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A Bank Stock Bets It Can Perform Better Than Radiohead

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In 2007, the band Radiohead released its album In Rainbows through its website and allowed fans to pay what they wanted for it. As an experiment in distribution and dependence on record labels, the outcome for one of the most beloved bands was unclear. One firm estimated that only 38% of fans paid anything, arriving at an average $2.26 per album downloaded -- far from the current typical floor of $10 per album. However, lead singer Thom Yorke responded that "in terms of digital income, we've made more money out of this record than out of all the other Radiohead albums put together, forever." Even so, the band ditched the pay-what-you-want model for its next album.

Even with Radiohead's questionable outcome with the scheme, Green Dot's  (NYSE: GDOT  ) GoBank, launched in January, is offering checking accounts where its members decide what to pay as a monthly fee, between $0 and $9. Does this make any sense for the company to think customers will voluntarily pay?

A deeper look into pay-what-you-want
Just as far as banking is from a rock band, fast-casual restaurant Panera Bread (NASDAQ: PNRA  ) operates five stores with a pay-what-you-want system -- although for Panera, these stores represent a charitable aspect of the company more than any profit motive. It opened the first of such stores in its home of St. Louis as a way to offer meals to those who might need one, and it recently expanded the program by offering one item, turkey chili, as a pay-what-you-can meal across all of its St. Louis locations. Panera notes that these restaurants typically take in between 70% and 80% of revenue compared with regular locations, and about 60% of customers pay the standard amount, with 20% paying more than usual and 20% paying less.

One study on the charitable aspect of pay-what-you-want found that it greatly increases the potential profit. In the study, researchers tested consumers' reactions when purchasing a photo taken while on a roller coaster with the differences between fixed price, fixed price with half going to charity, pay-what-you-want, and pay-what-you-want with half going to charity. The most profitable choice? Pay-what-you-want with the charity component. More consumers paid an average of $5.33 for the photo in that case.

Unfortunately for GoBank's chances, without the charity component, the average price per photo fell to $0.92.

Potential profits
While GoBank doesn't have the charity aspect in its favor if it plans to make money from its scheme, it is a great marketing tactic to separate it from other banks. In a time of Occupy Wall Street, banks have found it difficult to impose fees and often hurt their reputation when doing so. In 2011, Bank of America  (NYSE: BAC  ) attempted to impose a $5 fee if consumers used debit cards for purchases. That was met with significant protest, and it helped instigate Bank Transfer Day, where big bank customers were urged to switch their money into credit unions. Bank of America dropped the debit fee plan. To avoid another such protest, late last year the bank decided against instituting new monthly checking account fees ranging from $6 to $25 that it had been testing in a handful of states.

If GoBank can position itself as a consumer-friendly option among what are seen as vampiric banks, it could realize plenty of customers to help kick off its operations, and earn revenue through its other fees even if customers decide to pay $0 per month.

Additionally, Green Dot's operating revenue comes mainly from its prepaid financial services sold through retail partners, with a whopping 62% from Wal-Mart, and another 20% from the next three largest partners. Green Dot's GoBank is a new segment for the company, and one that it can experiment with while funding it from its positive free cash flow traditional prepaid business.

Worth a shot
Launching a new financial service means enticing customers to switch over, and using a pay-what-you-want model could be very enticing even if it seems like a gimmick. It seems this model is best paired with a charitable cause, and being online instead of face-to-face with social pressure may even further hurt GoBank's monthly fee take, but for a new start-up, it's probably worth the risk.

Even with a charity-minded side, Panera has returned almost 2,500% since going public. Even with those tremendous gains, there's reason to believe that the best is still yet to come. The stock has been on an absolute tear over the past five years, and you're invited to find out why -- and what else there is to look forward to -- in The Motley Fool's brand-new premium report on Panera. Included are key areas that investors must watch, as well as opportunities and threats facing the company both today and in the long term. Don't miss out on this invaluable investor's resource -- simply click here now to claim your copy today.

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