A New Model for Retail Banking?

by Carol Coye Benson on March 1, 2010

in Banking, Banking Industry, Carol Coye Benson, Prepaid

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Green Dot‘s IPO plans revealed that they are becoming a bank holding company. This is completely fascinating to me – and gives, I think, a peek at what may come for retail banking in the future.

At Glenbrook we’ve been talking, thinking, and writing for some time about two related issues. One is the problems retail banks have with their economic model: in a nutshell, that consumers expect “free checking,” and that too much of the bank’s revenue comes from either customer-invisible (interchange, NII) or customer-antagonistic (overdraft fee) sources. The other is the growth of the open-loop prepaid card industry, and the potential for these “banks on a card” to serve not only the unbanked, but the unhappily banked as well.

The first logical intersection of these two issues is to predict continued growth for prepaid cards as they exist today – issued by non-bank companies with a shadow “network bank” as a supplier. But Green Dot’s plans go in a different, and potentially much more interesting, direction. Simply put, a prepaid, open-loop card from “Green Dot Bank” could be not just an alternative to a bank account, but a new type of bank account – one with a completely different economic model from current retail banks, but with some of the positive attributes (trust, security, etc.) that consumers associate with banks.

What appeals to me is the potential to get away from this trap of consumer-invisible or consumer-antagonistic revenue sources. These cards are, after all, paid for by consumers – at least in their current incarnation. The skeptic in me, of course, says that over time, these new prepaid cards will simply become “normal” retail bank accounts- with the bank living off of overdraft fees, interchange and NII. We’ll have to wait and see!

3 Responses to “A New Model for Retail Banking?”

  1. Carol,
    Excellent forward-looking snapshot of what Steve Streit and Green Dot crew is planning. “Green Dot Bank” won’t bring the established retail banking industry to its needs but it likely will give incumbent strategists something to worry about at night.

  2. Ben Weiss says:

    Great post and an interesting concept to handle the ‘future of banking’ model. Of course, the problem with free checking via prepaid card is that prepaid metrics are entirely dependent on fees that a normal checking account holder would never be willing to pay, namely monthly account fees, ATM transaction fees (on top of local bank fees, usually), Balance inquiries, additional/stolen card replacement, card delivery fee, and account opening fees. These are mostly consumer-antagonistic of course. While the unbanked might find the prepaid option appealing, folks with bank accounts will not likely make that switch without heavy incentives.

    When comparing the GreenDot approach to other non-traditional bank accounts, such as internet bank outfits and the likes of USAA, you see the latter options competing with their brick and mortar rivals by drastically lowering fees (returning ATM fees) and lowering the barriers for deposit (remote deposit capture). While the prepaid platform will work for GreenDot insofar as further simplifying the process of opening an account, and potentially making payment easier/cheaper, I’d be particularly skeptical of their success if they cannot compete on these fees.

  3. Rae says:

    This isn’t a new way of banking. This is the model credit unions have provided for years!!!

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