Word from the Streit: Green Dot CEO Talks to Paybefore

By Loraine DeBonis, Editor-in-Chief

Green Dot is no stranger to headwinds. Since it went public in 2010, it has faced what some analysts were describing as apocalyptic competition from the likes of American Express and Chase, fraud concerns that led to pulling its profitable MoneyPak product off the shelves, rising regulatory costs and uncertainty, as well as earnings that fell short of its IPO promise. The company’s stock price is up 40 percent since the start of 2016 and it beat analyst expectations for Q1 growth, including the first quarterly growth in active cardholders in 12 months. But Green Dot has been embroiled in a battle over board seats with investor Harvest Capital, which has called for the ouster from the board of Green Dot CEO Steve Streit and two other board members. Now in the midst of a proxy fight leading up to the May 23 shareholders’ meeting, Streit spoke with Paybefore about Harvest Capital’s concerns, how he sees Green Dot’s position in the market and when he’d show himself the door.

Paybefore: What is the most important thing you want shareholders to know before the meeting on May 23?

Steve Streit: When I make decisions, I look at the risk-reward of that decision and the possible unintended consequences. If you look at how well the company is doing, it’s clear that we’ve made great progress and that our six-step plan is working. We had an unassailable first quarter and investors have been rewarded with a more than 40 percent uplift on the share price since the beginning of the year. We also have a lot of business development coming to fruition. We’ve rolled out Green Dot Money, we have a new deal with CVS and we’ve gotten regulatory approval to offer secured credit. We’re delivering on what we said we’d deliver on.

When you look at how well we’re doing, I’d ask investors to consider that as part of their risk-reward analysis. One of the things we’ve made very clear is our goal to get to at least $1.75 earnings per share by 2017. We have about 18 months to grow earnings per share by 30 percent, and there’s no way I can duck from that goal. Our board is tough and independent and will hold me accountable for hitting that or not. Overall my message to investors is: Don’t stop our progress and don’t risk that progress. Let’s see if we can hit this lofty goal and if not, then I’ll be shown the door and rightly so.

Earnings at a Glance One of Harvest Capital’s key arguments for new leadership is that Green Dot’s stock price has precipitously declined by 71 percent over the past five years and the company has underperformed compared with its self-selected peer group by 274 percent, according to a Harvest presentation. Green Dot’s stock price was $23.39 per share at press time, up 0.52 percent over the previous trading day. Shortly after its 2010 IPO, the company was trading as high as $44 per share. But in its own investor presentation, Green Dot suggests that under-performance over a five-year period is attributable to a lofty IPO valuation followed by a price correction, not poor management or execution. The board is promising an ambitious goal of $1.75 earnings per share revenue by 2017 to prove that its six-step plan is right for the company. Below is a snapshot of Green Dot’s total operating GAAP revenue from the last five quarters: Q1 2016: $228 million, up from $227.2 million a year earlier. At the end of the quarter, there were 4.75 million active Green Dot cards in the market, up from 4.50 million at the end of Q4 2015, marking the first quarterly growth in active cards in a year. Q4 2015: $150.9 million up from $150.6 million in 2014. Q3 2015: $146.4 million up 1.2 percent from $144.7 million for Q3 2014. Q2 2015: $170.2 million, up 16 percent from $147.0 million for Q2 2014. Q1 2015: $227.2 million, up 43 percent from $159.3 million for Q1 2014.

Paybefore: Comparisons with NetSpend have come up in this proxy battle with Harvest. What do you see as the biggest differentiators between Green Dot and NetSpend?

SS: First, let me say that I value Troy Woods, the CEO of TSYS, and I think he’s done a wonderful job as CEO and COO before that. I don’t want this to be negative, but I think the biggest difference between NetSpend and Green Dot comes down to one word—sustainability.

Green Dot once had internal discussions about merging with NetSpend prior to its sale to TSYS, but didn’t move forward because of my concern that overdraft fees and high monthly maintenance fees were not part of a sustainable model. While I understand overdraft fees are highly profitable in the short term, it’s the wrong platform upon which to build a sustainable business model. Green Dot instead chose to diversify our business to ensure we’d have plenty of room for upside in different channels. That has worked out very well for us.

We now own the largest tax refund processor with TPG that gives us future opportunities in the tax channel, we’ve become No. 2 in the check-cashing channel behind NetSpend, and we also launched our award-winning mobile checking account GoBank. We’ve integrated GoBank with Uber, we’re more ubiquitous online with AccountNow and AchieveCard, we’ve launched an online lending marketplace and we’ve been approved to offer secured credit through Green Dot Bank.

None of those things existed two years ago. We have so much room to grow and we have a deeply respected brand. All that has come together to make Green Dot a much larger company than NetSpend both on the top and bottom line—without having to charge overdraft fees or do anything that puts our future at risk.

Paybefore: Let’s talk about overdraft. That’s one area where Harvest has been critical and yet NetSpend is the only prepaid company really offering any type of overdraft—likely because of the regulatory uncertainty and previous problems around credit and prepaid. Why are you opposed to overdraft fees?

SS: I am one of the inventors of the prepaid product and I’ve been consistent for 15-plus years in not charging overdraft penalty fees. The reason is simple: It’s mean. Our customers are struggling financially. They’re working hard trying to support their kids and to be hit by a $15, $20 or $30 fee, it can be the difference of a single mom eating Cheerios for dinner or going without food altogether so her child can have a protein-rich dinner. If a person making $100,000 a year gets hit with a $30 fee, it’s irritating but life goes on. It doesn’t affect their world like it does for my customer. When a customer holds a Green Dot brand card, they know they have a product that helps and does no harm.^[1]

Paybefore: Do you think the CFPB will make this discussion a moot point by making overdraft regulations on prepaid cards too onerous as in its proposed prepaid accounts rule?

SS: First of all, I do not envy Director Cordray and his senior staff who are no doubt wading through thousands of pages of federal law to make sure the final rule can withstand the likely court challenges to come. I believe that’s why there have been so many delays. But no matter what kind of external pressure is thrust upon the CFPB, I don’t think Director Cordray is going to back off that core tenet and allow millions of dollars in overdraft fees to be charged to America’s poorest consumers.

Paybefore: What if, theoretically, the CFPB changed its position and made overdrafts with prepaid less onerous—no Reg. Z, for example—would you reconsider your position?

SS: Here’s the thing: While I have personal beliefs about overdraft, I would never make a business decision based only on those personal beliefs. If you look at the popularity of the Green Dot brand, I think people understand that we have a pro-consumer mindset and that’s what makes us No. 1.

If within the new regulation we can find new ways and new products and services that fairly rewarded costumers and investors, I would never choose not to make an honest dollar. We run the business based on what’s best for customers and investors. For us, choosing not to charge overdraft fees isn’t just the right thing to do, it’s a good business decision that has helped us build a great brand that has allowed us to sustain our position against our competitors.

Paybefore: Clearly, you’re not averse to helping your customers get access to credit—you’ve just launched Green Dot Money and earlier this year you announced the PreFUND program with TPG—and there’s a real need in the market for access to short-term credit. But in both those cases, Green Dot is not the lender. Why not?

SS: With the exception of our forthcoming secured credit card product from Green Dot Bank, you’re right, we’re not the lender. The goal of Green Dot Money is to offer a specially curated list of lenders that specialize in underwriting low- and moderate-income consumers. Today the online lending marketplace caters to prime and near-prime customers. If you make $50,000 or less, where would you go? With Green Dot Money, Green Dot technology searches our marketplace for lenders that can say yes to you. It’s like Match.com for loans. And then we get paid a finder’s fee by the lender, but we don’t have any of the payback risk.

At TPG, the goal of PreFUND is to enable the tax refund customer to get up to $750 of their refund upfront with no fee. It’s a way to help tax preparers to compete with the big franchise players like H&R Block and Jackson Hewitt, but it’s also been a way to introduce new customers to the Green Dot brand. This year, we were not the lender with that program. In effect, we outsourced the balance sheet and the risk. Maybe in the future we serve as the lender, but we thought it was safer and wiser to gather data on the pilot before putting our balance sheet at risk.

What’s at Stake? What began with a private letter to the Green Dot board in March of 2015 became public in January when Harvest Capital Strategies LLC, then owner of some 6.2 percent of Green Dot stock—the firm now owns 9.3 percent of the company’s common stock—sent another letter calling for new board leadership at Green Dot, including the removal of CEO and Chairman Steven W. Streit. Green Dot’s three contested board seats will be decided at the May 23 shareholder meeting. Green Dot is urging shareholders to vote on the white proxy card “for” the re-election of incumbent director nominees: Streit, who owns 8 percent of Green Dot stock; Michael J. Moritz, a large Green Dot shareholder and current chairman of Sequoia Capital; and Timothy R. Greenleaf, audit committee chair, who oversees enterprise risk management committee and cybersecurity, key relationships with bank regulators and auditors. Harvest’s board nominees on the green proxy card include: Philip B. Livingston, former CEO of Ambassadors Group; Saturnino Fanlo, president and chief financial officer of marketplace lender Social Finance Inc.; and George W. Gresham, former chief financial officer and executive vice president, NetSpend. Gresham declined an offer to be appointed immediately to Green Dot’s board. Independent proxy advisory firms have come down on all sides of the issue. Institutional Shareholder Services Inc. has come out in support of Harvest Capital’s board nominees, saying: “As the dissident [Harvest] has made a compelling case that change at the board level is warranted, and each of the dissident [Harvest] nominees would add distinct, significant experience directly relevant to effecting that change, votes FOR dissident nominees Fanlo, Gresham and Livingston are warranted.” Another independent proxy advisory firm, Egan-Jones recommends Green Dot’s stockholders vote for the re-election of the company’s experienced director nominees. A third proxy advisory firm, Glass Lewis and Co., supports Gresham’s nomination only. Glass Lewis also advises against Harvest’s recommendation of removing Streit as CEO and instead suggests splitting up the roles of chairman and CEO. “… we aren’t supportive of Harvest’s campaign to remove Mr. Streit as CEO and current leader of Green Dot—an action which doesn’t appear to us to be warranted or advisable at this time .… we also see evidence supporting the board’s argument that Green Dot is now headed in the right direction, specifically in view of the company’s most recent strong and improving performance, which despite Harvest’s continued critiques, has helped propel the company’s stock price 41 percent higher year-to-date, compared to virtually no gains among the Prepaid Peer Group,” Glass Lewis noted. Green Dot said its board will appoint an independent chairman after the annual meeting and it will appoint Gresham, subject to his acceptance, regardless of the outcome of the 2016 annual meeting vote. Correction: When Pay News originally reported Green Dot’s May 16 announcement about its independent chairman plans, we erroneously wrote that Glass Lewis supported all three of Harvest Capital’s board nominees, when, in fact, the firm only supports the nomination of George Gresham. Paybefore regrets this error.

One of Harvest’s criticisms has been that we have a bank with a significant balance sheet that could be levered up to provide a large book of unsecured loans to our customers. While that looks enticing on paper, the reality of such a lending program could be very dangerous to the company’s sustainability because that approach doesn’t consider the risk of non-repayment or the massive interest rates you’d need to charge to mitigate the risk of non-repayment. It’s easy to loan money, but it’s not easy to get paid back, especially in our customer segment. At the same time, there are ways to safely and responsibly monetize our balance sheet and with our new consumer lending approval from our regulators, we’re certainly eager to generate a higher return from our bank than we have in the past.

Paybefore: What lessons have you learned from this exchange with Harvest, which I realize isn’t over yet?

SS: Green Dot is known for having strong relationships with all our stakeholders and in more than 15 years, we’ve never seen anything like this. The attacks have been incredibly personal and painful. All of us have read about these types of campaigns at other companies and, as you know, these types of activist campaigns aren’t uncommon. But when you’re the one going through it, it’s certainly a difficult and painful process. At the same time, Green Dot is known for loving its customers as a cultural norm and investors are certainly our customers. As such, we are taking very clear and very public steps to let our investors know we care and to let them know we are listening.

Paybefore: You’ve faced challenges and had some difficult quarters. What headwinds have been most difficult?

SS: In late 2012 when competition began flooding the market, many analysts predicted the end of Green Dot—that we’d be swept off the map with the likes of Chase, American Express, PayPal and U.S. Bank entering the market. It was a very scary time with these massive companies spending unbelievable amounts of money to beat Green Dot.

We also had to pull a profitable MoneyPak reload product because of regulatory and fraud concerns. We’ve now relaunched MoneyPak with new protections in place, but we haven’t recovered those losses yet. We’ve survived all these things and have emerged the undisputed champ in our industry.

Had we over-reacted or lost our sight of our relationship with customers, we could have ended up with nothing left. I think our board and management team has done a wonderful job dealing with the crises at hand to ensure that we’ve continued to build the business and maintain the strength of our great brand.

We’ve grown our non-Walmart revenue by 80 percent in two years through both acquisitions and organic expansion, we renewed our largest partner with a long-term deal, we signed Steve Harvey as our spokesperson and greatly enhanced our brand image and appeal, and we’ve continued to grow and diversity our business. We’ve got a great future in front of us that few would have thought possible three years ago.

Paybefore: Why do you think you should remain at the helm of Green Dot? 

SS: I think I may have answered that in talking about all the things we’ve accomplished in such a short time. We’ve grown and diversified the business and have a great future runway for growth. We’ve expanded our non-Walmart revenue, we’ve built multiple modern fintech products that are winning awards from industry and consumer advocates, and we’ve hired the best senior leadership in fintech.

One of the things Harvest has been saying is that we have high turnover, but the average tenure on our executive team is seven years. Some of our executives have been with us all 15 years. But as anyone who works with Green Dot knows, the loyalty and longevity of our senior team is a key strength of our business.

At the same time, it’s important for shareholders to understand that I don’t see myself as working for a paycheck. I see myself as an investor whose wealth is in the value of Green Dot stock. So I am fully aligned with investors to increase our franchise value.

Paybefore: When would you feel compelled to step aside?

SS: If I ever feel I’m not effective or can’t be effective, I would never have an issue stepping aside. When you work as many hours as I do, you need to have something to make it worthwhile. For me, it’s that single mom working 12 hours a day, who dreams about making life better for her kids. It’s about giving her and the millions of others like her access to the American banking system. When she sees the Green Dot logo, she knows she’s protected and safe and not being ripped off. The combination of that mission to serve our customers and the financial opportunity it presents for the company and our investors is what drives me to succeed.

Related stories:

• Green Dot’s Strong Q1 Doesn’t Silence Harvest
• Harvest Doubles Down on Call for Change at Green Dot
• Green Dot Responds as Leading Shareholder Calls for Ouster of CEO
• NetSpend: NCLC Report Conflates Relationship Between Prepaid, Payday Lenders

^[1] NetSpend told Paybefore in 2015 that its overdraft protection is structured much better than traditional bank overdraft programs and offers cardholders flexibility in dealing with large income swings that can lead to temporary cash shortfalls. Customers who opt-in to the program benefit from features including a $10 “buffer zone,” a 24-hour grace period to avoid a fee and a cap of three fees per month. Due to those safeguards, 63 percent of overdrafts made on NetSpend prepaid cards don’t incur a fee.