Good customers are the core of any business. Banks are particularly aware of this problem after experiencing the pain of ill-advised loans during the housing bubble. But Capital One Financial (NYSE: COF ) has gotten a public rebuke for using the ChexSystems database to help identify customers it doesn't want to count as clients.
Could ChexSytems-like databases blacklist you? And who's left to turn to if you do get turned down?
Making money or avoiding pain
When it comes to a bank, good customers are worth their weight in gold -- Capital One Financial is well aware of this.
Such customers not only keep their savings in a Capital One Financial account, but they also use Capital One credit cards and take out Capital One mortgages. In fact, the whole point of a bank is to take in deposits that are then lent out to borrowers. The deposits earn a portion of the interest on the loans and the bank keeps the rest.
However, if customers turn out to be problematic, their costs can outweigh their benefits.
Banks learned this in spades during the housing led 2007 to 2009 recession when they lent too liberally. For example, Capital One Financial's net charge off rate more then doubled between 2007 (2.1%) and 2009 (4.58%). When you've made a loan that won't get paid back, you charge it off and simply accept the loss.
Clearly, Capital One Financial was working with some customers that didn't turn out to be good customers. That's why it uses software to help screen out potentially bad customers, watching for such things as bounced checks and past fraud as indicators.
A bounced check is all it takes?
Wait a second! Fraud is understandable, but a bounced check? That could just be a mistake.
Well, that mistake could get you blacklisted from doing business with some banks. That said, the New York Attorney General just got Capital One Financial to agree to limit its use of such background checks to egregious acts like fraud.
But the fact that banks are using these databases to turn customers away shows why there is such an opportunity in serving the underbanked.
While some can't afford a banking relationship, others simply can't get one even if they have gotten their finances in order. Companies like Green Dot (NYSE: GDOT ) have jumped on this opportunity.
Green Dot to the rescue
Green Dot's main business is selling prepaid credit cards. But once you are a customer it also offers bill pay, check deposit, and direct deposit services, among others.
Prominently displayed on its site is the guarantee, "No credit check or minimum balance." While that may be music to the ears of someone with a checkered past, it's not a big deal for Green Dot because customers have to pre-pay for its services. There's not much risk there and customers, good and bad alike, get to have a bank-like relationship.
If you're reading this you probably have a bank and you probably can't imagine life without one. Neither can I, but it must be tough.
That's why Green Dot's sales increased nearly 60% between 2010 and 2013. That said, it would logically seem that an improving economy, even a slowly improving one, would lead to less business at Green Dot. But that's just not happening.
Over the last three years, the number of active cards Green Dot has in the market has increased nearly 7%. The amount of money loaded onto its cards increased nearly 14%. And the amount of transaction activity on Green Dot cards increased just over 20%. It looks like an improving economy is making Green Dot customers better, well, customers.
That said, Green Dot's operating margin has been contracting. However, that's not surprising since it has been expanding its business footprint. In fact, Green Dot now actually owns a real bank! Which means it can market its bank services to its best pre-pay customers. Now that's an interesting opportunity to turn the underbanked into the banked, and to make money while doing it.
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