What happens when you need to shutter a successful product?
If you’re Green Dot, you invest in other products, and diversify. The company is developing new products and channels and bought two small competitors and a tax refund processing company, as it deals with the loss of a profitable product, MoneyPak, the company said yesterday.
Green DOT (NYSE:GDOT) beat Wall Street estimates with $40.8 million in profit in 1Q, but lowered guidance on the year due to higher-than expected losses related to MoneyPak.
In February, Green Dot Corp. pulled the plug on MoneyPak cards, which allowed the transfer of funds using a PIN code on the back. MoneyPak had received — even when the cards were no longer available — negative media attention for its use in high-profile fraudulent activity, and was even rumored to be a favored form of currency for prisoners. Transactions with the card cost $4.95, making it a profitable product for Green Dot, but it turned out the headache wasn’t worth all the “meshugaas” (Yiddish for craziness), as CEO Steve Streit described it.
One particularly prized feature of the cards was that balances could be easily transferred off the card to PayPal accounts, to billers, or to other prepaid cards. That was the value proposition of MoneyPak cards — while not payments instruments themselves, funds loaded on the cards could be quickly sent to friends, kids, whomever, and unfortunately, the bad guys took full advantage.
So beginning in April 2014, when the cards were removed from Walmart stores, and continuing until Feb. 1, 2015, Green Dot pulled MoneyPaks off the shelves to spare themselves the trouble. But yesterday they had to tell investors how it went. Here’s Streit:
The sad truth is that we’re losing a large amount of legitimate business from good customers who used to regularly use MoneyPak to pay bills, load cash to PayPal, reload their prepaid cards and so on. It’s painful to lose good business. But on the positive side, with the discontinuation of MoneyPak, we have in fact eliminated the potential for that product to be used as a means to commit fraud. The only way to now reload money to your Green Dot Bank-issued card is either by swiping your actual debit card at a retailer, by loading money through a bank-to-bank ACH transaction or by loading money through direct deposit.
The quantity of cash transfers was down 2.5 million, or 13% on the quarter, 20% year-over-year. The negative impact on revenue for the quarter from the loss of MoneyPak was $12 million.
Streit said during the Q&A that the company expects some MoneyPak customers to convert to swipe-to-reload customers, but that it is difficult to model. For one thing, it is difficult it is for a company that relies on retail to get messages across:
Some retailers — we love all of our retailers, but some have better training protocols than others. So it would not at all be uncommon in Q1, especially when we first made the change, to walk into a particular retailer, the customer knows exactly what they want to do, hey, can you swipe my card, what do you mean, ‘swipe it’? ‘Manager aisle three, what do you mean swipe it? No, buy a MoneyPak. No, no the company said you swipe it, I don’t know what that means….’ Unfortunately, that’s retail, it’s not pretty, but that’s the nature of the game and some are better than others.
During the quarter Green Dot also saw its number of customers using direct deposit to load cards hit 1 million, with 3 million active reloaders, so it has no shortage of legitimate, loyal customers, which may eventually make up for the loss of MoneyPak:
It’s hard to quantify it, but on one hand, you’re saying, hey, this product has pretty good gross margin, maybe it’s a 40% or 45% gross margin, but that’s also the product generating all the calls to call center and all the risk activities, and me flying to Washington D.C. to give testimony to Senators, and packaging that is out of stock and constantly doing emergency replenishments and on and on and on. And, in fact, while we couldn’t quantify it and rip it apart in an analysis, just knowing the company the way I know the company, I said, Guys, when we get rid of that product, you’re going to see a lot that nonsense go away. And, in fact, that’s happened, so call center utilization and utilization of our risk investigators and charge-offs as a percentage of MoneyPaks, all of that has plummeted.
Green Dot is also switching all its transaction processing from TSYS to MasterCard, which will go on well into 2016. Streit had little to say about GoBank, Green Dot’s mobile-first bank account: “GoBank continued to do well. The retention continued to do well. Really, the same story as last time, that product has done well.”
But, it seems, not yet well enough to make Green Dot forget about MoneyPak.