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Edited Transcript of GDOT.N earnings conference call or presentation 11-May-20 9:00pm GMT

Q1 2020 Green Dot Corp Earnings Call

MONROVIA Jul 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Green Dot Corp earnings conference call or presentation Monday, May 11, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel R. Henry

Green Dot Corporation - CEO, President & Director

* Jess Unruh

Green Dot Corporation - Interim CFO & CAO

* Michelle Blaya

Green Dot Corporation - VP of Communications & Communities

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Conference Call Participants

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* Andrew Garth Schmidt

Citigroup Inc, Research Division - VP & Analyst

* Andrew William Jeffrey

SunTrust Robinson Humphrey, Inc., Research Division - Director

* George Frederick Sutton

Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst

* Georgios Mihalos

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* John Hecht

Jefferies LLC, Research Division - MD & Equity Analyst

* Joseph Anthony Vafi

Canaccord Genuity Corp., Research Division - Analyst

* Ramsey Clark El-Assal

Barclays Bank PLC, Research Division - Research Analyst

* Reginald Lawrence Smith

JP Morgan Chase & Co, Research Division - Computer Services and IT Consulting Analyst

* Robert Paul Napoli

William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology

* Wai Ming Kwok

Keefe, Bruyette, & Woods, Inc., Research Division - VP

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Presentation

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Operator [1]

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Good day, and welcome to the Green Dot Corporation First Quarter 2020 Earnings Call. Today's conference is being recorded.

And at this time, I'd like to turn the conference over to Ms. Michelle Blaya. Please go ahead.

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Michelle Blaya, Green Dot Corporation - VP of Communications & Communities [2]

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Thank you, and good afternoon, everyone. On today's call, we'll discuss Green Dot's first quarter 2020 performance. Following the remarks, we'll open the call for questions. For those of you who haven't accessed our earnings release that accompanies this call and webcast, it can be found at ir.greendot.com.

As a reminder, our comments include forward-looking statements and our expectations regarding future results and performance. Please refer to the cautionary language in the earnings release and in Green Dot's filings with the Securities and Exchange Commission, including our most recent Form 10-K and 10-Q for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements.

During the call, we'll make reference to our financial measures that do not conform to generally accepted accounting principles. For the sake of clarity, unless otherwise noted, all numbers we talk about today will be on a non-GAAP basis. Information may be calculated differently than similar non-GAAP data presented by other companies. Quantitative reconciliation of our non-GAAP financial information to the directly comparable GAAP financial information appears in today's press release. The content of this call is property of the Green Dot Corporation and is subject to copyright protection.

Now I'd like to turn the call over to Dan.

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [3]

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Thank you, Michelle, and welcome everyone to the Green Dot Corporation Q1 2020 Earnings Call. Today, we will discuss Q1 results and the impact of COVID-19, and share some of my early thoughts around the areas of focus for Green Dot going forward.

Before we jump in, I would like to first thank the Board of Directors for providing me this opportunity and responsibility to take the lead here at Green Dot. A particular of my gratitude and appreciation is owed to Bill Jacobs and Chris Brewster, who provided day-to-day leadership on an interim basis prior to my arrival. We are all very thankful for their continued leadership. The real shout out, however, goes to the entire team at Green Dot. During the interim period, the company executed the busiest quarter of the year, tax season, without a hitch, delivering results well in excess of plan.

But the true heroics of the team really began on February 3 when 300 of our developers in Shanghai found themselves having to shift quickly to a remote work environment amidst the height of COVID-19 in China. Then on March 16, all call centers in the Philippines and India were closed due to COVID-19, which took our global call center staffing from 1,900 to 500 in just 1 day. Facing directly into the challenge, the customer service and IT infrastructure teams scrambled to bring online work from home capabilities for our call center representatives across the globe, so that we could continue to serve customers during this critical time. Then work from home directives hit here in the U.S. a few weeks later. And again, the team adapted to complete remote working arrangements while continuing to serve our customers and partners.

And if that wasn't enough, in April, our systems and people were tested once again when the first wave of relief funds from the CARES Act flooded customers' accounts through direct deposits, creating almost the equivalent of a full pack season of refund loads in a single day. Yes, these have been unprecedented times, and they have tested all of us in ways no one could ever imagine. I'm proud of the team's unwavering dedication to our customers and each other throughout these turbulent conditions. And I'm excited to be on board as one of the newest members of the Green Dot team.

I'll now hand the call off to Jess Unruh, who will report on the company's Q1 results and comment on guidance for the remainder of 2020. After which, I will wrap up with some of my initial observations of the company and some current thoughts around our areas of focus and go-forward strategy.

Jess, over to you.

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Jess Unruh, Green Dot Corporation - Interim CFO & CAO [4]

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Thanks, Dan. Good afternoon, everyone. Before I get started, I'd like to say thank you to our employees. Despite the many challenges during this unprecedented time, they have been steadfast in their support of our company, coworkers, customers and partners. I'm going to cover our financial results for Q1 and then spend most of my time discussing recent trends in light of the impact of COVID-19.

Our Q1 2020 non-GAAP revenues grew 6% to $347 million, and we delivered adjusted EBITDA of $92 million and non-GAAP EPS of $1.13. These results exceeded the guidance we shared on our Q4 earnings call despite headwinds in late March from COVID-19. As a refresher, we expect that our Q1 non-GAAP revenue to be approximately 30% to 31% of our full year guidance of roughly $330 million, and we expected adjusted EBITDA to be around 48% of our full year guidance or roughly $86 million.

The year-over-year revenue growth in the quarter was driven by both of our segments. Non-GAAP revenues in our Processing and Settlement segment increased 14%, driven by strong performance in both tax processing and money processing services. The number of tax refunds processed grew 3%. We also expanded the adoption of our taxpayer advance programs and introduced new tax processing services in 2020 that have exceeded our expectations. Revenues from our Money Processing services increased as a result of 10% growth in the number of cash transfers, principally from third-party reload partners.

Non-GAAP revenues in our Account Services segment grew 2% as a result of an increase in BaaS program management service fee revenues earned from platform partners and continued growth in the number of direct deposit active accounts from our BaaS and PayCard programs. This growth was partially offset by a decline in the number of active accounts in our consumer programs with active accounts for the segment down 5% year-over-year, consistent with our expectations. Offsetting some of the weakness in lower-margin active accounts was 4% growth in direct deposit accounts, which helped drive a 10% increase in gross dollar volume.

An additional factor in the quarter was a year-over-year decline in net interest income due to lower yields on our cash balances as a result of rate decreases by the Federal Reserve earlier this year. As expected, we experienced year-over-year margin compression in the quarter, largely due to an increased revenue share rate associated with the renewal of the MoneyCard program, and our marketing efforts to promote our Unlimited product, both within our Consumer Business as well as a decline in interest income, which carries a very high margin.

We generated strong operating cash flows in Q1 of $104 million. Additionally, we drew the maximum amount of our revolving credit facility as a precautionary measure in light of uncertainties around the current economic environment. At the end of the first quarter, after considering our investment in TailFin, and our $100 million draw on our revolver, we had $218 million in unencumbered cash. We believe maintaining a strong liquidity position is prudent in light of meaningful uncertainties and to ensure we have ample flexibility to pursue strategic priorities.

Now I'd like to discuss the impact of COVID-19 and our thoughts on guidance for the year. First and foremost, we believe that the long-term strategy to grow our business will remain intact despite the impact of COVID-19. However, in the near term, it's very difficult for us to forecast our revenues because the COVID-19 situation is rapidly evolving and both the duration and severity of the economic impacts are unknown. Therefore, we are withdrawing our 2020 guidance for non-GAAP revenue, adjusted EBITDA and non-GAAP EPS.

While we are not in a position to provide detailed guidance, I'd like to briefly share a few trends we have observed across our business segments and channels. I'll start with our Account Services segment, which incorporates our account programs in our Consumer Business and our 2 platform programs, BaaS and PayCard.

In our Consumer Business, our retail channel has been impacted by reduced foot traffic at our retail partners. Although most of our largest retail partners are providing essential services, consumer activity noticeably slowed with the shelter-in-place mandate. Our online channel, however, has remained strong. Our BaaS programs have been resilient but some partners had headwinds in their business, such as those in transportation and ride sharing. Our PayCard programs are facing headwinds associated with unemployment. Overall, the year-over-year trend in our key metrics and revenues in January and February were strong, and then we saw a marked slowdown in late March and early April, as the impact of COVID intensified.

As April progressed, we saw a surge in GDV from stimulus funds deposited onto our account programs. During April, we've deposited nearly 2 billion stimulus loans from the IRS, and that has benefited purchase volume and interchange revenues in April. GDV is a leading indicator of our revenue for all of our account programs, and we've experienced mixed trends over the past 2 months and make it difficult to confidently forecast our revenue in the coming quarters.

We're monitoring our direct deposit active base to better understand sources of GDV and churn. With respect to the former, we've seen increased proportion of ACH deposits coming from government benefits as customers file for unemployment. The enhanced unemployment benefits afforded under the CARES Act has helped offset erosion in payroll deposits.

In our Processing and Settlement segment, our tax processing services has been largely unaffected as most Americans eligible for a refund received their funds in January or February. In March and April, we've seen a migration in volumes away from tax preparers to do-it-yourself programs online, but overall volumes of tax refunds processed are expected to be in line with our previous forecast. The deferral deadline to submit tax returns to July has little impact on our tax processing services since that deferral generally benefits those that pay taxes as opposed to those eligible for refund.

With respect to our Money Processing services, the trend is consistent with our account programs. We saw a slowdown in reload activity in late March and early April, and those trends have moderated as April progressed. In summary, we've experienced healthy double-digit year-over-year growth in January and February and mid-single-digit decline in March. Our April revenue will be flat year-over-year due to the benefit of the stimulus funds. As we look out over the remainder of Q2, we anticipate trends to revert back to the pre-stimulus levels that we saw in March and early April, with interest income on deposits also expected to be materially lower throughout the year, as the rate on overnight funds is year 0. All in, we expect Q2 non-GAAP revenue to be down somewhere in the neighborhood of 10% year-over-year.

Let me turn my attention to operating expenses. The majority of our costs, such as revenue share and processing expenses, are variable. If revenue declines so will these expenses. However, we are anticipating a few headwinds that will create margin compression throughout the year. First, we had significant disruption in our third-party offshore call centers as a result of COVID. We've made significant progress with our partners to restore these staffing levels. In the short term, we've moved some staffing onshore, which will be more expensive for us. Additionally, our strategic initiatives to transform our call center operations have been delayed as a result. To be clear, this initiative is very important to us as it will provide margin improvements in future years. We will continue to focus on these initiatives throughout the year. However, some of the benefits we expected to realize in 2020 will be delayed.

Second, we earned tiered volume incentives from the payment networks. Our purchase volume in 2020 will be negatively impacted by COVID, and as such, we will likely earn fewer incentives. Green Dot maintained solid liquidity and cash flow. As I noted earlier, we have taken steps to strengthen our liquidity position in light of the uncertainty, including drawing $100 million on our revolving credit facility. We've also instituted an enterprise-wide headcount freeze, delayed or reduced noncritical projects and implemented strict travel restrictions. We are being disciplined with our spending while preserving investments in strategic initiatives. We're evaluating additional actions to reduce expenses further if needed. Thus far, we've reduced our planned SG&A spend by $30 million.

With that, I'll turn it back to Dan.

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [5]

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Thank you, Jess. As you heard, the team delivered a solid Q1. This is something I can take no credit for. However, I am very grateful for it. The first quarter has always been the company's strongest quarter in terms of revenue and profitability. With no one knowing the extent of the negative amounts of impacts of COVID-19, we are very fortunate to have banked this quarter before the world changed.

Due to work from home requirements, my arrival to Green Dot on March 26, as of now, has to be virtual. But nonetheless, we are making very good progress. Driven by the urgency created by the pandemic, the leadership team and I began working aggressively to eliminate unnecessary expenses. So far, we have reduced planned SG&A expense by close to $30 million for the remainder of the year. These reductions in expenses will not impact our ability to serve our partners and customers more while these expense reduction hinder our future growth. Consequently, when we all emerge from this current economic situation, Green Dot will be a leaner, more efficient operation.

My decision to join Green Dot comes from my desire to build a lasting and transformative company that delivers inventive financial service offerings that improve the financial lives of our customers. If you were at Netspend, I've had some great practice, and I'm really looking forward putting some of that experience to work here at Green Dot. This company has a tremendous collection of assets; a bank; a proven, modern and scalable tech platform; millions of customers; and over 100,000 points of retail distribution with its own cash deposit network. And if that's not enough, partnerships with some of the largest and most powerful consumer companies on the planet, Apple, Intuit, Uber, Walmart and others.

I believe that at the end of the day, successful ventures and their relative level of success comes down to 2 fundamental things: people and focus. So in addition to spending urgent energy on expense reduction, I've spent a lot of time getting to know the senior leadership team at Green Dot. I've been learning about the assets we have and the areas where we need work. I've been reviewing everyone's level of commitment and skills and gaining their input on what we should do to improve and grow. These conversations, together with discussions with members of the Board and select individuals in my professional network, has started to shape a go-forward strategy and view for the company. At a very high level, I can share the following.

First, are we going to sell the bank? In a word, no. To do anything in the payment space -- I'm sorry, FinTech space, you have to have access to the nation's banking system. So if every payment/FinTech company needs a bank, why would we, as one of the only FinTechs that owns a bank consider selling? So no. The answer is no. And no matter how many different ways you ask me the question, the answer will be no. We are not selling the bank. It is a strategic asset, a competitive differentiator and a source of immense potential value.

Next, we are going to get much more efficient. Operationally, we lack clarity inside the organization in terms of which divisions are most profitable and efficient and which ones are just the new cool thing to talk about. We are not taking full advantage of our scale in terms of automation, vendor management and internal staff efficiencies. In addition to growing the top line, we will become much, much more focused on bottom line growth, free cash flow and margin expansion. Three, we have 3 very powerful but currently underleveraged businesses inside Green Dot: tax processing, Money Processing and PayCard. These are tried and true businesses that produce solid results, but they can be so much more if properly supported. We will no longer take these businesses for granted, but we will put energy and resources behind them to ensure their continued growth and market leadership.

Item number four. In terms of our Consumer Business, we will be spending significant time this year preparing ourselves for 2021. The intention is to be focused on delivering a consumer banking product that will create lasting value for the mass market consumer in this country. We will take full advantage of our bank charter, retail distribution and direct-to-consumer capabilities. I believe the reason we are seeing such an abundance of so-called challenger banks pop up is because both Netspend and Green Dot squandered their advantages in this space over the past 5 years. We will be working hard in the coming years to regain that lost ground.

And finally, our BaaS platform or what I refer to internally as our partner business. The Green Dot has done a tremendous job in securing multiyear agreements with some of the best consumer-facing companies on the planet, Apple, Intuit, Uber, Walmart, to name a few. Our unique combination, the payments experience, retail cash deposit network, tech platform and bank, gave us the ability to deliver valuable turnkey solutions that these companies were searching for. But what gets me really excited, however, is the thought of what we can bring to these partners. Once we start to flex our creativity and assets, I think we will be able to bring these partners and others integrated payment and financial service solutions they've never thought possible.

Now this brings me to the people side of the formula. Great vision without great people is irrelevant. Today, inside Green Dot, we have some great people, but I intend to add a few more in the near-term to continue to progress toward building a truly world-class organization. These talent additions will help solidify our vision and accelerate our growth and prominence in the payments and FinTech world. First of these new additions is Daniel Eckert. He was announced recently. The recognized FinTech, digital retail and payments pioneer, Daniel most recently served as Walmart's leader for Services & Digital Acceleration at Walmart U.S.

I first met Daniel nearly a decade ago after he arrived at Walmart to lead its financial services division. We struck a good relationship that has lasted to this day. We share what could perhaps be described as an embarrassing interest and appreciation for the complexity of the payment ecosystem, and we now share a mutual enthusiasm for what we can create with the assets here at Green Dot. Daniel will be working alongside me in the role of Chief Product, Strategy and Development Officer. His experience, capabilities and vision are hard to match, and I'm thrilled to be able to partner with him on this adventure. In closing, I want to once again thank everyone at Green Dot and also you, our shareholders, for this opportunity.

With that, I'll turn this over to the operator and open up for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question here from Ramsey El-Assal with Barclays.

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Ramsey Clark El-Assal, Barclays Bank PLC, Research Division - Research Analyst [2]

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Dan, thanks so much for doing this call, and welcome back to the game as it were. I wanted to ask you about just one kind of tactical question and then another one a little higher level. Are you getting a boost from accounts on file from the stimulus? In other words, are you capturing that volume? Are there any newly-acquired customers who are signing up in Green Dot in order to capture the volume, who might end up being a Green Dot customer ongoing? Or is it more just you had customers that were already had their accounts linked to the IRS and the money just sort of flowed automatically? Can we think of this as an acquisition tool? Or is it really more just kind of a one-off benefit for the existing customers? Then I have one follow-up.

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [3]

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Yes, Ramsey, it's both. We had -- with our customers we've had for a long time with direct deposit and also through our tax business, we've had a big surge with GDV, with the stimulus from the CARES Act. But I also believe that we saw -- we're seeing quite a nice little pop, if you will, in terms of card ordering activation. And I believe that's for customers who were -- need stimulus, but also it's for customers who were kind of in need of a form of electronic payment for the way the world is changing now in terms of having to order so many goods and services online. Really a lot of cash-based consumers don't have that option of cash anymore. I think we're benefiting a little bit in both ways.

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Ramsey Clark El-Assal, Barclays Bank PLC, Research Division - Research Analyst [4]

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A little bit in both ways. Okay. And then my follow-up question is a little bit broader. And it's building on something you said at the end of your prepared remarks about challenger banks. And I was just wondering if you could kind of give us your updated thoughts on how COVID could impact the competitive landscape in your industry? Are these challenger banks also receiving kind of a onetime maybe lifeline, as it were, from stimulus type payments? Obviously, they were all -- many of them were pre-profit. Do you think you'll come out of this in a better competitive position? Or it will just be something that's somewhat similar with you guys having to, again, work harder and smarter to gain "lost ground?"

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [5]

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Well, I think COVIDs require every -- pretty much every business in the country to work harder and smarter. I believe that the neo-banks that have customers who were on direct deposit have a little bit of a benefit. But I believe that everyone is going to have some challenges here because we've got 20 million Americans currently unemployed. And I believe that the lower income consumer in this country are probably disproportionately impacted. And so the nice thing is in Green Dot is, we've got a nice diversified business. We're in a much better position, I think, than just kind of a monoline neo-bank to weather the storm. And the other nice thing is we've got positive free cash flows, strong revenues and cash in the bank. We don't need to go out and raise our Series C, D, E & F, as many others have to. So I think, collectively, we're all solving a big need in the country. So I hope that everybody makes it through this, but I do think the challenger banks are going to have a bit of a challenge in the coming 12 months.

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Operator [6]

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And we'll take our next question here from Andrew Jeffrey with SunTrust.

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Andrew William Jeffrey, SunTrust Robinson Humphrey, Inc., Research Division - Director [7]

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Dan, welcome. Look forward to working with you again.

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [8]

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Yes, Andrew. Nice to hear your voice.

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Andrew William Jeffrey, SunTrust Robinson Humphrey, Inc., Research Division - Director [9]

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Yes. Likewise. I'd like to maybe build on Ramsey's question a little bit with regard to challenger banks. One of the points of consternation, I guess, is the way I'd say it, among investors, I think, in the last 12 or 18 months with Green Dot has been the level of sales and marketing spend aimed at maintaining the competitive position and maybe combating some of these newer entrants. Do you have a view or can you give us some insight this year as to whether maybe even directionally do you think your sales and marketing was elevated? Is that something you can bring down? How should we be thinking about Green Dot's competitive response, COVID-19 notwithstanding?

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [10]

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I think that what you're going to see is kind of a philosophical change in the approach in terms of consumer marketing. What -- as I referenced in the call, we intend to spend significant amount of time and energy this calendar year to prepare ourselves for 2021. And Green Dot, I believe, has a bit of a history of kind of, "Hey, every year or so, here's a new product." And let's market and promote that new product. And my philosophy is in Green Dot, you know what, we're a bank. We own a bank. So there's -- we really should start -- stop calling marketing companies challenger banks and neo-banks because none of them are banks. They are all just marketing companies. Marketing products and pieces that they have put together from other third-party service providers. So our go-forward strategy and philosophy is going to be leverage our actual bank charter to be able to issue real DDA accounts and provide customers a long-term solution for their financial and payment services needs. So what you can expect is we will continue to spend meaningful dollars on sales and marketing. But we're going to get off the treadmill and start climbing a flight of stairs. What I mean by that is we will be creating a product that a customer is going to want to take and keep for years, in the year he's going to build and build more customers on the base that we have.

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Andrew William Jeffrey, SunTrust Robinson Humphrey, Inc., Research Division - Director [11]

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Okay. I look forward to seeing how all that evolves in practice in the numbers. And then I guess, with regard to new products, Unlimited, in particular, which was launched to quite a bit of fanfare. We get a lot of questions about sort of the economics of that product. The rewards are pretty generous. And I think that falls under the category of what you can control. And I know it's early days for you and you're still virtual, but can you give some thoughts on the profitability of that product? And if that's one of the things, perhaps, that we're going to see you address in the near term?

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [12]

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Yes. We will be addressing that product here in the near-term and we're making -- probably making some modifications for that. But it's a -- and we'll be doing that very thoughtfully because we do have some customers who have embraced that product, and we're going to make sure that they stay happy. But we'll probably make some modifications to that on a go-forward basis to be able to continue to maintain strong acquisition to improve the economics of it.

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Operator [13]

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And we'll take our next question here from Bob Napoli with William Blair.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [14]

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Dan, welcome back, and good luck to you guys. I guess, just you talked about a number of key initiatives or things that are underleveraged. And I think the BaaS business, the tax business, which -- what is your, like, I guess, top priority? What are your top priorities from the business and product perspective? And as the BaaS business was, I think, growing at a high rate. They have Uber as a client. Has that business slowed down a lot?

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [15]

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Yes. I think in terms of top priorities, the arrival of Daniel Eckert -- I couldn't be more thrilled with that. That's how we think about that. Yes, and he's a great guy and the vantage point that he's had over the last 10 years at Walmart. If you think about bringing somebody in to basically -- we wanted Daniel's main responsibilities is going to be the BaaS business, partner business. And so to be able to have Daniel sitting in the room with our partners at Apple and Uber and Intuit and others, Wealthfront and to be able to talk about what's possible, what sort of solutions we can bring these partners by leveraging the assets we have of a bank and a platform, retail distribution, what have you.

So yes, we will continue to be driving deeper in that business. Our philosophy on BaaS is to -- a term I use is kind of, sweep the stairs from the top. So we'll be focusing on our current large partners and other large partners in this space and in the industry to work with. So we'll be -- Daniel and team will be focused on driving that. And then we will maybe -- as I mentioned in the call, we're going to focus on kind of a reboot, if you will, of our Consumer Business. And that's to really create banking products that will offer lasting value for the mass market consumer in the country and just put our shoulder behind that and just -- you may find these calls boring because we're just going to just stay focused, and year after year just continuing to promote and grow that customer base.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [16]

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And a follow-up question. Just, I mean, Green Dot does have a strong balance sheet. Any thoughts of how you might want to utilize that? Is there something from an M&A perspective that you would -- that's a tuck-in that supports your new strategy or your adjusted strategy? I mean because -- how else would you intend to utilize the balance sheet?

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [17]

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I haven't identified any acquisition targets yet. I much, much more prefer organic growth than acquired growth. I find organic growth is a lot easier to integrate, get a much higher return on your assets and equity that way. But in terms of the strength of the balance sheet, I don't -- I intend this. We will continue to grow the business and to keep that dry powder, have no immediate thoughts right now of -- certainly not have any share repurchases in this current environment. We just want to stay strong and stay liquid, get through 2020.

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Operator [18]

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And we'll take our next question from Andrew Schmidt with Citi.

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Andrew Garth Schmidt, Citigroup Inc, Research Division - VP & Analyst [19]

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Welcome, Dan. Glad to have you.

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [20]

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Thanks, Andrew. Nice to be here.

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Andrew Garth Schmidt, Citigroup Inc, Research Division - VP & Analyst [21]

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So this theme was asked over the course of the past few questions, but I just want to hone in on it. You mentioned the Green Dot and Netspend have squandered some of the opportunity over the last several years, exceeded some of the advantage to these challenger banks as they're called. Could you just talk a little bit more about your strategy kind of reinvigorate Consumer Business and kind of to take that opportunity back, whether it involves faster product cycle times? You talked about creating more value for the mass market consumer. Maybe a few more details that underlie that would be helpful.

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [22]

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Yes. I'll share what I can. I mean I think what's most important -- and I remember that I'm kind of having flashbacks a few years ago. What's most important is remember, like this is not a zero-sum game. So if you think about the unbanked, underbanked, low to modern income consumer in the country, it's huge. I mean it could be 50% of the population. So there's plenty of room out there for a very successful Green Dot, a very successful Netspend, a very successful 3 or 4 other neo-banks. So I think that's first and foremost. And everybody seems to treat this industry like it's a football game. Someone is going to win and somebody is going to lose. And that's really not the marketing in that case. I think actually, the more of us that are out there promoting alternative to a traditional bank account, the better because we all collectively have built awareness and acceptance of such products. So the strategy really, it's nothing groundbreaking other than -- and we're going to leverage the fact that we are a bank, and we're going to have real DDA accounts out there for the consumer. We're going to need to tight and clean on our product, tight and clean on our messaging. And just go after it, day in and day out, build that customer base, really put time and attention on our customer service side of things to make sure that our customers have as little friction as possible, getting the card, moving the card, using the card and get great service whenever they have a problem. And to me, that's how you build a business, and that's how you build a brand. You don't build it by spending hundreds of million dollars in marketing and sponsorships. You build it by having a good solid products and building great service, day in and day out for years and years.

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Andrew Garth Schmidt, Citigroup Inc, Research Division - VP & Analyst [23]

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Okay. That's helpful context. And my follow-up question, just want to ask about potential behavioral changes post-COVID. Obviously, there's a pretty substantial reduction in foot traffic to stores. Some of that will come back, but it seems like some of that is just structurally not going to come back, delivery, curbside pickup, things like that. Can you talk about how that might affect the business in terms of just behavioral changes, thinking about just the accelerated shift in the physical to digital? And then just more broadly, strategy regarding just distribution?

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [24]

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Sure. Two great questions there. It's -- I think it's hard -- difficult for anybody to predict like what's the post-COVID world going to look like. But I think that everybody could agree that in so many aspects, video conferencing, just delivery of products and grocery pickup, I mean, we've seen kind of 2 years' worth of digital transformation in 2 months. And the challenge that I have -- one of the challenges, I believe, in terms of the growth of the prepaid segment, if you will, or an alternative bank account is for consumers that I always thought were tracked in cash. Those consumers were doing just fine with cash. And I believe that COVID is really forcing a lot of consumers to have to search out a digital solution. Because even if they could go to a check casher and cash a check, the ability to use cash when -- we have one example of a cable. We saw a spike in card sales, some more in the country.

And just we were curious, like is this -- is there a fall happening here. And what we found out was the local cable company, which was usually always open to accept payments for your monthly cable bill was closed. And they had a sign on the door directing customers to go across the street to one of our retailers and get a Green Dot card and load that card and pay their cable bill electronically. So when I hear little soundbites like that, I realize that, hey, a lot of the consumers that were hanging on to cash for the last few months really didn't have an option and got pushed into the electronic payments world. And I think that will definitely benefit us at Green Dot as well as many other players in the space.

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Operator [25]

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And we'll take our next question from George Sutton with Craig-Hallum.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [26]

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Dan, welcome. And I think I'm a good example. I took $200 out before this crisis started. I think I still have the same $200. Nobody will take my cash.

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [27]

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Sure. That's the same way. I hit the ATMs and load up on cash, and I noticed it's good for nothing.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [28]

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Exactly. So you are absolutely committed to the bank. I hear that. But you mentioned you're planning to get better data about the different segments and different offerings. And I'm curious how much of a look at the sacred cows this is? Are you planning to make some changes with this information? Or are these more refinements?

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [29]

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I would say it's the latter. It's more refinements. The guy that was in my -- the seat before me, I think, was brilliant and had really great instincts, and that worked well for him for a long time. I don't think I'm that smart. And so I like data. I like numbers. I like to test things. And I like expanding margins on bottom line growth. And so we'll look at the data. Jess and his team will run the numbers, and we'll see what's the highest and best use of our capital. And when I say capital, it's not just dollars, but it's also time and energy and people. So...

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [30]

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I understand. One other thing. I think it was Jess, in his prepared comments, mentioned we drew down some of our facility. And part of that usage may be for strategic activities. Is there something upcoming that isn't clear? Or was that just a generic message?

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Jess Unruh, Green Dot Corporation - Interim CFO & CAO [31]

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Yes. I think it's just a generic message. So making sure we have enough dry powder that gives us the most optionality as we look. I'm going to give Dan some time to dig through the leads and go through his strategic review process and understand what is the best use of our capital and then that provides us with some dry powder down the road, if we need it for strategic initiatives.

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Operator [32]

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And we'll take our next question from Reggie Smith with JPMorgan.

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Reginald Lawrence Smith, JP Morgan Chase & Co, Research Division - Computer Services and IT Consulting Analyst [33]

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I guess maybe the first one is kind of high level. Dan, I was curious. How you thought about, I guess, stepping back into the industry? It seems as they kind of shift with some kind of retail customer acquisition. And now things are being activated digitally. You've got, as you said, the challenger banks and you've got the Squares and the Venmos of the world. Kind of how do you think about, I guess, competing in that space? I know historically, Green Dot, Netspend had a stronghold on the check cashing in the retail space. But how do you play with some of these guys that may have larger installed bases than yourself, or different features to get people to even take out of card. And so it's almost like an add-on type feature. So what are your thoughts there?

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [34]

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Well, to me, kind of what -- where things are moving is one of the reasons I was excited about taking this opportunity at Green Dot is when you look at the collective assets of Green Dot. It's funny. If you dissect the word FinTech, fin is financial, tech is technology. Well, everybody's got technology, but nobody has really got the financials. Everybody borrows the bank. So if you take that definition literally, you might be one of the only FinTechs out there, except for maybe Square now because I think they bought a bank. So while there are bigger players that are kind of waiting into the space and providing financial services, which is, for me is thrilling because many of those partners -- or many of those companies are our partners, Apple, Uber, Walmart, Intuit.

And so I believe that we can really, as I mentioned in the call, partner with them and bring them some really unique solutions. But when you add to that, the fact that we have been directly acquiring consumers for 20 years, and we have 100,000 physical retail points of not just distribution of cards, but for the acceptance of cash and for the acceptance of payment. So we've got this infrastructure of physical points as well as infrastructure of our bank and bank charter that has the license to take these deposits and also extend credit to consumers and to players in our industry and in the industry of our partners. It gets pretty exciting. Can I tell you what are the top five things in our product road map today? No. Because we're really in the infancy of putting together our plans and our strategy. But I believe that with our balance sheet, with our bank, with our retail network, with our technology platform and with our partners, we are very, very well positioned to be a significant player in the payment space in the years ahead.

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Reginald Lawrence Smith, JP Morgan Chase & Co, Research Division - Computer Services and IT Consulting Analyst [35]

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Got it. And if I could sneak one more in. The question I often ask Steve in the past is kind of thinking about BaaS. And I know you've only been in the seat for 1.5 months or so. But just curious, 5, 10 years from now, is the company more of a platform for other FinTechs and less about direct issuing? Or do you think -- how do you think about the mix longer-term? Where is your strengths and values in this entire kind of ecosystem?

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [36]

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We got a left on. We got a right on. So we've got good strong strength in the direct-to-consumer acquisition through our direct marketing channel and our retail distribution. And we've got great strength in our platform and great partners on that platform. Well, it's -- don't get me using sports analogies because I'll make a fool out of myself, so we can talk about left hook and right hook wherever you want -- how you want to put it. But I think that if we think about -- as I think about, I mean, we've got a convergence here of consumers that they want to interact with their favorite companies and brands and products. And if we can provide seamless ways for those consumers to interact, i.e., purchase goods and services, we think that consumers and companies will benefit from that.

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Operator [37]

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We'll take our next question hand from Steven Kwok with KBW.

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Wai Ming Kwok, Keefe, Bruyette, & Woods, Inc., Research Division - VP [38]

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Hope everyone is doing well. And Dan, welcome aboard. My first question is just around the 10% down revenue guidance. I was just wondering how much of that is baking in the stimulus benefits. If you could help break apart what you're seeing or what's your assumptions on both the BaaS side and then on the consumer side as well? Like how should we think about that for the second quarter?

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Jess Unruh, Green Dot Corporation - Interim CFO & CAO [39]

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Sure. Steven, it's Jess. I think, obviously, in the prepared remarks, we've talked about the benefit from stimulus funds, especially with respect to our trends in late April and early May, and continue to see those trends improving. So it will be hard to know exactly what's going to happen in the back half of May and certainly even harder to know what's going to happen in June. So look, we think because of the lack of visibility in the short term, I think it's prudent for us to provide a guide of 10% down.

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Wai Ming Kwok, Keefe, Bruyette, & Woods, Inc., Research Division - VP [40]

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Got it. And then just on the expense side. If, let's say, this environment -- type of environment continues, like how much additional expenses are there for you guys to take out? Can you just elaborate on like what level of expense reductions would you be willing to do?

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Jess Unruh, Green Dot Corporation - Interim CFO & CAO [41]

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I'd say, from a fixed cost base that they are marketing dollars or something you can focus on. And then, of course, just like everyone else, we have payroll to evaluate and understand whether we would make any actions there. But for the time being, yes, we feel pretty good.

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Operator [42]

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We'll now take our next question from Joseph Vafi with Canaccord.

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Joseph Anthony Vafi, Canaccord Genuity Corp., Research Division - Analyst [43]

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Dan, welcome onboard to Green Dot. I just wanted to ask one of the -- I just wanted to ask one of the previous questions just a different way. If you kind of -- I know, Dan, you're...

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [44]

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No. Joe, I tried to tell you, we're not selling the bank. Ask as many times as you want. We're not going to sell the bank.

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Joseph Anthony Vafi, Canaccord Genuity Corp., Research Division - Analyst [45]

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No, I'm not going to -- I know you're not going to sell the bank. I know you're not going to sell it. No, no. I just wanted to ask on looking at the different businesses, if you've got a feel for where you think the ROIs are higher at this point or where you sense they may be higher. Especially if you look at the BaaS business kind of versus kind of -- as one big bucket versus the consumer as another big bucket? And then I'll have a quick follow-up.

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [46]

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Yes. I think kind of where we are right now, I'm still early in my review of the company. I think it's obvious to anybody who follows the company, our tax processing business, TPG, has good numbers, as you can see that in the first quarter every year. But I think that both -- if you look at just a general sort of the Consumer Business and the BaaS business, both of those businesses are excellent businesses with some very, very exciting growth potential, which is a matter of us focusing on the right partners and the right products in those respective spaces and just continuing to invest thoughtfully and methodically over the years.

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Joseph Anthony Vafi, Canaccord Genuity Corp., Research Division - Analyst [47]

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Okay. Fair enough. And then just circling back to some of the consumer products, and we're kind of hearing more noise from some of the P2P guys on full bank account functionality on their P2P platforms. And the Customer Act model is a little different than kind of a traditional player. And -- I don't mean -- I don't want you to give away any your secret sauce at this point. But how should we think about that? Or how do you help us think about their customer acquisition, which has kind of sometimes spread pretty virally versus the traditional model?

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [48]

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Absolutely. And thanks for your questions. And I appreciate that question a lot. And that -- so you think about the -- if you call the usual traditional, so traditional is kind of traditional Green Dot or kind of neo-banks that are out there. Works like, we want to be your bank account in a somewhat traditional fashion. That's the consumer side of Green Dot. And as I mentioned, we're going to focus, rebuild and get busy on that. And then if you think about the BaaS side of the house, with the partners that we have and other partners that we're talking to, we intend to be a piece of the plans and strategies of those partners around their method of kind of embracing their end users and facilitating their kind of interaction with those end users and not that those end users use to buy goods and services or to communicate with one another or to support each other or to provide funds to one another. And so we may see couple, 3 million, 5 millions of accounts someday in our consumer platform, but through our partners, in terms of pieces of the payment ecosystem we provide, we may see tendered lines or accounts there, but a much smaller revenue per, if you will, that's still all profitable, nice and recurring with good margins.

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Operator [49]

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And we'll take our next question from George Mihalos with Cowen.

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Georgios Mihalos, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [50]

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Dan, welcome back and look forward to working with you again. Wanted to circle back to a question that I think Reggie had asked and maybe you can elaborate on it a little bit. But when you look at the market now compared to when you were running Netspend, I think when you sold Netspend to TSYS, there were a lot of motivations for doing so beyond cost. There were additional channels you were able to kind of tap into from a growth perspective. Is the current environment different at all than the one where you sort of sold Netspend into TSYS? Meaning, is the idea of being part of sort of a multi-product, multi-channel sort of institution not as attractive as maybe what was the case 7 years ago?

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [51]

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George, thanks for that question. Just to be clear, I answered this many times. I haven't so in like a public platform. But I didn't sell Netspend. Netspend was bought. And so Netspend was -- and TSYS is great, great people there, and it was a wonderful transaction for everyone. Don't get me wrong. But the -- and I think as evidenced by the growth of Netspend post acquisition. The environment and the potential growth of that business was there, and I think continues to be there. So from a standpoint of the environment different today than it was then, I really don't see it as much different. If you think back then, we had American Express and Chase Bank and lots of other competition out there. So I don't see that as much unlike this current wave of challenger banks and neo-banks. I think what is different is back in the day of Netspend and Netspend Secure, PayPal, back in those days, and conversations with Apple were just beginning. And now you're seeing likes of Uber that have come in, Walmart is moving beyond just a card product and more payment solutions, has a partnership with us and TailFin.

So I think what is different -- I think it's absolutely stay the same. And that the low to moderate-income consumer, this market and population is still huge. Nobody has rightfully, properly claimed a position to be the new financial services company to serve the low to moderate income concern in this country. No one has said, this is it. Everyone -- many have started and then they decided to try to move up channel and go to the higher income customers. So I think if the opportunity for -- to serve this very large customer base is still there and still ripe for the taking. But then I think what has changed is the technology to as such, where everybody's got a very powerful computer, single 5G speeds in their pocket. And so what you're going to be able to do with that, together with partners like Apple, Uber, Intuit and Walmart is savvy players that own a bank, have great technology, have tremendous payments experience, are going to be able to create some very powerful solutions for the consumer and reaches consumers through these great partners.

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Georgios Mihalos, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [52]

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Okay. I appreciate that color. And then maybe just a quick follow-up for yourself, for Jess. A lot of discussion around optimization and a focus on the bottom line and improving margins. I'm just curious if you're willing to sort of put out there sort of an aspirational margin target if we look several years down the road, past COVID and the like. What do you think the proper margin profile is for this type of business?

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [53]

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It's -- sorry, Jess and I are on Zoom. Point is, George, like he wants to take that one. So as I said in my call, I mean, we're going to focus on free cash flow, bottom line growth and margin expansion. Where it goes in the blended margin, that's really hard for me to say. In terms of where should the margin be on the consumer side of business? I may have some experience on that. Where is the margin going to be on the BaaS side of the business? Based on how fast we make this, both revenues and such, I'd be a fool to guess at this point.

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Jess Unruh, Green Dot Corporation - Interim CFO & CAO [54]

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And I think it's fair to give Dan some time to understand which products are most profitable and give him the chance to uncover block, put in the rocks and whatnot, and I think that's going to take some time. So I think we'll have better clarity down the road here.

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Operator [55]

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And we'll take our last question here from John Hecht with Jefferies.

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John Hecht, Jefferies LLC, Research Division - MD & Equity Analyst [56]

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Really appreciate all the color and kind of the goals and strategies going forward here and how you're trying to develop them. So a little bit more just, I guess, technical questions here. Within the interchange revenues, how much of that's physical versus e-commerce? And what have you seen, say, the last few weeks? Obviously, it's more e-commerce now, but anything striking with respect to those trends?

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Jess Unruh, Green Dot Corporation - Interim CFO & CAO [57]

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I mean again, clearly, we've seen, as you'd expect, an uptick in card-not-present transactions. So you see obviously, PIN, which you would traditionally see in-store migrate to signature and even more so to online in-app. And so that, in theory, should give us greater interchange return. Now I would say that there are some headwinds to interchange in that. The interchange rates you get at the highest tiers are all related to travel and things like that. So obviously, those categories of MCCs are shrinking, while other sort of card-not-present categories are increasing. So overall, it's a benefit to interchange rates. But there are some implied headwinds within it.

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John Hecht, Jefferies LLC, Research Division - MD & Equity Analyst [58]

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Okay. And then within BaaS, I wonder, can you talk about -- you talked about pipeline. And if -- can you talk about how you see the BaaS opportunity set over the next several quarters?

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [59]

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The pipeline is very strong. And I think that where we are, to be completely transparent, is we're actually in a position to be selective in terms of the partners that we go with. So we're going to be spending time through marketing and chasing after partners, but I'd be a little bit more selective in terms of the partners that we work with. It's for more of a -- I'd say it's focus more on quality as opposed to the quantity in terms of partners that we have presently.

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Operator [60]

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And at this time, I would like to turn the call back to Mr. Dan Henry for any additional or closing remarks.

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Daniel R. Henry, Green Dot Corporation - CEO, President & Director [61]

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Thank you, operator. Hey, Jess, thank you very much for doing our first virtual Zoom earnings call. It's kind of unique. And thanks, everybody, for dialing in and listening, and talk to you here in about 3 months again.

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Jess Unruh, Green Dot Corporation - Interim CFO & CAO [62]

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Thank you, Dan.

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Operator [63]

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And this concludes today's call. Thank you for your participation. You may now disconnect.