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Edited Transcript of GDOT.N earnings conference call or presentation 4-Nov-20 10:00pm GMT

·44 min read

Q3 2020 Green Dot Corp Earnings Call MONROVIA Nov 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Green Dot Corp earnings conference call or presentation Wednesday, November 4, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Alison Cahill Lubert * Daniel R. Henry Green Dot Corporation - CEO, President & Director * Jess Unruh Green Dot Corporation - Interim CFO & CAO ================================================================================ Conference Call Participants ================================================================================ * Andrew Garth Schmidt Citigroup Inc., Research Division - VP & Analyst * Andrew William Jeffrey Truist Securities, Inc., Research Division - Director * Ashish Sabadra Deutsche Bank AG, Research Division - Research Analyst * 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 * Jeffrey Brian Cantwell Guggenheim Securities, LLC, Research Division - VP and Analyst * Ramsey Clark El-Assal Barclays Bank PLC, Research Division - Research 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 ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, and welcome to the Green Dot Corp. Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Alison Lubert, Vice President of Communications. Please go ahead. -------------------------------------------------------------------------------- Alison Cahill Lubert, [2] -------------------------------------------------------------------------------- Thank you, and good afternoon, everyone. Today, we are discussing Green Dot's third quarter 2020 financial and operating results. Following remarks, we'll open the call for questions. Our most recent earnings release that accompanies this call and webcast can be found at ir.greendot.com. As a reminder, our comments may include forward-looking statements and 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 with 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. -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [3] -------------------------------------------------------------------------------- Thank you, Ali. Welcome, everyone, to Green Dot's Q3 2020 Earnings Call. It's been a busy and productive few months since we last gathered. We are pleased to report a better-than-expected third quarter, which we attribute to a number of factors, including our continued work to drive efficiencies and lower cost and increased demand for our products across our consumer, retail and B2B offerings. We remain focused on unlocking new opportunities and capitalizing on the accelerated shift from cash to digital banking and payments, which was further illuminated by the pandemic and other dynamics taking place in the marketplace. As we -- and we are already seeing benefits from our work-from-anywhere initiative from both a cost savings and talent recruitment perspective. In a few minutes, I'll pass it over to Jess to walk you through the details of our financial results, but I'd like to start by sharing a few highlights and my perspective on what contributed to a solid third quarter. I'm going to focus on 3 key areas of progress that stem back to the objectives I laid out earlier this year. These will include improving our financial performance and execution, refocusing and enhancing our BaaS strategy and launching our new and lasting challenger bank initiative. While Jess will cover the financial performance in detail, let me provide you with my take on the results for the quarter. Non-GAAP revenue increased 22% compared with the third quarter of the prior year. This higher revenue was driven by a combination of new and existing customers using Green Dot products to electronically receive their income, elevated deposit balances from stimulus funds received in Q2, growth in our BaaS partner fees and accelerated demand for digital banking and payments products. We also started to see recovery in areas of our business that were negatively impacted by COVID-19. Our total operating expenses for the third quarter of 2020 increased by $42 million compared to the third quarter of the prior year, and our margins expanded by approximately 100 basis points. A big component of the increase in operating expenses was related to growth of our BaaS business. We also had lower marketing expenses in the quarter. If you recall, Green Dot spent a majority of its full 2019 marketing budget in the second half of 2019. Finally, we had a few headwinds to margins, especially, and increased revenue share, with one of our key retail partners, higher transaction losses on our purchase volume and the timing-related expenses associated with incentive compensation for our employees. Moving on to our BaaS business. As we previously announced, we officially kicked off new relationships with Intuit and Kabbage in the third quarter, which further positions Green Dot to serve and empower America's 30 million-plus small businesses and entrepreneurs. Leveraging Green Dot's capabilities, Intuit announced their plans to launch a QuickBooks cash account, and Kabbage announced plans for Kabbage Checking. We're also very excited about Kabbage's accelerated potential now that they are part of American Express. Through these products, small business owners will now have access to more seamless, safe and value-driven banking and cash management for their businesses. We're incredibly proud to be a part of this movement and look forward to deepening our partnerships with Intuit and Kabbage and doing more for small businesses in the future. We believe the opportunity for Green Dot to offer its services to the vast SMB segment is immense, and we look forward to providing you with more updates regarding this opportunity. On that note, you may have seen an exciting announcement last week about a new strategic investment and partnership with Gig Wage, which for those who may not be familiar, is a very impressive and fast-growing start-up, focused on creating a better financial ecosystem for the rapidly expanding gig economy. When I met Gig Wage's founder, Craig Lewis, earlier this year, it quickly became clear that we have similar goals and visions for the industry and for our customers and that we could do a lot together. Green Dot led Gig Wage's Series A funding round, and we will serve as their infrastructure bank partner, enabling Gig Wage to launch a number of new financial solutions designed for 1099 workers and their employers. As a strategic investor and BaaS partner, Green Dot has an exciting opportunity to grow this vertical and capitalize on the growing demand for better banking and payment solutions for the gig economy. Also, we have a few new partners we will be announcing soon, brands that everyone will know and recognize. One thing I want to reiterate is our commitment to partnering with select, high-impact and high-potential companies, meaning they are highly respected brands with very impressive reach or they're start-ups with tremendous potential, which we will differentiate ourselves as a BaaS provider by acting, not just as a bank sponsorship, but also a true partner, providing end-to-end support, spanning technology, program management, call center support, fraud and our retail network and more, which we consider a huge differentiator for Green Dot. Last but certainly not least, one of the most important and exciting areas of focus and progress has been unlocking our potential as a powerful challenger bank. Earlier this year, one of the goals I set for the company was to introduce a new direct-to-consumer bank, and that vision will come to fruition very soon. Last week, we officially launched our wait list for Go-to Bank, which is an entirely new and simplified digital banking experience that will offer meaningful value and features designed to save people time and money and manage and move money effortlessly. We chose Go-to Bank as our new brand by doing some pretty extensive research and because we want this product to be the go-to destination for modern banking and money movement for everyone wherever they go. Go-to Bank will be a solution designed primarily for low- to moderate-income consumers who are looking for and can benefit from a better way to bank and transact. And we plan to expand the target market as we enhance the product features and services over time. As one of the only challenger banks to actually be a bank, Go-to Bank will position Green Dot to compete aggressively and profitably. When we launch early next year, Go-to Bank will offer a compelling value proposition to a wide range of customers, including the security and protection that comes with a member FDIC bank, an intuitive mobile app and experience where you can quickly set up and manage your account, no monthly fees when you use direct deposit, free in-network ATMs, 10x national average AQI and other valuable features and rewards. And our plan is to expand on those features quickly. This new brand and product set represent a meaningful and long-term commitment and strategy for Green Dot. So you can expect to see a lot more of this in 2021 and beyond. While we intend to spend to develop the Go-to Bank brand and acquire customers, our marketing dollars will be based on a data-driven marketing strategy, driven by thoughtful and rigorous return-on-investment requirements and expectations for lifetime value. Green Dot has a proud 20-year history of serving over 33 million customers through our retail direct-to-consumer products and many more through our banking partners like Walmart, Apple, Uber and other well-known innovative brands. We know how to build products that make money movement and access more seamless, intuitive and safe for everyone. We also know there is a significant segment of our population that continues to be underserved by the financial services industry, and we have the opportunity to change that with Go-to Bank. I encourage you to visit gotobank.com and join our wait list. As you may be able to tell, we have been incredibly busy laying the foundation to deliver value-added products and services to our customers, directly as well as through our valuable BaaS partners. At the same time, we are delivering on our commitment to rightsize the cost structure and establish sustainable operating leverage, which will create value to you, our shareholders. I would like to thank our valuable employees who have been working tirelessly through these challenging times. And with that, I'll pass it over to Jess to walk through our numbers. -------------------------------------------------------------------------------- Jess Unruh, Green Dot Corporation - Interim CFO & CAO [4] -------------------------------------------------------------------------------- Thanks, Dan. Good afternoon, everyone. Overall, Green Dot had strong financial results in the quarter and significantly exceeded our internal expectations from 3 months ago. The momentum we saw in Q2 from stimulus funds, unemployment benefits, and new users on the platform carried into Q3. We are pleased that the scale of our platform and our market reach puts us in a position to benefit from the accelerated adoption of digital payments. Our Q3 2020 non-GAAP revenue grew 22% to $279 million, and we delivered adjusted EBITDA of $34 million and non-GAAP EPS of $0.25. We experienced a few significant tailwinds as well as headwinds in the quarter that I'll walk you through. Overall, we're pleased with the strength of the consolidated performance. Focusing on our top line results for a moment. Non-GAAP revenue growth in the quarter was driven primarily by our account programs, with strong performance in key metrics, such as account acquisition, gross dollar volume and purchase volume. The growth in gross dollar volume was driven, in part, by the extension of federal unemployment benefits and higher levels of tax refund deposits onto our account programs due to the extension of the tax filing deadlines to July 2020. Altogether, this resulted in increased management service fees from our BaaS partners, increased monthly maintenance fees from elevated deposit balances and growth in interchange revenue. Consistent with the previous quarter, the interchange rate we earned was down year-over-year in Q3 due to a 30% increase in the average ticket size per transaction. Since interchange fees have both fixed and variable components, we earned smaller fees in percentage terms on larger transactions. Partially offsetting the increase in revenue in our account segment was an increase in cash rewards related to Green Dot unlimited accounts. We also experienced revenue growth in our money movement services, primarily due to a 9% growth in the number of cash transfers, a significant growth in tax refunds processed from a shift in the tax filing deadline and continued growth in new tax processing services we introduced this year. Partially offsetting this growth was a year-over-year decline in SimplyPaid disbursement transactions as a result of the disruption in the ridesharing business from the effects of COVID-19. Another headwind discussed on prior calls was the year-over-year decline in net interest income due to lower yields on our cash and investment balances as a result of rate cuts by the Federal Reserve earlier this year. Let me turn my attention to our expenses and margins. Our total non-GAAP operating expenses in Q3 grew by $42 million or 20% year-over-year, and our margins expanded approximately 100 basis points. Sales and marketing expenses declined by 5% due to lower marketing expenses year-over-year. Our marketing spend in 2019 heavily concentrated in the back half of the year, whereas we are spreading the spend more evenly across 2020. The lower marketing expense was partially offset by an increase in revenue share with our partners, including an increased revenue share rate associated with last year's renewal of the Walmart MoneyCard program. Compensation and benefits expenses increased 18% due to incentive compensation for our employees. Consistent with our commentary on our prior earnings call, we've reinvested some of our planned SG&A saves to incentivize and reward our nonexecutive employees for their extraordinary efforts to serve our customers and execute on our priorities as we navigate through the pandemic. Processing expenses increased 60%, in line with corresponding revenue increase in our BaaS fees and interchange revenue. Other general and administrative expenses increased to 43%, mainly as a result of an increase in transactional losses from higher volumes of customer disputes. In Q2, we experienced a significant increase in transaction losses, primarily due to operational disruptions caused by COVID-19. In Q3, and likely for the remainder of this year, the basis points of loss on transactions will be a headwind to margins as we continue to work diligently on improving the customer experience and align our fraud prevention processes with the industry's best practices and performance. We expect loss rates will begin to normalize in 2021. Depreciation expense in Q3 increased 15% year-over-year, due to increased capitalization development costs over the past several years to support our strategic initiatives. We expect depreciation expense to increase in the short term and then begin to flatten out as we reduce the level of overall spend on development by consolidating some of our products and focusing on prioritizing our development based on strategic impact and incremental operating margins. From a liquidity perspective, we generated $37 million of operating cash flow during Q3 and $199 million year-to-date. Our cash at the holding company at quarter end was $152 million. The $100 million revolver is available to us, should we need it to invest in strategic initiatives. Now I'd like to focus on expectations for the remainder of the year. As we look ahead, while our business remains very healthy, it is important to remember that Q2 benefited from approximately $2 billion of gross dollar volume from stimulus funds and Q3 had a follow-on benefit from elevated deposits. Additionally, Q2 and Q3, in aggregate, benefited from approximately $2 billion of incremental federal unemployment benefits afforded under the CARES Act. While we are well positioned to continue to benefit from the accelerated adoption of digital payments, we expect our KPIs to continue to normalize as stimulus disbursements roll off and enhanced federal unemployment benefits expire. While each of account acquisition, gross dollar volume and purchase volume were, in Q3, above long-term historical trends, we do anticipate that normalization will occur throughout Q4 2020. One item to note for Q4 is that we expect a year-over-year decline in cash transfers. We decided to not renew an agreement with a large reload partner because proposed renewal terms and associated margins did not meet our expectations. Thus, our cash transfer volumes and the related top line revenue will be impacted. But given the lower profitability of this contract, we actually expect the overall percentage contribution margin in our money processing channel to improve. As we think about the full year 2020, we expect our non-GAAP revenues will be in the range of $1.175 billion to $1.185 billion. We expect adjusted EBITDA to be in the range of $195 million to $200 million and non-GAAP EPS to be in the range of $1.95 to $2. These ranges do not anticipate another significant federal stimulus program, nor do they anticipate a further economic slowdown from the impact of COVID-19. In conclusion, we remain focused on reducing the overall complexity of our operations with the goal of generating consistent operating leverage in the years to come. We believe decisions made this year will begin to benefit us in 2021 and beyond. Speaking of 2021, we expect to provide formal guidance for the year when we report our Q4 2020 results in February. While we're still in our budget process, we would like to provide some insights for you to consider as you build your models. First, we will have positive impact from initiatives discussed earlier, including new BaaS partnerships and Go-to Bank as well as various costs and capital efficiencies. We will also have year-over-year headwinds associated with the government benefits that positively impacted our 2020 results, as we discussed earlier. We look forward to providing a more detailed discussion on our next earnings call. With that, operator, let's open the line for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And the first question comes from Bob Napoli of William Blair. -------------------------------------------------------------------------------- Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [2] -------------------------------------------------------------------------------- Lot going on. Just maybe a first question, just on direct deposit. Dan, I mean the -- in your prior roles, I mean, direct deposit was a big focus. I know it's a big focus here. Penetration rate currently is about 40% on direct deposit accounts. Is there a strategy around building the direct deposit customer base at a faster rate? If so, what is it? And what kind of a penetration rate or other metrics would you judge the success of that program on? -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [3] -------------------------------------------------------------------------------- Yes, Bob, I think your question, I think, illustrates the knowledge and awareness of, like, of what we do. The direct deposit customer is extremely valuable customer. So as we -- when we launch our challenger bank initiative early next year, we will be very focused on driving that direct deposit growth with that product. In terms of any sort of metrics or levels of success, can't give those to you at this point. But yes, it's going to be a cornerstone to our strategy and our focus on growth. -------------------------------------------------------------------------------- Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [4] -------------------------------------------------------------------------------- Great. And then maybe just as a follow-up, the new partners, it sounds like you have a pipeline of new large and small partners, as you mentioned, startups and well-known brands. Is there a different approach to those new partners versus what Green Dot has had in the past? Or is it more a partnership, as you view, and would this generate higher ROIs maybe than some of the partnerships in the past? -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [5] -------------------------------------------------------------------------------- No. The approach, Bob, is different. And I don't know what was shared publicly, but from my understanding is -- or my approach is very much of a quality instead of quantity in terms of partners. And if you think about what we have at Green Dot, we have a very unique collection of assets. I mean I'll say right now, I don't like the BaaS acronym for us because we do a lot more than just give access to our BIN, so I think of banking as a service. We can bring to our partners -- our partnerships, a bank, we can bring logistic expertise in terms of [issuing plastic]. We've got a tech stack. We have a reload network. We have customer service call centers, management expertise. We've got fraud management expertise. So we bring a whole collection of services. And so our new approach is not to just let any fintech come along and kind of take us one piece at a time of our service, but more look for large partners, like many of the ones we have that are looking for kind of an all-encompassing solution and relationship, work to deepen that relationship and bring powerful products and solutions that really nobody else can offer because nobody else has a collection of the assets we have, bring those to large partners who can really drive scale for us in adoption of the masses with those solutions. And then on the other side of the spectrum, more partnerships with companies like Gig Wage. It's -- Craig Lewis, the CEO of that and founder of that business, he's a tremendous entrepreneur, hard charging. He's built a great little platform. He's got some great prospects in terms of a growing wave of the gig economy. And we want to play in that, and we see being able to invest in a company like Gig Wage, truly be their partner and help them grow and grow with them in the gig economy. That's the strategy we want to do on our partner approach. So as I said, what I just read is it's either large partners with tremendous reach, or small, very powerful partners with tremendous growth potential. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- The next question comes from George Sutton of Craig-Hallum. -------------------------------------------------------------------------------- George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [7] -------------------------------------------------------------------------------- Congratulations to me. I'm the latest wait list customer for the new challenger bank offering. So... -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [8] -------------------------------------------------------------------------------- Ah, Go-to Bank. All right. We will be your go-to bank for all your seamless and frictionless financial services. So glad to have you on board. -------------------------------------------------------------------------------- George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [9] -------------------------------------------------------------------------------- If you can handle all my wife's needs, I'm very impressed. So question competitively. Goldman Sachs just announced entrance into the BaaS market. Axos had to give up a customer because they had reached too large a size and couldn't work with rev share. I think Goldman will have the same issue. So curious how you're -- and I'm happy that you're defining some of your capabilities a little bit more specifically. But I'm curious, competitively, when I look at that larger landscape and issues that some might run into, and then look at the sort of some of the bigger opportunities in the space, just help us understand when you're building up this pipeline, how competitive it is. And I would also like to add, and I don't need a follow-up question. So this will be my follow-up question. The renewal deal that you didn't go forward with and how that demonstrates customers you might be moving away from? -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [10] -------------------------------------------------------------------------------- Sure. So the renewal we passed on was with a partner that was only using our reload network. And so we -- what we saw there was somebody who was demanding high volume in service with next to no margin, sometimes negative margin, and we were not willing to go there. Especially, as I said, they were just doing a la carte solution, where all they wanted to use was our reload network. So we walked from that partner. In terms of the other thing, your other question in regards to how we -- as our bank grows with all these new partners, how do we maintain the asset level. Really don't want to get into a lot of detail on that, but rather just to share that we're very confident that as we structure our business, Greg Quarles, who's now the CEO of our bank, we can run our bank, we can stay below the $10 billion asset level for a long, long time with very significant volume coming across our institution. And if you compare that with, say, a Goldman Sachs bank or whatever banks are out there now jumping on the BaaS wagon, those banks are entirely different types of banks than we are. Those are traditional financial institutions that do all sorts of banking and lending, and they want to be $300 billion, $400 billion in assets. And so that's -- they will have a different issue, and we'll be able to protect our revenue with higher interchange by maintaining our $10 billion-or-less asset size. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Your next question comes from Andrew Jeffrey of Truist Securities. -------------------------------------------------------------------------------- Andrew William Jeffrey, Truist Securities, Inc., Research Division - Director [12] -------------------------------------------------------------------------------- I wonder if I could maybe build on Bob's question with regard to -- I guess, more specifically with regard to unit economics, taking a look at the Go-to Bank side. I'm maybe a little bit behind George as far as getting on the wait list, but I'll get there. And looking at cash back and some other products, the consumer incentives seem competitive, quite rich, and I appreciate the focus on direct deposit. Dan, can you just give us some comfort that these are really good ROI products despite whether it's 6% or 7% cash back? Those are pretty those are pretty juicy returns or rewards, I should say. -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [13] -------------------------------------------------------------------------------- I'm really glad to hear you ask that question with that kind of what will be almost skepticism, right? No, seriously because... -------------------------------------------------------------------------------- Andrew William Jeffrey, Truist Securities, Inc., Research Division - Director [14] -------------------------------------------------------------------------------- I'm not skeptical often. -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [15] -------------------------------------------------------------------------------- It's not how you make your living, I know. Absolutely. The economics on this product are going to be stronger than, I think, any product that we have at Green Dot currently. And those 6% and 7% cash back rewards, those are -- those returns are funded by the merchants who are issuing those reward programs. So those won't come as a cost to us. So it's really about how we can be creative and designing, really, value-rich opportunities, propositions for the consumer that they love and embrace, and we still preserve the very good economics on our product. -------------------------------------------------------------------------------- Andrew William Jeffrey, Truist Securities, Inc., Research Division - Director [16] -------------------------------------------------------------------------------- Okay. I mean, as a follow-up, I guess, I'll press my luck, again, as a skeptic. With a product that, for example, that hasn't been announced, but we got maybe a little bit of a sneak peak around yesterday, the Amazon Flex product. I mean, do you feel like -- and that's just one example. I mean, do you feel like there's a means of pressing the advantage over the long term in terms of getting customers like that to participate in funding rewards? I mean that's, obviously, a clear positive. I just wonder if you can frame up if that's a sort of sustainable economic model, given the size of the customers. -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [17] -------------------------------------------------------------------------------- Yes. I think that's just an example of the sort of things that we're going to want to explore with our partners. And it's part of our new approach around our partner strategy of how can we create compelling solutions. Let's say, if we have a partner who is a retailer, we have a bank, we have the ability to -- we can open up with very little friction a digital wallet that can reside in the apps of our partner. That's what we do now. And we could create credit-building tools for consumers, with our partners. We can actually even create small low-risk loan products with our partners. We can, together with our partners, just as you mentioned, create rewards products for the consumers. So that's where -- I get really excited about what we're doing here is if you think about -- with Go-to Bank, we are very focused in creating powerful products and solutions for our direct-to-consumer business. Those products and solutions that we create we can easily expand and offer those to our partners, whereas we can market and we can reach a couple 2 million, 3 million, 4 million, 5 million, 6 million, 10 million customers on our own. We can take some of the products and solutions that we have created, bringing them to some of our partners, and we can then be reaching consumers in the tens of hundreds of millions at a time. So yes, you're spot on in terms of -- from a long-term perspective of being able to work with and engage with these partners, we have the opportunity to reach a very, very large number of consumers in this country. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- The next question comes from Ramsey El-Assal of Barclays. -------------------------------------------------------------------------------- Ramsey Clark El-Assal, Barclays Bank PLC, Research Division - Research Analyst [19] -------------------------------------------------------------------------------- I wanted to ask you about 1099 and gig economy and the opportunity for the company. I mean, given your investment in Gig Wage, the Amazon product, you already have an Uber product out there, should we view this as sort of almost the primary opportunity for BaaS? When you talked about those kind of pipeline is full and potentially announcing new partners soon, is this a real strategic pivot for the company kind of into that, developing product specific to that kind of opportunity set? -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [20] -------------------------------------------------------------------------------- No, it's not, Ramsey. It's not a pivot. It's not a new direction. It is -- but it is an important growth channel for us. So I kind of -- I like to -- I'd rather ride a wave than paddle a canoe. And so I look for waves. And to me, the gig economy is a wave. It's a growth wave. And so if we can -- if you think about our partnership with Uber, this investment and partnership with Gig Wage, other potential solutions that are out there, we're becoming well equipped to serve the gig worker, just as we are very well equipped to serve a low- to moderate-income consumer, just as we are working to be very well equipped to serve a small business. And so that -- and all of those avenues will leverage the common denominators that we have of a bank reload network, customer service, fraud controls, et cetera. So that's -- so it's absolutely -- it's a great question. I want to be clear, this is not a -- I'm not schizophrenic. This is not a switch or a pivot. It is a way to basically take these assets that we have and the skills that we built over decades and how do we stack new opportunities on top of them to just drive incremental revenue with attractive margin. -------------------------------------------------------------------------------- Ramsey Clark El-Assal, Barclays Bank PLC, Research Division - Research Analyst [21] -------------------------------------------------------------------------------- That makes a ton of sense. My follow-up is on Go-to Bank. And I'm just wondering if you could kind of encapsulate for us, what is different about this offering relative to other kind of prior mobile-first Green Dot products like Unlimited and Gobank? Is it more of the distribution? Is the product structure itself sort of different? I was just wondering if you could elaborate there a little bit. -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [22] -------------------------------------------------------------------------------- Yes. Thank you for this question, Ramsey. The big difference is our commitment. And so Go-to Bank is very different from all products that have been launched in the history of Green Dot because Go-to Bank is it, okay? From this point forward, there's no more NASCAR, there's no more puppy dog cards, there's no more unlimited cards, it's Go-to Bank. And with Go-to Bank, it's going to be go to savings, and there's going to be go to other solutions that are feature and functionality tied to this Go-to Bank account, for our consumer that we want to take this product. And by the way, it's a real bank account because it's issued by Green Dot Bank. So it's not a marketing company who's hanging off of someone else's BIN. This is a Go-to Bank issued product so that we can -- we will really be able to create products and solutions to serve the full financial needs of our customers. So our goal here and our intent is, you will not be hearing a new product launch every single year from Green Dot. You will be hearing about feature and functionality additions to the GoBank product on a regular basis for years to come. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- The next question comes from Andrew Schmidt of Citi. -------------------------------------------------------------------------------- Andrew Garth Schmidt, Citigroup Inc., Research Division - VP & Analyst [24] -------------------------------------------------------------------------------- First question on new customer acquisition. So now that we have couple quarters post stimulus under our belt, wonder if you could talk about what you're seeing in terms of organic account growth in the quarter, for lack of a better term, meaning are you seeing an elevated level of net new adds from nonstimulus, nonunemployment benefit customers? And any help there would be much appreciated. -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [25] -------------------------------------------------------------------------------- It's a good question, Andrew. I think it's hard to really pull apart what's nonstimulus and what is stimulus. I can say that we have seen an elevated amount of new customers coming into the system. And again, sort of hard to dissect whether they're coming in for nonstimulus versus stimulus reasons. But yes, across Q2 and Q3, we saw a significant amount of new acquisition, both in retail and then the strength of the direct business, which is in part the better marketing efforts we have and the better cost per funded, but also in large part to additional stimulus funds and just the attractiveness of our products given this digital acceleration. -------------------------------------------------------------------------------- Andrew Garth Schmidt, Citigroup Inc., Research Division - VP & Analyst [26] -------------------------------------------------------------------------------- Understood. Okay. That's good context. And then just my follow-up, maybe I'll ask it. There's a -- obviously, a lot of news about M&A out there. Dan, I was hoping to get your view about just philosophically, how you feel about scale acquisitions versus capabilities. Just philosophically, just interested to kind of get your viewpoint on just the M&A front. -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [27] -------------------------------------------------------------------------------- My viewpoint in terms of what are we looking to grow through acquisitions or just like -- not really clear what you're asking. -------------------------------------------------------------------------------- Andrew Garth Schmidt, Citigroup Inc., Research Division - VP & Analyst [28] -------------------------------------------------------------------------------- Yes. The question is: How much of a priority is M&A versus growing organically? -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [29] -------------------------------------------------------------------------------- Got it. -------------------------------------------------------------------------------- Andrew Garth Schmidt, Citigroup Inc., Research Division - VP & Analyst [30] -------------------------------------------------------------------------------- And then within -- in a pure M&A, are you open to more scale acquisitions? Or would you be more capability focused? -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [31] -------------------------------------------------------------------------------- Got it. Got it. So what I really like about what we have in front of us at Green Dot is we have real significant growth opportunities and potential without any acquisition. And I've always said that your ROE on organic growth is much higher than acquired growth. So I'm a big fan and believer of organic growth. It comes with -- to me, it comes with a lot fewer problems. You're not trying to integrate a new culture or whatever out there. You know what you've got when you are signing customers and growing customers and land them on your existing infrastructure and you're using your core competency. So we don't need acquisitions to grow. So I want to make sure that's perfectly clear. However, from a standpoint of are we open. Absolutely. We're absolutely open to acquisitions that will enhance our functionality, accelerate our ability to grab some opportunities or just kind of incrementally add to our current volume. And so yes, we're -- and those would be from a small add-ons to largers that might be even transformational. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- The next question comes from Steven Kwok of KBW. -------------------------------------------------------------------------------- Wai Ming Kwok, Keefe, Bruyette, & Woods, Inc., Research Division - VP [33] -------------------------------------------------------------------------------- The first one I had was just around the early look into 2021. I know you called out roughly $4 billion of stimulus and unemployment benefit. Should we think of that as being around like a $40 million revenue headwind? If you just use like a roughly 1% exchange rate. And then as we've -- is there any early indications around like the what the margins on that could be? And you mentioned there's a positive headwind -- positive tailwinds around the new businesses stuff like from -- as of right now, do you feel like those can offset essentially what the headwinds could be for next year? -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [34] -------------------------------------------------------------------------------- Sure. Good question. Jess, do you want to take it? Or you want me to take that? -------------------------------------------------------------------------------- Jess Unruh, Green Dot Corporation - Interim CFO & CAO [35] -------------------------------------------------------------------------------- Yes. I can take it. Look, I think there's been a lot of puts and takes associated with COVID in 2020. Portions of our business were negatively impacted, we had higher dispute call center costs, while other portions of our business were positively impacted by accelerated demand for digital payments and the government benefits. And it's really hard to sort of isolate the direct impact of the government benefits specifically. So I think as you think about 2021, trends in gross dollar volume per active will really start to normalize from what you've seen in Q2 and Q3. Ultimately, we believe we'll be in a better place for long term because of that digital adoption. And I think the -- I think about sort of what that GDV means, I think about it in GDV yield as opposed to necessarily just interchange because there's fees and other things associated with it. But we can speak more to our 2021 guidance on the next call. -------------------------------------------------------------------------------- Wai Ming Kwok, Keefe, Bruyette, & Woods, Inc., Research Division - VP [36] -------------------------------------------------------------------------------- Got it. And separately, there was an article out there around Square perhaps buying the Credit Karma's tax business. I was just wondering, is this something that you guys would possibly look at. And separately, given that it would be helping Intuit, around that, I know you guys have a relationship with Intuit as well. Just wondering in terms of your relationships with Intuit, like, how long are those contracts locked up for? -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [37] -------------------------------------------------------------------------------- I believe we announced that we recently renewed the Intuit contract. So we have a number of years now in that new contract remaining. We don't want to get in tax preparation business. So. But I mean there's -- we did -- that opportunity did come across the desk, but we decided that that's not in our sweet spot of skills, capabilities and where we see our growth potential. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- The next question comes from George Mihalos of Cowen. -------------------------------------------------------------------------------- Georgios Mihalos, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [39] -------------------------------------------------------------------------------- Just going to ask -- Dan, ask 2 quick modeling questions and then I'll hop off. I guess the first, can you quantify, or maybe I missed it, how much of an impact the nonrenewal from the reload partner will be? How much of an impact that's expected to have in the fourth quarter? And then the lower interchange yield, which I think was attributed to larger transaction size, would you expect that to sort of tick back up in the fourth quarter and sort of be more in line with what we've seen over the first half of 2020? And I'll hop off. -------------------------------------------------------------------------------- Jess Unruh, Green Dot Corporation - Interim CFO & CAO [40] -------------------------------------------------------------------------------- Yes. I'll take that one. On the latter question around interchange yield, we're already starting to see some of that normalize back to what we see in the past of, say, 120 basis points. So the further we get from those stimulus funds coming on, the more the interchange rate normalizing. To your first question around the reload partner. We're obviously focused on generating strong cash flows and margins. Sometimes, it means you need to walk away from deals. But when I think of Q4, we expect cash transfer volume to be down year-over-year. We expect the margins of our money processing business to be up. And as we think about the future, we have a pretty active BD pipeline for new reload partners and tend to add new partners next year. And then as you think about Go-to Bank and our consumer products in general and us bringing them back to health, as we grow our BaaS partnerships, et cetera, we believe the reload network profit and margin will improve despite losing some third-party reload volume because we make more money off of reloads on our own products than we do in our third-party products. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- The next question comes from Ashish Sabadra of Deutsche Bank. -------------------------------------------------------------------------------- Ashish Sabadra, Deutsche Bank AG, Research Division - Research Analyst [42] -------------------------------------------------------------------------------- I wanted to focus on the small business accounts. You talked about Intuit and Kabbage. I was just wondering if you could help -- but if you can talk about how big that addressable market is and the strategy going forward? Do you expect to sign up -- work with more partners? Or is that also a strategy to go direct to -- try to address the small businesses directly? And then finally, is the Go-to Bank being also the solution for the small-business customers? -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [43] -------------------------------------------------------------------------------- Yes. Ashish, Go-to Bank is not a solution for the small-business customers. However, if you think about a lot of small businesses in this country are sole proprietors and individuals. So the future functionality on Got-to Bank is very possible that small independent operators, sole providers may pick up our Go-to Bank product and make it their account, but that's definitely not the intent or the design of the product. Our opportunity around small business in the country, I mean, it's very large. I mean, there's millions of small businesses in the United States. Our partner Quickbooks they had 8 million small businesses alone that use their solution. So I think as we talked on the last call, it was in the press release, you could do your research and see those numbers. But we are -- QuickBooks is offering QuickBooks cash account, which is basically a bank account that's operated by Green Dot Bank, and we receive income off of that account. And we're very enthusiastic about that growth potential with QuickBooks. They can just -- 12%, 15% penetration into their base will be 1 million customers, 1 million small-business accounts on our platform. And similar opportunity with Kabbage, where we have a big account of debit card issues for Kabbage small businesses. With Kabbage now being part of American Express, the growth potential there, the marketing impact of American Express behind that product is very exciting. So I can't quantify it for you right now, but it is bigger than Redbox. -------------------------------------------------------------------------------- Ashish Sabadra, Deutsche Bank AG, Research Division - Research Analyst [44] -------------------------------------------------------------------------------- That's great. That's great. And maybe just a question on election outcomes and potential for a small second stimulus. How should we think about impact, if any, on the Green Dot just because a lot of the customers are unbanked, underbanked or at the lower end of the credit segment? -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [45] -------------------------------------------------------------------------------- Well, Green Dot customers by the nature of having Green Dot products are no longer unbanked. And so a stimulus -- another stimulus check would -- like the prior ones would, be a positive to Green Dot, and be positive in the ways the others have been positive. It will be positive in the immediate term of just additional funds to our customers, will come on to the account and will be spent and generate revenue for Green Dot, but it will also create additional impetus for cash-based consumers to adopt our product and engage in electronic payment methods. So -- which we believe is -- we believe and we are already benefiting from kind of a accelerated change in consumer behavior around electronic payments. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- The next question comes from Jeff Cantwell of Guggenheim Securities. -------------------------------------------------------------------------------- Jeffrey Brian Cantwell, Guggenheim Securities, LLC, Research Division - VP and Analyst [47] -------------------------------------------------------------------------------- Dan, it's nice to see you guys perform well this quarter. Can I just touch on a couple of the key themes here by asking you 2 very simple questions? But I hope to get a serious response. First, can you tell us what some of the learnings have been this past quarter as you're managing through this pandemic? Where are you growing more confident about Green Dot's revenue opportunity going forward? We've certainly noticed your comments about small businesses, which I think are very timely, for example, but where are you getting more confident? And where are you conversely thinking more pragmatically about the company? And then I have a follow-up after that. -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [48] -------------------------------------------------------------------------------- You said you're going to ask a question and you hope to get, like, I think you said a serious or maybe a nonflipped answer. So I'm trying -- I mean I feel more confident about all areas of the company. It's -- I'm feeling we still have a lot of work to do. I will not -- I'm not going to sugarcoat that. We've got a lot of bad ingrained habits that we have to change across the organization. But I'm feeling really a seismic shift inside the company to where -- we have a tremendous amount of talented people who really care about what we do or they care about doing a good job. And as we -- as myself and other leaders are providing a clear direction in terms of here is what we need to do and why and here's how we generate revenue and here is why margin is important, the light bulbs are going off and people are really starting to do the right thing. And I see we've got growth potential in all areas of our business. Even -- I'll pick on retail because I think everyone kind of believes just in America today, with the shift to so much being online is that retail as an entire sector, across the economy, is as a headwind. And so -- and for our business, I mean, we're not immune from the challenges of foot traffic is dropping in retailers. But we're in some very interesting conversations with a number of our retail partners now. How can we expand our footprint, not just in their store, but into the daily lives of their consumers? How can we expand financial services and offerings to their customers and partnership? So I believe that we've got growth potential in our PayCard business and our tax business and our retail business, certainly in our direct-to-consumer business. And what I love about all that is you think about the competitive advantage that, that affords us in terms of striking out on powerful, disruptive large opportunities with a lot of our BaaS partners. We've got a bank, all the assets I've already (inaudible) reload network, bank, call center operations, fraud controls, technology stack. All of those solutions are "bought and paid for'' with our existing core businesses, which are all growing. And so now if we want to get creative and aggressive with some major partners, so we can "collectively change the world'', we've got that opportunity. -------------------------------------------------------------------------------- Jeffrey Brian Cantwell, Guggenheim Securities, LLC, Research Division - VP and Analyst [49] -------------------------------------------------------------------------------- Okay. That's great color. And that leads to my follow-up. With Go-to Bank, can you drill down a little bit for us on the strategy there for customer acquisition? I'm hearing you on the Go-to Bank value proposition, I'm understanding the strategic rationale for making this the go-to product. So Dan, if I'm a consumer in 2020, I have a number of options, right? I have these newer bank options, I have traditional bank options and I have Green Dot. So my question to you is -- and given all your experience in the industry, I want to ask if you can help investors understand how you're going to drive new customers to Green Dot. -------------------------------------------------------------------------------- Daniel R. Henry, Green Dot Corporation - CEO, President & Director [50] -------------------------------------------------------------------------------- Sure. I think that what's important to say and I feel I've said it for the last 10 or 15 years, I mean, the total available market is tremendous, right? And it's not a zero-sum game. And so just as there is Chase and Wells Fargo and Bank of America and Compass and BBVA, I mean, there is room for a significant number of FIs, if you will, offering solutions to consumers. And so we will market in our traditional fashion that we have done, we're going to do it much -- in my opinion, we're going to do it better, smarter. We're going to do a significant amount of research, we spend our money effectively, tremendous amount of research around the name Go-to Bank and the design of Go-to Bank and research around the products we're offering and how pricing them, so we'll get a better return on every 1 of marketing dollars that we spend. And I know this -- I just know this. I know this from my days at Netspend, I know this from sitting on the Board and being an investor in other prepaid companies over the years that you build a good solid product and you market it effectively, you will get your fair share of customers. And so we will get our fair share of customers. And yes, customers will have to choose between us and a few other offerings. And we'll get our fair share of customers who will choose our solution over others, and we will grow that business. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- This concludes our question-and-answer session. The conference has now also concluded. Thank you for attending today's presentation, and you may now disconnect.