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Prepaid card company Green Dot Corp. is buying a small bank in Utah, an acquisition that will allow it to streamline its business.
The Federal Reserve on Wednesday approved the company's $15.7 million purchase of Bonneville Bancorp in Provo, Utah. The bank will be renamed Green Dot Bank and will eventually issue the company's prepaid cards.
The prepaid cards issued by Green Dot function much like debit cards but are not linked to bank accounts. The money that customers load onto the cards is instead pooled together and held in accounts at third-party banks, which issue the cards bearing the Green Dot name.
Almost all Green Dot cards are currently issued by Synovus Financial Corp. in Georgia.
Over the next 18 months, however, the issuing of the cards will be transitioned to Green Dot Bank, said Steve Streit, CEO of Green Dot. The move is expected to save the company service fees and other expenses it pays to third parties.
The prepaid cards Green Dot sells through Wal-Mart Stores Inc. are issued through GE Money Bank and will not be affected, he said.
Bonneville is currently the 60th largest bank in Utah, according to an announcement from the Federal Reserve approving Green Dot's acquisition. It has $29.6 million in deposits, which represents less than 1 percent of the total deposits in the state.
Federal Reserve Governor Elizabeth Duke dissented from the acquisition approval, citing Green Dot's focus on prepaid cards. She noted that the company's reliance on a single product makes it vulnerable; for example, consumer demand could decline or new regulations on prepaid card fees could curb the company's profit.
She also noted that Green Dot relies on a single retail partner for a large chunk of its revenue. To mitigate risks, Green Dot had proposed maintaining increased capital levels for five years and refraining from paying dividends for three years.
Prepaid cards are often used by low-income individuals who do not have bank accounts or prefer avoiding the traditional banking relationships.
The market for prepaid cards has been growing significantly amid the downturn. Last year, consumers loaded $41 billion on prepaid cards, up from $29 billion in the previous year and $19 billion in 2008, according to Mercator Advisory Group.
The growth of the prepaid market comes at a time when banks have introduced new and higher fees on checking accounts. Prepaid card issuers say that is prompting more consumers to look for alternative payment methods.
Green Dot's shares jumped $2.11 or 7.7 percent, to $29.62 on Wednesday.