It's no secret that cash is being used less and less in Americans' daily lives and that financial technology, or fintech companies are some of the biggest potential beneficiaries.
While most of the headlines about investing in the trend toward a cashless society have to do with major payment processing companies like Visa or giant consumer-facing companies like PayPal, it could be a good idea to dig a little deeper. With that in mind, here's an introduction to Green Dot (NYSE:GDOT) and why it could be a big winner in the war on cash.
How Green Dot makes its money
Green Dot's mission is to "provide modern, affordable, and accessible banking services to the masses." It aims to do this through two main avenues.
Green Dot sells its own banking products, such as prepaid debit cards and GoBank bank accounts. In addition, the company creates banking products and services for use by other companies, which Green Dot refers to as its "banking as a service," or BaaS, platform.
Green Dot's primary source of revenue is interchange fees, which it earns every time a customer uses a Green Dot payment product to make a purchase. In addition, the company earns fees from certain products, such as monthly account membership fees, and it also generates interest income from customer deposits and its secured credit cards.
What is banking as a service (BaaS)?
I recently had the opportunity to speak with Brett Narlinger, Green Dot's chief revenue officer, at the Money20/20 conference, and he gave me an excellent, simple English explanation:
Many companies need some type of banking service. Maybe they need a payment card, or a person-to-person payment app, but becoming a bank isn't practical or desirable in most cases. We allow them to use a piece -- or several pieces -- of the banking infrastructure we've built over our 20-year history to offer the services their customers need.
To name one example, Green Dot's largest and oldest partner, Walmart, uses Green Dot's technology to issue the Walmart MoneyCard prepaid debit card product.
The past couple of years have been very exciting for Green Dot, in terms of BaaS partnerships. There are many companies that can benefit from offering banking products to their customers but that have no desire to become an actual bank. Just to name some of the most notable recent partnerships:
- In 2016, the company partnered with Uber to both provide drivers with a mobile checking account and to facilitate Instant Pay, where drivers can get paid instantly after a drive.
- In 2017, Green Dot added several key partners, including Apple and Intuit. Green Dot's technology now powers Apple's person-to-person payment platform and Apple Pay Cash, as well as the TurboTax prepaid debit card.
- Just this year, Green Dot has partnered with popular investing app Stash to provide the technology and banking platform behind users' bank accounts. And most recently, Green Dot announced a new partnership with TaxSlayer to create the TaxSlayer prepaid Visa card to allow that company's 10 million customers the opportunity to directly deposit their refund easily.
Why Green Dot could be a big winner
In addition to its potentially lucrative BaaS partnership agreements, the more recent of which are not yet fully reflected in Green Dot's revenue and earnings, there's a major industry trend that should benefit Green Dot in particular.
You may have heard of the "war on cash," a phrase that is often used to refer to the trend toward becoming a completely cashless society. For example, merchants such as street vendors now often accept card payments, and this was largely unheard of just a few years ago. And if you need to give money to a friend, you can now do it through a person-to-person payment app instead of giving them physical cash.
Green Dot's target customers are those who are most likely to still use cash for everyday purchases. There's a surprisingly large subset of the U.S. population that doesn't have a checking or savings account, still receives a paper paycheck and cashes it, and doesn't yet use person-to-person payments.
It has become far less convenient to use cash in many everyday situations over the past few years, and this trend should continue for many years to come. And as it does, these cash-heavy consumers could come pouring into Green Dot's ecosystem in massive numbers.