My view is that CBDCs offer banks a transformational opportunity to reinvent payments and retail banking. The attributes that make CBDCs great are different, and in conflict, with today’s retail banking. But these differences are not necessarily a threat. What do banks see in CBDCs that causes them to go into defense mode? Why should you look at them in a different light?
16 Jan 2012
GDOT Bank – Federal Reserve Authorization
GDOT bought Bonneville Bancorp for $15.7M + $14M Capital Infusion on 8 Dec 2011. Bonneville was a Utah licensed state bank and a Fed member (regulated by Fed). This is a very significant deal for several reasons:
- Sets a new regulatory guidepost in the creation of “national” bank with a pre-paid focus. See Bank Talk article on how GDOT was able to get Fed Approval, specifically around CRA responsibilities.
- Is essentially WMT’s retail bank for consumer services (WMT owns ~15% of GDOT)
- Model for future deals in State Chartered banks (particularly for retailers)
- Highlights need for reassessment of “pure play” banks in pre-paid space (ex. Meta)
- NEW PRODUCT potential in interest bearing pre-paid accounts targeted to the lower mass market
This is a brilliant move by the Fed, and by GDOT. The Fed is rightly concerned about the fact that the bottom 4 deciles of customers are no longer profitable for the big banks.. and there is an exodus. How does the US financial system retain customers in the lower mass? GDOT and WMT believe it is not through the typical branch model. Just as with Tesco in the UK, Retailers are proving to be excellent distributors of banking services. Retailers do not need to make their margins on bank services alone, in fact banking services improves the overall retail value proposition, brand and loyalty. The same holds for mobile operators internationally. Why should I pay for all of those branches and sales people if all I need are basic payment services?
I joined Citi in 2006 with the mandate to grow the retail business without growing the number of branches. Creating the ING direct competitors.. the HOOK was high yield savings. GDOT bank could be catalyst for a new retail banking model, with a HOOK associated with “payment”, retail convenience, loyalty and data use.
What are the core product innovations? Here is my list:
- Combining a GPR card with retailer brand and distribution (WMT). Banks normally have to seek charters that enable them to operate nationally (ex. Fed, the now defunct Thrift, …) when doing business in multiple states. Virtual GPR cards don’t have this problem as consumers are buying a banking product in another state.
- Stand alone consumer value proposition. GPR card that can earn interest on funds held on balance. GDOT/WMT also have a established a rate structure that is one of the best in the business.
- WMT’s integrated value proposition. International transfers ( WalMart owns part of MGI they are 30% of MGI’s TPV), International Banking (Mexico, Canada, GDOT, …), StraightTalk prepaid mobile, … they have all the components to deliver value. Can they bring it all together?
Banking is a network business.. the GDOT opportunity is to build the network quickly through key retailers (as physical distribution). What other innovations can they bring to market? At the top of my list would be instant credit (Paypal BillMeLater does this through a WebBank a Utah ILC). Or real time transfers to any bank (using $0.58 Fed wire…).
Today, MSBs are restricted in both offering interest on accounts and the length of time they can hold a balance (escheatment). There will be some regulatory scrutiny by the State Regulators on how cash in/out is performed at the physical retail outlet, and what constitutes a “bank”. From the Retailer’s perspective, the GDOT card is a product which can be bought (buy $100 GDOT reload), with cash out from ATM or through a Mastercard purchase. GDOT is a licensed MSB in 39 States (according to their 10-k) with a network of 50,000 cash in/out locations. Previously GE Money was the US bank for the WMT MoneyCard. A single state licensed bank owned by an MSB network may face some state regulatory scrutiny. GDOT can probably address by keeping as separate legal entity with its own BOD and capital.
If I were thinking of starting the next PayPal… I would skip getting MSB licenses in 47 states and start looking for a Utah bank I could buy.
What to look for:
- Retailers following this model (including ISIS, Amazon, …). Particularly retailers serving lower mass market
- Salary d0miciliation (direct deposit) onto a card
- Future of GE Money. GE has been looking to sell Mark Begor’s business for some time. It is subscale, and WalMart is its largest US customer. My guess is that WMT had to develop fall back plans in case GE did sell the business. I would not be surprised to see GDOT bank be the primary bank behind the MoneyCard.. but it hasn’t happened yet.
- Pre-paid processors and platforms looking to create their own brands.. or change their relationships to retail branded banks
- MSBs moving toward a state bank license. Issue is cash in/out. MSBs that require their own branded physical distribution will keep MSB license… those that are virtual will move to GDOT model.
- Consumers making switch to a “new” banking model centered around payments.
- Semi closed payment networks with integrated loyalty and incentives.
- New Payment Banks which make money on marketing and data (not interchange). See Googlization
For those interested in a Utah Bank.. please call my favorite Utah Banker.. Crawford Cragun..
Your thoughts are appreciated. As always sorry for the typos and the brevity.