GoBank, a new online bank created by Monrovia’s Green Dot Corp., offers checking accounts and online bill payment, and it’s insured by the FDIC.
But it’s not like any bank you know.
Unlike most every financial institution that calls itself a bank, GoBank doesn’t make loans.
“It’s not really a bank if it’s not making commercial loans,” said James Barth, a professor at Auburn University in Alabama and senior finance fellow at the Milken Institute in Santa Monica. “They can do that, but it’s not a bank the way we think of it.”
Banks typically offer checking and savings accounts to attract deposits, then loan deposits out at interest to make money. But Green Dot, the company that pioneered prepaid debit cards, has a different plan for making money with GoBank.
“We don’t do loans,” said Steven Streit, the company’s chief executive. “You can really lose your shirt doing credit. That’s not in our wheelhouse, so we don’t do it.”
Instead, he said GoBank will make money by charging a few small fees, and keeping both risk and overhead low – so low that GoBank should be profitable from the start.
Green Dot had been operating GoBank as a pilot program with about 200 customers. Last week, GoBank officially launched and announced it would accept as many as 1,000 more customers.
Streit declined to say how many customers he expects the bank will be able to attract in its first year.
GoBank offers free checking accounts designed for use with a smartphone application. Customers have their paychecks direct-deposited into an account and use that money for paying bills online. They can also deposit cash at retailers that sell Green Dot’s prepaid cards, get cash at ATMs and make purchases with a GoBank debit card.
Deposits are insured by the Federal Deposit Insurance Corp., thanks to Green Dot’s acquisition in 2011 of a small bank in Provo, Utah. GoBank’s smartphone and web apps were built by a team from Loopt, a social network developer acquired by Green Dot last year.
GoBank has no branches or tellers, leaving customers to conduct all their business online. Several banks have used that model starting in the 1990s when Internet use became more common.
But GoBank is different in that it is designed specifically for smartphone users, with account activities handled by an app. Streit calls it the first financial institution created specifically for the “smartphone generation.”
“If you use Yelp or Facebook, you’ll feel very at home using GoBank,” he said. “It’s built from scratch to be a mobile bank on your mobile phone.”
It’s also different from other banks in how it plans to make money and what it does with customers’ deposits.
GoBank brings in revenue in several ways.
It brings in interchange fees, the per-transaction fees merchants pay for the ability to accept credit and debit card payments. It also charges $2.50 whenever a customer uses an ATM that’s outside of the GoBank network, though that network includes about 40,000 machines nationwide.
Two smaller revenue sources are optional fees. GoBank customers can pay $9 for a personalized debit card with a picture of their choice instead of the GoBank logo.
They can also opt in to a “pay-what-you-want” monthly membership fee of up to $9. In a press release, Green Dot said surveys indicate most customers will pay something if they like GoBank’s services.
The final revenue stream is interest earned from deposits held by the bank. GoBank doesn’t make loans, but it does invest deposits in an interest-bearing Federal Reserve accounts and potentially in other low-risk instruments such as Treasury notes.
Those investments yield little interest, but GoBank doesn’t pay interest to its customers, meaning every cent earned goes to the company. That could be a small but steady revenue stream, and coupled with other income could be a solid business, said analyst Barth.
“If costs are low and all they’re doing is collecting deposits and investing them, it’s kind of similar to a mutual fund,” he said. “If they put funds into bonds and treasuries, coupled with the interchange fees they’re making, maybe that’s a pretty good model.”
Still, checking accounts are a big departure for Green Dot, which for more than a decade sold prepaid debit cars to people without bank accounts who wanted to shop online. Now the company is reaching out to different clientele: people who already have bank accounts but aren’t happy with the likes of Bank of America and Chase.
“This is for those who have an account today and want something more flexible and more moderately priced,” Streit said.
Reaching those customers is key for Green Dot, which has seen its share of the prepaid card market erode as major financial institutions, including New York’s American Express Co. and JPMorgan Chase & Co., have started to offer prepaid cards. But if GoBank is a hit, those same competitors could try to offer similar services and go after Green Dot once more.
“If this started to look very good, others would offer the same,” Barth said. “Anything that could become somewhat successful is likely to be copied. And there’s no prohibition on other banks doing similar things.”
For the time being at least, Streit said he isn’t concerned. Citing a report from the Pew Charitable Trust, he said most checking accounts come with fees. He doesn’t imagine big banks will be interested in letting customers off the hook.
“It’s certainly possible they could create GoBank copycats,” he said. “But to do so, they would need to cannibalize their own higher-fee checking accounts and would lose billions in the process.”
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