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FRB Approves Green Dot Application

Monday, November 28, 2011

Blayne V. Scofield | Bloomberg LawBoard of Governors of the Federal Reserve System, Order Approving the Formation of a Bank Holding Company (Nov. 23, 2011) On November 23, 2011 the Board of Governors of the Federal Reserve System (FRB) approved Green Dot Corporation’s application to become a bank holding company. The approval allows Green Dot to consummate its acquisition of Bonneville Bancorp, the parent company of Bonneville Bank, which it announced more than 20 months ago in February 2010. FRB’s approval means that Green Dot will become the first prepaid card company to operate its own bank and gives Wal-Mart Stores Inc. an indirect foothold in the U.S. banking market.

Why the Approval Matters

Green Dot offers Visa- and Mastercard-branded prepaid cards to consumers. Its cards are sold in retail locations and on the internet. Under its current structure, Green Dot does not actually issue its cards. Instead, it relies on banks (i.e., Synovus Bank and GE Money Bank) to issue cards, maintain customer accounts, and hold customer funds. Green Dot designs and markets the prepaid card programs and provides recordkeeping and settlement services. There are two reasons why Green Dot does not currently issue its own prepaid cards: Visa and Mastercard. The Visa and Mastercard networks provide the infrastructure for carrying out payment transactions. Their systems connect cardholders’ accounts with merchants’ accounts. This facilitates transaction execution and settlement. However, Visa and Mastercard generally permit only banks and certain payment processors to directly access their networks. Prepaid card companies like Green Dot (as well as merchants) must use banks as conduits to gain access to the Visa and Mastercard networks. Green Dot's acquisition of Bonneville Bank will allow it to connect directly to the Visa and Mastercard networks and issue its own cards. This carries two important benefits. First, it means more money for Green Dot which currently pays Synovus Bank and GE Money Bank fees for their card issuance services. Going forward, Green Dot will be able to retain these fees for itself. Second, it means less regulatory risk. When a prepaid card company relies on an issuing bank to issue cards, it faces two levels of regulatory risk—its own compliance with applicable law and its issuing bank’s compliance with applicable law. If the issuing bank fails to satisfy its compliance obligations, it can create issues for the prepaid card company. For instance, in July 2011 banking regulators subjected MetaBank, a leading prepaid card issuer, to a cease and desist order that required it to obtain regulatory approval before launching any new prepaid card programs. This was a significant obstacle for prepaid card companies that relied on MetaBank’s services. While Green Dot has not encountered MetaBank-like problems with its bank partners, the acquisition of a bank will allow it to control its own destiny and avoid regulatory problems that are beyond its control.

Governor Duke’s Dissent

In its application, Green Dot indicated that its bank will offer a single product line—prepaid card products. According to FRB, this will expose Green Dot’s bank to “significantly greater risks” than a normal bank with diversified product lines. As a result, FRB’s approval was subject to capital and liquidity requirements. Green Dot's bank must maintain a tier one capital ratio of 15 percent or more for the first five years after the acquisition (i.e., more than double the tier one capital ratio of a well-capitalized bank) and is prohibited from paying dividends for its first three years. In addition, Green Dot must maintain cash or cash equivalents either at the bank or at the holding capital level equal to the amount of insured deposits. FRB governor Elizabeth Duke dissented. Governor Duke argued that Green Dot's narrow focus on issuing prepaid cards and its dependence on Wal-Mart Stores, Inc. (more below) presented too much risk to merit approval. She was dismissive of the approval's conditions. In her view, the capital and liquidity conditions would not shield Green Dot from a collapse of the prepaid card market as a whole nor would they offer any meaningful protection in the event Green Dot loses Wal-Mart as a customer.

Deafening Silence

One of the most remarkable aspects of FRB’s approval (as well as the dissent) is the lack of discussion regarding Wal-Mart. Although both the approval and dissent make passing references to Green Dot's dependence on a "single retail partner," neither mentions Wal-Mart by name nor quantifies Green Dot's relationship with Wal-Mart. Wal-Mart plays a large role in Green Dot's operations. According to Green Dot’s third quarter 2011 10-Q, Wal-Mart holds approximately 2.2 million shares of Green Dot’s Class A common stock, which represents 8.7 percent of Green Dot’s Class A common stock and 5.2 percent of its total outstanding common stock. In addition, sales at Wal-Mart locations have consistently accounted for a majority of Green Dot's total revenues each quarter.
Percent of Operating Revenue From Sales at Wal-Mart60%63%NA**63%64%63%NA**58%60%61%
* This is the earliest available information. Green Dot conducted its initial public offering and first became subject to reporting requirements in mid-2010. Its first 10-Q (for the second quarter of 2010) also contains 2009 quarterly information for comparison. **Green Dot did not report quarterly data in its 10-K for the year ending December 31, 2010. Instead, it presented only five- and twelve-month data.
Data: Green Dot SEC filings
The entry of Wal-Mart in banking markets has long been a contentious issue. Wal-Mart has tried (and failed) to acquire a bank three times over the last twelve years. Its1999 effort was thwarted by the Gramm-Leach-Bliley Act, its 2002 effort was blocked by the California legislature, and its 2005 attempt stalled when the Federal Deposit Insurance Corporation declared a moratorium on industrial bank acquisitions after receiving Wal-Mart’s application. In each case, Wal-Mart was vigorously opposed by consumer advocates and banking industry groups. Any company that “controls” a bank must register as a bank holding company and is subject to regulation by FRB. Under the Bank Holding Company Act, 12 U.S.C. § 1841(a), a company “controls” a bank if it directly or indirectly (i) owns 25 percent or more of any class of a bank’s voting stock, (ii) may elect a majority of the bank’s directors, or (iii) “exercises a controlling influence” over the bank’s management or policies. Wal-Mart clearly does not satisfy clause (i) or (ii) of the definition of control. However, its relationship with Green Dot raises questions about whether it will indirectly exercise a controlling influence over Green Dot's bank. FRB has never defined the type of conduct that constitutes the exercise of a controlling influence. However, in its 2008 Policy Statement on Equity Investments in Banks and Bank Holding Companies, FRB indicated that it evaluates the business relationships between a minority shareholder and a bank holding company when determining whether the minority shareholder has a controlling influence. In the Policy Statement, FRB stated that it "continues to believe that business relationships should remain limited" between a minority investor and a bank holding company and that it pays "particular attention" to such relationships when determining whether a minority investor exercises a controlling influence. Given the controversy surrounding Wal-Mart's involvement with banking and the size of its relationship with Green Dot, it is surprising that FRB declined to specifically address Wal-Mart in its approval. A discussion of FRB's view of the situation would have enhanced the transparency of FRB's approval process and provided useful guidance for companies and practitioners who seek to structure similar transactions in the future.

Foot in the Door

FRB's approval of Green Dot's acquisition of Bonneville Bank makes Green Dot the first nonbank prepaid card company to acquire a bank. This gives it significant competitive advantages in the market and will likely spur interest by its competitors in similar transactions.
Prepaid Card CompanyIssuing BankOwnership of Issuing Bank?
AccountNowMetaBank The Bancorp BankNo No
Green DotBonneville Bank GE Money Bank Synovus BankYes No No
NetspendMetaBank Inter National Bank U.S. Bank SunTrust Bank The Bancorp BankNo No No No No
PreCashMetaBank The Bancorp BankNo No
Rush CardThe Bancorp BankNo
Western UnionMetaBankNo
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