Why Big Banks Should Fear GoBank

When prepaid debit card vendor Green Dot (NYSE: GDOT  ) announced early this year that it was trialing a new concept in banking, my interest was piqued. After all, the company had seen some hard times in 2012, and I wondered if this new offering would help bolster the company's sagging profile.

Now, Green Dot is ready to release its smartphone-based virtual bank to the world, marking July 4 as the official launch date. The four-month trial has apparently been a rousing success, and investors have graced the company with a share price boost of nearly 50% so far this year.

Not your ordinary bank
When Green Dot management discussed the GoBank concept back in January, CEO Steve Streit noted that fees charged for checking accounts at large banks like Bank of America (NYSE: BAC  ) , Wells Fargo (NYSE: WFC  ) , and JPMorgan Chase (NYSE: JPM  ) can become problematic for the young and others with limited resources. Streit particularly noted overdraft fees -- which can be quite steep at the large banks, sometimes costing more than loans from payday lenders.

Online-only banks are not entirely new. The Bank of Internet (NASDAQ: BOFI  ) , for instance, is also completely virtual, having no physical bank locations while still offering a wide array of products and services. Fees do exist, though, and Bank of Internet charges an overdraft charge on its regular checking account, though not on Rewards Checking. 

In addition to the idea that GoBank is meant to be the only banking experience that is primarily based upon mobile devices, the costs associated with the account is the real difference between Green Dot's bank and the big guys. GoBank doesn't charge overdraft fees, and it has a network of 40,000 ATMs that customers can access for free, though a fee of $2.50 is charged for use of an out-of-network machine. As for a monthly maintenance fee, customers can choose their own -- on a sliding scale of $0 to $9 per month.

Treating customers right
Another way GoBank shines in comparison to the biggest banks is in its customer relations. Banks like Wells, B of A and JPMorgan are known for behavior like ordering debit card charges to maximize penalties for their customers -- something for which those banks, and many others, were cited by the Consumer Financial Protection Bureau, and for which they have been compensating consumers over the past couple of years.

GoBank has started out treating its customers well, and has informed those involved in the beta testing that the company has locked their monthly membership fee at $0. The way GoBank is onboarding customers has already won accolades from the Financial Brand, which notes that very few banks bother to welcome new customers, or help them navigate around their new accounts.

It seems that investors have been following the progress of GoBank, and are pleased by the results. Green Dot is planning a media blitz to introduce the product to the mainstream, which should ramp up its customer base very quickly. Time will tell, but it looks like Green Dot has tapped into a segment not often courted by banks -- and it just might be a big winner.

With so much of the financial industry getting bad press these days, it may be a greedy when others are fearful moment. Not surprisingly, some of Warren Buffett's biggest investments are in the space. In the Motley Fool's free report, "The Stocks Only the Smartest Investors Are Buying," you can learn about a small, under-the-radar bank that's too tiny for Buffett's billions. Too bad, because it has better operating metrics than his favorites. Just click here to keep reading.


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