldest and biggest players in the prepaid card market, is about to change its fee structure drastically, and by doing so, it could accelerate the maturation of the young prepaid industry.
The overhaul, following Wal-Mart Stores Inc.'s price cuts four months ago, will give Green Dot cardholders an incentive to reload and reuse their cards after the initial amount has been spent.
In August, Green Dot will reduce its up-front fees for all consumers, and it will start waiving its monthly maintenance fees for consumers who use their cards regularly, executives said Tuesday.
"One of the problems with a lot of the prepaid products out there is that it rewards your worst customers," said Steve Streit, Green Dot's founder and chief executive. "If you buy a card and use it once and throw it away, you never pay any monthly fee. If you buy the card, really like it and really use it and keep it for a year and a half, the way a lot of our customers do, you're paying a lot of money just to make sure that it works."
Like an airline's frequent flier program, Green Dot's new pricing structure will reward repeated use, Streit said. "If you're a regular user of the card, the miles rack up. We really want this to be a product that they use over and over, and fees never become a material consideration of whether they use it or not."
He spoke to American Banker during the fourth annual Underbanked Financial Services Forum. (The conference was presented by the Center for Financial Services Innovation, a nonprofit arm of Chicago's ShoreBank Corp, and SourceMedia Inc., the parent company of American Banker.)
Green Dot, which markets its own cards and provides reloading and support services for Wal-Mart's MoneyCards, may not have the retailer's name recognition. But Streit said his Monrovia, Calif., company has sold more than 10 million of its cards, which are sold mostly in grocery stores and other retailers, since 2001 and has "several million" active accounts.
When Wal-Mart reduced its up-front, reloading and monthly maintenance fees to $3 each in February, it said it was on the way to having 2 million customers. Kathy Barney, the president of H&R Block Inc.'s bank, said in an interview Tuesday that it issued about 2.7 million of its prepaid Emerald cards this past tax season.
Mark Troughton, Green Dot's president of cards and network, said its up-front fee will be "significantly lower than it is today." In addition, "if you're a regular user, it will be completely free from ATMs to back-end fees," including monthly fees. However, all users will still have to pay the up-front free, as well as reloading fees if they reload their cards through channels other than direct deposit. "That's not really a card fee. That's a retailer fee."
Green Dot would not say how much its reduced up-front fee will be or how the company will determine whether a cardholder is a regular user, beyond "a couple of tests," as Troughton put it. "It's really easy. … You don't have to have lots of money. If you make this card your primary vehicle, that's the mind-set with which we approached the pricing model. For us, it's about building a portfolio of long-term customers."
On July 1, nFinanSe Inc. will cut the up-front price of its reloadable prepaid card by $2.95, to $3, the Tampa company said Wednesday. The other fees — a $2.95 monthly maintenance fee and $2.95 reload fee — will not change. Direct deposit and customer service will remain free, nFinanSe said. (Some prepaid providers charge consumers to call a customer service center.)
"When Wal-Mart went to $3, we had thought all along that we would be reducing our price," Jerry R. Welch, nFinanSe's chairman and CEO, said in an interview Wednesday. "We had to get the cards priced down to a level where you can really get attention in the marketplace."
The lower prices "will really stimulate impulse buying of prepaid cards," he said. "Those higher prices" for the cards "really don't encourage trial and usage."
Russell Simmons, the music industry mogul whose Rush Communications Inc. offers the prepaid RushCard, acknowledged Wal-Mart's influence in April as he discussed plans to introduce lower-priced versions of his cards. (None have yet appeared.)
Green Dot dismissed the suggestion that it was reacting to Wal-Mart's repricing. "I don't think so," Troughton said. "It's pro-consumer. It's alignment" with consumer needs.
But observers quickly noted a "Wal-Mart effect" on the prepaid industry.
"Given that Wal-Mart has lowered its fees, we're seeing downward pressure on fees generally," said Rachel Schneider, the innovation director for the Center for Financial Services Innovation. "And it may not be purely a Wal-Mart phenomenon. It may be that there's increased competition in the marketplace and generally growing prospects for prepaid cards, and the industry may be at an inflection point where consumers are starting to evaluate different card offerings versus each other in a way they hadn't in the past."
Similarly, John Grund, a partner at First Annapolis Consulting Inc., said he would view Green Dot's decision "in the context of Wal-Mart's repricing," but he also said the plan is "just a natural stage of evolution" in the industry.
"We'll see the pack start to separate," Grund said. "It wouldn't be unusual to see some of the big guys go for some more intense competition to further complete the land grab in the prepaid space."
Fees at H&R Block, which already waives most up-front and monthly fees for active cardholders, are unlikely to change soon.
"Every year we re-evaluate them," said Amy Roberts, the Kansas City, Mo., tax preparation company's director of product development for card programs. "Going into next year … we actually just did our analysis, did a comparison against what we consider our key competitors in the space, and we think we're in a great competitive position with our fee structure, and it still remains a great value."
(According to its Web site, after three months of inactivity, H&R Block charges a $2.50 monthly maintenance fee.)
Roberts would not say how many cardholders reload and reuse their Emerald cards. However, "the population that is" doing so "is reloading $4 million per day," she said. "And every year we see it increase. This past tax season we saw a 20% increase in the reload rate. People who reload it are extremely loyal. We haven't seen them go anywhere."
Schneider said that if Green Dot or another large player were to waive reloading fees, it would have a bigger effect on the industry.
Still, "retention is one of the major challenges to prepaid companies," and Green Dot's plan "strikes me as an innovative way to increase retention, because it's directly focused on their existing customer base and I see how that would potentially drive longevity," she said. "They're trying to lower fees selectively for the customers they want to keep. So that may be a good strategy in terms of segmenting the market and offering the right pricing structure for different kinds of usage."
