Green Dot Corporation
Q3 2016 Earnings Call Transcript

Published: 10 Nov 2016

[Operator:]

Good afternoon, and welcome to the Green Dot Corporation's Third Quarter 2016 Earnings Conference Call. Please note, this event is been recorded. I would now like to turn the conference over to Dara Dierks. Please go ahead.

[Dara Dierks:]

Thank you, and good afternoon, everyone. On today's call, we will discuss 2016 third quarter performance and thoughts about the remainder of the year. Following these remarks, we will open the call for questions. For those of you who have not yet accessed the earnings press release that accompanies this call and webcast, it can be found at ir.greendot.com. Additional operational data has been provided in a supplemental table within our press release. As a reminder, our comments include forward-looking statements about, among other things, 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 the most recent Form 10-K that we filed on February 29, 2016, for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements. During the call, we will make reference to 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, including revenue per active card will be on a non-GAAP basis. The information may be calculated differently than similar non-GAAP data presented by other companies. Quantitative reconciliations of our non-GAAP financial information to the most 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 Steve.

[Steven W. Streit:]

Thank you, Dara, and welcome, everyone, to our third quarter earnings call. I'm pleased to report that Q3 was another good quarter for Green Dot, led by continued strong revenue performance from our new category of prepaid cards that rolled out earlier in the year and better than expected performance from our Green Dot Direct division. We also enjoyed better than expected bottom line performance, led by the success of our ongoing cost savings initiatives that favorably impacted SG&A and supply chain costs, combined with the expanding margins on the prepaid card business as a result of the new fee plans and better customer behavior that combined to deliver materially better unit economics from our base of active card holders. Total non-GAAP operating revenue came in at $154.6 million, representing a 5.6% year-over-year growth rate with adjusted EBITDA coming in at $23.8 million, a growth rate of 7%, even with the inclusion of $2.3 million in unusual incremental launch expenses in the quarter and the addition burden of a $1.5 million write-off of an uncollectible receivable from a prior period. Non-GAAP EPS for the quarter was $0.21, versus our expectation of $0.16. This equates to year-over-year non-GAAP EPS growth of 40%, including those incremental unusual expenses in the quarter. We did better than we guided as a result of slightly lower D&A, a better tax rate related to tax credits, and of course the fact that we achieved a better than expected adjusted EBITDA result. The high level summary of the quarter is that the year's playing out along the thematic that we laid out when we provided full year guidance on the February call. Non-GAAP total operating revenue, adjusted EBITDA, and non-GAAP EPS results are all improving steadily quarter after quarter on a year-over-year basis. For example, non-GAAP total operating revenue was minus 1% year-over-year in Q1 and we have plus 1.6% year-over-year in Q2 and plus, as you just heard, nearly 6% in Q3. So that trend line is encouraging, especially when much of that revenue is of a higher margin nature and is then layered on to an increasingly more efficient operating platform. Mark will provide some key stats on our card portfolio later in his section, but I do want to call out our Direct Deposit penetration, which continues to improve very nicely, up 15% year-over-year in the quarter with 67% of our total card loads now coming from Direct Deposit as of Q3. We are seeing Direct Deposit growth as both a percentage of active cards and growth in the absolute number of Direct Deposit accounts. The quality of our Direct Deposit customer is very strong relative to many other prepaid programs, because substantially all of our Direct Deposit customers are self-enrolled as opposed to a card that a customer receives, say as a payroll card from an employer or as a disbursement card in lieu of cash. In our case, substantially all of our Direct Deposit enrollment is a result of a customer buying the card and taking the initiative to enroll themselves in Direct Deposit through their employer or benefits provider, just as you all have likely done with your own checking account. We have many initiatives in development to continue to make that self-enrollment process easier and more intuitive for our customers. As you know, earlier this year, we introduced a framework of a Six-Step Plan to drive growth and deliver at least $1.75 in non-GAAP EPS in 2017. We remain focused on this Six-Step Plan and I'd like to share our progress on each step. Our first step was to launch new, more appealing products with materially better unit economics at all 100,000 Green Dot retailers. These new products are doing very well for us and seem to be attracting a more committed customer base. We see this commitment not just in terms of the usual KPIs like higher GVV (05

[Mark L. Shifke:]

Thanks, Steve. I'd like to start by providing some insight into our strong performance in the quarter on the top-line and bottom line, followed by commentary on our two business segments and how they each contributed to our results. First, I'm pleased to report that we delivered $154.6 million in non-GAAP total operating revenue. Recall that due to MoneyPak's discontinuation in early 2015 and the negative impact it had to active cards and associated revenue over the course of the year, we started this year with an approximate $35 million headwind that we would need to grow past just to break-even in 2016 on a year-over-year basis. As we look at our quarterly performance sequentially over the year, non-GAAP total operating revenue was down 1% in Q1 and was up 1.6% in Q2 and then was up again 5.6% in Q3. We expect Q4 non-GAAP revenue to be up year-over-year as well, and we will discuss this expectation as part of guidance later in the call. So this trend shows our growth plans are working as expected. Revenue growth came from all product lines, including prepaid cards, GoBank accounts and cash transfers. In our Account Services segment, the quality of our portfolio continues to drive revenue growth. Account Services' revenue grew by 5.4% year-over-year and revenue per active increased 16% year-over-year. We believe this increase reflects a shift in the mix of our active card portfolio toward higher revenue-generating customers as compared to 2015. You can see evidence of customer quality with our third consecutive quarter of increases in purchase volume, which was up 2%, and gross dollar volume which was up 6%, despite active cards being down 9%. Direct deposit penetration as a percentage of active cards was up for at least the 10th consecutive quarter year-over-year, posting a 15% increase in the percentage of active cards receiving Direct Deposit. Our Processing and Settlement segment also delivered solid results. This segment is up 5% year-over-year with revenue per cash transfer growing by 6% year-over-year. We expect this trend to continue primarily because we no longer offer free reloads on our new prepaid card products, while the previous card products that are still able to be reloaded for free are slowly becoming a smaller portion of our total active cards. In addition, the new MoneyPak sells for $1 more than the old MoneyPak. As such, we would expect our average revenue per reload to continue to rise. So, it's encouraging to once again see organic growth from this legacy business line. We also enjoyed solid performance on margins. Adjusted EBITDA in the quarter was $23.8 million, including the absorption of approximately $2.3 million of incremental expenses in the quarter associated with launching our new prepaid products in approximately 100,000 retailers. On top of that, we also booked a write-off of $1.5 million related to an uncollectible receivable from a prior period. So, despite the burden of those combined $3.8 million in expense in the quarter, we were still able to expand consolidated margins by around 25 basis points on a year-over-year basis. Margin expansion is being driven in our legacy business lines by what we believe to be four sustainable and repeatable factors. One, higher revenue per active card from our installed base of older prepaid cards. Two, better unit economics from our new suite of prepaid cards. Three, a continuing trend of higher revenue per reload transaction. And four, an increasingly more efficient operating platform, allowing more of that incremental revenue to fall to the bottom line. Non-GAAP EPS came in $0.21, representing year-over-year growth of 40% even with the absorption of those incremental expenses in the period. This outperformance was due to better than expected adjusted EBITDA performance in the quarter, combined with $0.01 of lower depreciation and amortization and $0.02 attributable to tax credits we are now allowed to fully recognize that yielded a lower than expected tax rate. Now, let's discuss our thoughts for the remainder of 2016. As we are now nearly halfway through the fourth quarter, we expect to finish the year at the high end of our non-GAAP revenue guidance range of $708 million to $713 million. But, we expect to finish the year at the low end of our adjusted EBITDA guidance range of $156 million to $160 million. This implies that we see around $4 million of higher than expected expenses unfolding in Q4. Approximately $2 million of this incremental expense is due to a decision to invest higher marketing dollars towards a program that's been delivering a strong return on investment. While this incremental marketing spend is a negative in the quarter, it's expected to be a worthwhile positive in future periods, which is why we are spending the money now. The other approximately $2 million is due to higher than expected fees being charged to us by the payment networks, primarily driven by higher than expected number of ATM transactions and purchase transactions in the quarter combined with higher than expected fees on those ATM and purchase transactions. We believe we have an opportunity to get at least part of these fees reduced going forward, but likely not in time to benefit this Q4. A full year result of $156 million of adjusted EBITDA is expected to deliver full year EPS that's above the middle of our non-GAAP EPS guidance range of $1.39 to $1.44. So, in summary, our top-line for the full year is looking strong and on track to deliver the high end of our expectations and the bottom line is proving to be quite resilient with full year adjusted EBITDA expected to finish at the low end of the guidance range, delivering non-GAAP EPS at above the midpoint of the guidance range. These results are despite absorbing the $2.3 million of launch expenses in Q3, plus absorbing higher than expected expenses of an additional $5.5 million on top of that for the second half related to the prior period write-off that we took in Q3 and the incremental marketing spend plus higher than expected payment network fees in Q4. As we begin to turn our attention to next year, we are encouraged by the financial trends we are seeing across our enterprise, including improvements in both consolidated top-line and bottom line results and we remain on track towards achieving at least $1.75 in non-GAAP EPS in 2017. With that, I would like to ask the operator to open the phone for questions. Operator?

[Operator:]

Thank you. We will now begin the question-and-answer session. Our first question comes from Ramsey El-Assal of Jefferies. Please go ahead.

[Ramsey El-Assal:]

Hi, guys.

[Steven W. Streit:]

Hi, Ramsey.

[Ramsey El-Assal:]

Hi. Nice quarter. I wanted to ask about the commentary, Steve, that you made on the Tier 1 capital ratio, expecting that potentially to come in lower, freeing up some cash for your corporate use. Can you quantify that for us in terms of – just sensitize it – I know you don't have the final number, but say it's...

[Steven W. Streit:]

Right.

[Ramsey El-Assal:]

...10% rather than 15%, what does that mean exactly?

[Steven W. Streit:]

Well, I can give you a sort of a range of options. The way it works is that we would lead internally and risk weight the assets on the balance sheet. We had – have an objective review of that, decide on it, be with our regulators and see if they agree with that review of our risk weighting. And then if we agree, we'd lower the capital ratio to something normal for that kind of risk weighted bank. So if you think of the world of possibilities without regard to Green Dot Bank, if you look at other banks in our world that have frankly riskier assets than we do, which today is almost all cash, anywhere from 7% to 9% is fairly typical. We don't know if we'll be in that range or not, but that's just actually if you look at other banks' call reports and capital reserves, sometimes less, sometimes as low as 6%. So if you think about us going from 15% to half of that or 15% to something less than that, you can kind of figure out the range of cash. We have about $140 million of Tier 1 reserve in the Bank today. So if you were able to wipe out half of that let's say and enable – well, that would be $70 million. But it's hard to know where we'll be. And we want to take a really careful approach to that, because the goal is here to free up cash that's appropriate but make sure that the bank is always being run with an extraordinary eye on conservatism and safety.

[Ramsey El-Assal:]

And any preliminary thoughts on prioritizing that? It were to materialize, any thoughts in terms of returning to shareholders versus M&A versus other uses?

[Steven W. Streit:]

Well, whether we did – the answer is no, not – not that I can talk about on the call. But look, we like share buybacks, right. We've done a $100 million so far; we have another $50 million left in the authorization, so we like that. And we like buying companies if they can be highly accretive. And I think we've done a good job with that as well. So, it could be either of those two things and both would in some way return cash to shareholders. But to your point, we want to put it to work and we want to put it to good use to generate a better EPS.

[Ramsey El-Assal:]

Okay. I wanted to ask about the new products you've launched and the pricing and the impact of that pricing kind of going forward. I understand that there is a sort of a critical math that has to be achieved in your portfolio wherein these new cards basically start to supplant every time the old cards and then the more favorable economics sort of show up. So I guess two questions. First, where are we in terms of this mix shift in the portfolio from the new economics – towards the new economics away from the old economics? And then I'm just trying to get an understanding of how that impact should be felt over time? Is there some type of an inflection or tipping point or we see sort of a more dramatic kind of step function impact from the new pricing or is it just sort of a more gentle tailwind that kind of feathers in (24

[Steven W. Streit:]

Yeah. I sort of – listen, that's a really strong question and one that I can't get a lot of precision to. The answer is, if you think of sort of two cohort maps on a wall or on a whiteboard and – or waves. I'm trying to think of a visualization here. You have the old cards trailing down over time, you have the new ones ticking up over time, and to your point, this is critical mass that generally, if you just look at our disclosures over a year is, if you have an average turnover of 8 months, then maybe it's six months, eight months. But the problem is, is that average is not particularly predictive because you have Direct Deposit customers retained for years, you have (25

[Ramsey El-Assal:]

Okay. And quick last one from me. Just mechanically on the new MoneyPak, are there incremental risk controls – are the incremental risk controls on that product all on the backend or do the customers have to jump through more hoops or show idea (26

[Steven W. Streit:]

Right. So it's all back end. The trick to selling products at a retail store is, a bottle of ketchup always has to be a bottle of ketchup. So, sort of little – a retail analogy for you, meaning that it's always got to work the same. So, when you buy a MoneyPak, it sells the same way it's always sold over the past 15 years. But before you can redeem – and if you will, you scratch off the back of a MoneyPak sort of like a lottery ticket and there is a number, a PIN number on the back. The act of redeeming that PIN number now requires you to register at moneypak.com and to us to verify your identity, take a lot of information from your mobile phone and other things we do to validate certain velocity controls and thresholds. So the answer is, there's more weight to the initial transaction. You have to enroll online and register like you would for any service if you wanted to be – Amazon Prime, right? You are going to fill out a form and provide some information. And moneypak.com works the same way. So that's where the risk controls take place is after the sale, because the nefarious activity wasn't with the purchase of MoneyPak; those were the victims if you will. It was with the people who redeemed MoneyPak. So the controls are more in the redemption side.

[Ramsey El-Assal:]

Great. That makes a lot of sense. Thanks so much.

[Operator:]

Our next question comes from Sanjay Sakhrani of KBW. Please go ahead.

[Steven W. Streit:]

Great. Hi, is that...

[Steven Kwok:]

Hey, this is actually Steven Kwok filling in for Sanjay. So the first question I have was around the M&A. You mentioned, now that's one of the areas that you could potentially use your excess capital towards. What are some of the areas of potential interest?

[Steven W. Streit:]

Oh, gosh. Let me think about how to – maybe let me do some live editing. Look, we always look for companies that are accretive to our segment of the world of banking and finance, which is low and moderate income Americans. So, it could be other prepaid programs to the extent there are – those of value left; it could be when we bought TPG for example – that wasn't prepaid, but it was a company that dealt with the same customer segment that we cater to and was a really logical add-on to us. It can be technology companies that have some technology that we use in our business every day. But the general framework we look at is, it's got to be a real company making real money and it's got to be something that we have confidence can be accretive in the first year of acquisition. It's too stressful otherwise and life is too short. So we try to make sure they are good acquisitions. And there's not a lot of them out there, but we do look at a lot and we sift through a lot of different opportunities, and if we can find something that is accretive and strategically on point, well, then we would pull the trigger on it.

[Steven Kwok:]

Got it. And then just when we calculate the adjusted EBITDA, if you were to add back those elevated expenses for this year of $11.4 million and you see the per (29

[Mark L. Shifke:]

Yeah. Hey, it's Mark. That is roughly the way to think about it. And yes, we do believe on a carry-forward basis, we will have expanded EBITDA margins that reflect the benefit you would have seen this year, had we not had those one-time costs.

[Steven Kwok:]

Can you quantify the size of – going forward, like is there a target of how much operating margin improvement you are looking at per year?

[Steven W. Streit:]

Great question. No, we can't. I mean, the reason is, it would have the effect of accidently guiding future periods. But we certainly believe that the margins can be better, and we are striving for cost controls to make them even better. And we've always said, even going back in the old days that our normalized margin for the company should be something that starts with a two; I've said that many times and we didn't know we've hit it. We had some difficult years, especially when MoneyPak was pulled off the shelf and – and we have the new products we've rolled out at Walmart few years back. Now, we missed it. We were in the teens, and that's not acceptable. But we are now comfortably back in the 20s, and we want to keep moving more in that direction.

[Steven Kwok:]

Got it. Thanks. Thought I just had to ask that question.

[Steven W. Streit:]

Yeah. No, I – that's where I left (31

[Steven Kwok:]

Right. Good quarter, guys. Thanks.

[Steven W. Streit:]

Thank you very much.

[Operator:]

Our next question comes from Ashish Sabadra of Deutsche Bank. Please go ahead.

[Steven W. Streit:]

Hi, Ashish.

[Ashish Sabadra:]

Hi, good quarter. Pretty solid...

[Steven W. Streit:]

Thank you.

[Ashish Sabadra:]

...momentum in revenues. My question was more on the operating metrics. I understand the active cards being under pressure, but even when I look at on a sequential basis, the sequential decline has been more than what we've seen prior to 2015. And when we think about it, it's combination of attrition and new card activation. Can you let us know, like have you seen a moderation in attrition and a pick-up in new card activation, and how should we think about those going forward, both the attrition as well as the activations?

[Steven W. Streit:]

Right. So the answer is, attrition, better; activation, not better. New card sales, that we will see. Here is how we sort of think about that. If you look at Q1, we were negative 11% year-over-year; Q2, we were negative – help me out guys – 10% year-over-year, and this quarter negative 9% year-over-year. So the comp is getting slightly better, but to your point, not by leaps and bounds. But it's not getting worse; it's getting better. And so we look at that, but it's sort of a – it's a – what do you call it, mutually exclusive and – not exclusive, but it's an opposite metric. The more you have retention and the more customers' buy your cards, and instead of buying them, throwing away, buying them, throwing away, they are buying them and keeping them, right. We start the fee when you get the product. It has all these features. It has cash back. So you have – if you look at sort of reloading customers on a year-over-year basis, that's flat year-over-year. If you look at it in Direct Deposit customers in the year-over-year basis, that's up year-over-year. So the actual core underlying portfolio that generates the revenue looks very, very strong. Where you are seeing the difference is that you don't have that one and done (32

[Ashish Sabadra:]

No. That's great. And thanks for the color. Just quickly on the activation itself, also on MoneyPak, you've seen some good traction on MoneyPak rollout; it's 40,000 locations, you have 13,000 coming up in first quarter 2017. So as MoneyPak gets rolled out, does that also help you on the card activation front? Is there any correlation there?

[Steven W. Streit:]

We don't know. It's too soon. Would like to think so, but it's hard to know because these rollouts are fairly recent. CVS and Dollar General just rolled out in the last few weeks. So, it's hard to know for sure. But we think overall, it can make the category bigger again. And then – and I alluded to this in the prepared remark portion of today's call is – and then the key is to come up with some really unique killer apps for MoneyPak that marry some of the cool technology we have in the company to make MoneyPak worth something more than it was before. So, there is a lot of innovation we think still to come on that product. But it's gone well so far; there's been a very good result on stopping the fraud and the nefarious activity which is a really important thing for us. And the retailers are excited about carrying it again, which is a wonderful thing. So, we'll see how it matures over time.

[Ashish Sabadra:]

That's great. And my final question, so Direct Deposit has been growing at a value-added (35

[Steven W. Streit:]

I think it can. Yeah, I – a common meeting that I would be in would be a marketing meeting and a stack meeting with our consumer accounts division run by a very talented GM named Mike Keeslar. And I'm constantly talking about all the ways that we can make it far easier and more intuitive to enroll in Direct Deposit. Enrolling Direct Deposit for you or me or anybody is not particularly easy. Even if you're using chase or something, you have to go online and print out a form and fill it out and take it to your HR clerk. And every fiber of my body seems to think that can be replaced by something more modern and more intuitive for a mobile based customer. So, we are always working on new ways to do that. And frankly, I just think we are just getting started with it. So it's hard to know how those plans will work and roll out, but I feel confident that we can continue to grow that penetration.

[Ashish Sabadra:]

Thanks, again. Good quarter.

[Steven W. Streit:]

Thank you very much.

[Operator:]

Our next question comes from Andrew Jeffrey of SunTrust. Please go ahead.

[Steven W. Streit:]

Hi, Andrew.

[Andrew Jeffrey:]

Hi, guys. Thank you for taking the question. Appreciate it.

[Steven W. Streit:]

You bet.

[Andrew Jeffrey:]

I guess a couple things; one, I wonder if you could give us a little clarity on what's driving those higher than expected fees on ATMs and purchase transactions. I understand the transaction on that (36

[Steven W. Streit:]

So the answer is, is that we had a fee increase from one of our network partners, which, as you may know from covering Visa, MasterCard and some of the ATM networks they have on an automatic basis – and this one happened to us and we need to have a better negotiation. I'd like to give you a better or more elaborate answer to that, but the combination of higher fees that went into effect automatically of some dates certain at (37

[Andrew Jeffrey:]

Okay. All right. Fair enough. And then, also a little color I guess on the receivable write-off if we could get it. Is that a real one-off? Is that something that is sort of normal course or just a little more (37

[Steven W. Streit:]

(37

[Andrew Jeffrey:]

Okay. (37

[Mark L. Shifke:]

(38

[Steven W. Streit:]

Yes, say it's $1.5 million and it became clear that you weren't going to collect it, and so just take the write-off now, move on with it and – if we can get it later, great, but just take the write-off and move on. But that was a real one-off situation and it could have been in any quarter. This is from a prior period, but we just decided to take the write-off this period.

[Andrew Jeffrey:]

Okay. And then one last quick one if I may. Just with regard to scale, processing costs were a little bit higher than what we were looking for this quarter and you are obviously spending against some growth initiatives. I heard your comments early on, on margin, Steve. Is there – do you have – when we look out at spend and as well as processing scale, is there some point in time where we move past some of the elevated expense levels and get more sort of consistent quarterly operating leverage? Is that a 2017 event or is it too early to put a line in the sand on that?

[Steven W. Streit:]

Well, so when we back out the one-time bads in the quarter and look at a more normalized run rate, the margin expansion has been pretty strong. So we like where we're at. Lot of noise in processing this quarter between the increased fees from the payment networks and more ATM usage – well, that doesn't sound like a big deal; it became a big deal. And so, we have to negotiate that. I think on the other side is the conversion from our former processor as you know to MasterCard TPS, and we need to complete that conversion, so we can take advantage of those normalized fees. And until then, we're feeding two mouths in effect as part of that. And so, 2017 should see some normalization of that. Nevertheless, despite absorbing all that stuff, we are doing okay, but we would expect the margin expansion be something greater than it is today. And looking out, those costs is something that we're just maniacal about, because you have to make those changes. It's tough for an organization. We're not a young business anymore; we are 16 years old, 17 years old. And we think of ourselves as a startup and we still operate many times with that mentality, which is a good thing on the business front and the technology front. But it's a big company. And to cut out the level of expenses we're looking to cut out requires reengineering and working with a lot of team members, and people don't like change. That's the reality of it. And so, it's a very deliberate process of getting wonderful employees and talented people to understand that technology can do things maybe today that it couldn't five years ago and that these things move on. And we have so many long-term employees at Green Dot that all these things take time to work through. But we think we have a lot of leverage still to come with margin expansion.

[Andrew Jeffrey:]

Okay. Thanks so much.

[Steven W. Streit:]

Yeah. You bet. Thank you.

[Operator:]

Our next question comes from Vasu Govil of Morgan Stanley. Please go ahead.

[Vasu Govil:]

Hi, thanks a lot...

[Steven W. Streit:]

Hi, Vasu.

[Vasu Govil:]

... for taking my question. So, Steve I just wanted to ask again about the Six-Step Plan that you guys have. I mean, it's good to hear you reiterate that guidance and sort of add at least $1.75 in non-GAAP EPS next year. And it kind of appears (40

[Steven W. Streit:]

Oh, gosh. They are all important and there is – when you roll out new products – and I've said this many times over the years – it would be intellectually dishonest to say that you know they are all going to be a hit or not. So you have initiatives in each one of those steps – some we highlight on different calls in different initiatives. And you know before the – not every child is going to grow up to be – I was going to say, not every child is going to grow up to be the President. And that's very appropriate thing to discuss today. But you don't know which of your kids are going to grow up to be the President. And so, you take a thoughtful approach to launching products knowing that some will make it and some won't, you know. And so, they are all important divisions. The credit divisions with secured credit card and Green Dot Money and those initiatives and others we'll roll out over time, to me have a lot of promise. And so we have to nurture those along and make sure we roll them out smartly until they can get to scale and contribute. Our legacy business is always going to be a big driver. Our Green Dot Direct division, which we didn't even have a few years back has turned out to be a really important driver. More people go online to buy cards; they shop online to buy the card; they expect a mobile first experience. I mentioned in my prepared remarks, 70% of all the hits to greendot.com and walmartmoneycard.com, accountnow.com, AchieveCard, GoBank, all of our Internet brands are from a mobile phone, not even from a desktop or laptop. And so we have to invest in all these things cautiously, knowing that some will hit and some won't. So I hate to rank order them except to say that in every division, there is important things. If you look at the one that has the most activity today besides the cards division, the Helena Mao's division, who is a 15-year Green Dot employee and one of our better GMs and she runs the money processing division. And in that division which suffered all the battles of MoneyPak and all that stuff last year and the year before is now the division that has the Uber account and is coming up with all the money processing stuff and all those exciting new technologies to serve an entirely new segment that didn't exist four years ago. So that's why you plant these seeds; if we had not built that technology and if we had not put our foot down and said, we will become a mobile FinTech leader, come hell or high water, three years ago, four years ago in 2012 starting with the purchase of Loopt, we would have been lost in the dust today as a company. And instead, we have this whole line of business activity in Helena's group on top of the card group. So you never know. You take your risks and your bets; you try to do it thoughtfully and cautiously knowing that some will work and some won't. And so we have optimism for all those six steps in all those divisions.

[Vasu Govil:]

Great. That's helpful. And I just guess following up on the online comments that you made, can you tell us what percentage of your customer acquisition today is coming online versus through the retail channel?

[Steven W. Streit:]

I can't; we have account segments' services division, which includes our consumer accounts division, all the retail cards we sell and checking accounts. And then we have our Green Dot Direct Division which is part of consumer accounts; we don't break it out. So unfortunately I can't, because it all looks the same on the income statement. They are all the same products we're selling just through different channels. But it's an important channel to have and one where continue to invest more money.

[Vasu Govil:]

Got it. And I guess one broader question on the addressable market and the growth opportunity. As you think about your total addressable market of unbanked and under-banked consumers, what does the adoption rate of prepaid cards look like today and how are you thinking about the remaining runway for growth?

[Steven W. Streit:]

I'm sorry, the last part, the remaining what?

[Vasu Govil:]

Runway for growth; like how much of do you think was – opportunity remains on that and how are you feeling about growth in 2017 and beyond because of that?

[Steven W. Streit:]

We think there is a large addressable market untapped for prepaid or lower moderate income. But increasingly, you are seeing it divided by age – much like the election; if you look at election map, the age turns out to be the difference of who voted which way as opposed to economics. And we're seeing something interesting develop with our products. So increasingly is an age thing. We have got to continue to make sure that we are a technology company first, married to a really awesome bank charter. That combination has turned out to be very strong for us. And we want to do more with that as we have commitment relief and able to use our bank for more exciting things. And so, we think there is a big opportunity. But to do it, we need to make sure that our products are relevant to younger people. And so – and that's where a lot of the effort is, because if you look at the new money transfer services and then things that young people use, young meaning under 35 years is that it isn't that Green Dot's competition may be from NetSpend or from American Express Serve or – those things are fairly well known and worn through at this point, and they are what they are and we are what we are. The question is, how do you compete with Venmo; how do you compete with Square Cash; how do you compete with whatever services may be out there from companies that today don't exist, that some kid in a garage somewhere is building that won't launch for two years and suddenly makes checking accounts look stupid. And so these are all the things that we're focused on. We have to make sure we are hitting our numbers today, which as you know we are working hard to do, but at the same time make sure we never forget that the future is about innovation and about younger people coming into the banking segment for whom walking into a branch does not make sense, or filing out an application or this kind of thing may not – and it's about, how does that consumer meet our product at a retail store where they are going every day; how do they meet our product online; how do they see it on a Steve Harvey show; how do they find it on a mobile app; and how does that product speak to them in a modern voice that they understand. And that's really where our opportunity is. If we can't get there, we're not going to have a long runway of growth. I think we can and I think we will, but that's why we've made the investments over the years we've made.

[Vasu Govil:]

Great. Thanks a lot.

[Steven W. Streit:]

You bet.

[Operator:]

Our next question comes from Reggie Smith of JPMorgan. Please go ahead.

[Reginald Lawrence Smith:]

Hey, guys, thanks for taking my question. I guess, I'm – I was trying to just read between the lines. You talk about I guess bank capital requirements possibly coming down and you mentioned acquisitions, and I think you also talked about possibly investing in some what sounds like higher yielding assets. And I'm just curious, how far up the risk curve are you guys thinking – one, am I hearing that correctly? And then two, how far up the risk curve are you guys? And what might these products be? Is this lending directly to consumers, is it – or would you be investing in that because of the higher return?

[Steven W. Streit:]

So the truth is that – first of all, Reggie, as always, you have great questions and tell (47

[Reginald Lawrence Smith:]

Understood. And I guess a follow-up to that. I think last quarter, you said that you started the lending place business and the acceptance rates were kind of low. It sounds like you've added some more lenders. Just curious, what are you seeing there from the acceptance perspective? And then I have one last follow-up if that's okay.

[Steven W. Streit:]

Right. We've added more lenders and all of them are increasingly reading like a who's who of that space, but we're not yet seeing the uptake in credit acceptance. And so, part of that is because as we talk to our credit partners, they're tightening up their credit straps in terms of who they give loans to, as they're not always sure about their ability to find money to lend and what the charge-offs rates can be on a new service. And some of them have come back and asked us to juice-up the underwriting data that we provide with that application to allow them to say yes more often. So, the answer is it's probably better than it was, but not at a rate that's going to be material. So, the GM who runs that division for us, a fellow named Richard Kang, is continually working on how to make that better and how to get the underwriting such that more people feel comfortable saying yes. On the secured credit card side, that's actually going better than we have thought at this stage of the game, and it's still very small, but a tremendous number of applications. Many of them are qualified to get the card. You still have to, under regulation, have the – oh! Gosh, the ability-to-repay test when they fill up the application, and we do that. And you need to make sure we're complying with all the underwriting standards, which we do, and they're getting approved. And then you send the card out and then they need to go make a security deposit at Green Dot Bank, using our Green Dot Reload Network at retailers nationwide to get the card started. And they're doing it. And so, that's one that has some promise to it. So, like I said to one of the previous callers, you never know which is going to grow up to be the big success. But we have a lot of hopes of all of them, and so that's how we're doing on credit so far.

[Reginald Lawrence Smith:]

Got it. And then just one last one. You kind of made the point that you like the fact that your Direct Deposit customers are people that walked in, bought a Green Dot card, signed up for Direct Deposit. And they tend to be, I guess, stickier and more committed to the product. Just curious have you guys reconsidered – or what's your view on being kind of a payroll card, maybe working directly with employers? Obviously, you got the Uber relationship, but possibly expand in that (53

[Steven W. Streit:]

We think it's – yeah, Reggie, it's (53

[Reginald Lawrence Smith:]

Perfect. Thank you. Congratulations.

[Steven W. Streit:]

You bet, Reggie. Thank you.

[Operator:]

Our last question comes from Mike Grondahl of Northland Securities. Please go ahead.

[Steven W. Streit:]

Hi, Mike.

[Unknown Speaker:]

It's actually Michael (54

[Steven W. Streit:]

If there – I'm sorry, your voice got a little below (54

[Unknown Speaker:]

If there's any seasonality from holiday promotions at the large retailers, if any of those stand-out?

[Steven W. Streit:]

You mean whether it'd be in Q4 or in Q3?

[Unknown Speaker:]

Q4.

[Steven W. Streit:]

Well, we don't know yet. But we are doing the Steve Harvey $5,000 Payday Bonus, which is another way we drive Direct Deposit, and that is Green Dot we believe is the best card for your payroll. When you think payroll, as Steve Harvey says, thinking payroll, think Green Dot, because that's an opportunity for people to put their check on the card. We give you early Direct Deposit. We're a bank that's FDIC-insured. You're dealing directly with the Bank, not through a third-party. And there is a lot of other things we do. You can get cash back rewards. So, we're always trying to come up with reasons for customers to think of us as their payday card. So, we're doing those kinds of promotions and we're doing the big one at retail and online. It's for all of our channels. And that rolled out maybe 30 days ago. So, we'll see how that does in Q4. But Q3, there would have been no seasonality. Q3 is actually, as you know, typically one of our lower quarters in terms of our annual seasonality. So, it is what it is. There was no promotion in Q3.

[Unknown Speaker:]

Got you. That's helpful. And then, just one last quick one. Are there any big changes in the processor migration project since the last call or is that – same expectations there?

[Steven W. Streit:]

Yeah. We mentioned in, I think – or I forget, either in the Q or the earnings release or the prepared remarks or all three, somewhere, that we're looking at second half – I'm sorry, first half of next year for the finish of the conversion, and we're on track to do that. I think TSYS on their earnings call made the comment that it was in second quarter, which is a fair comment. And so, we've got to get that done. And that's one where we're always cautious and always slow-moving and always risk-averse. Now, we're really cautious and really slow, because that was such an unpleasant experience to have those 30,000 or 40,000 cardholders have their service disrupted, and we don't have that happen again. So, we're really taking our time. MasterCard has been a good partner in working through those technology builds with us. Our team has done a fabulous job of looking at everything from soup to nut. So, we'll get around to it and do that. In the meanwhile, we keep chugging along.

[Unknown Speaker:]

Great.

[Steven W. Streit:]

By the way, while I'm on the topic, because I never get to say this, I want to thank TSYS. Listen, Troy Woods, Bill Pruett and the folks who run that process are people I've known for 15-plus years. They were with me when I started the company – 17 years. They were (57

[Operator:]

There are no more questions at this time.

[Steven W. Streit:]

Okay. Well, thank you everybody for tuning in. We appreciate your interest and have a wonderful day.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.