Green Dot Corporation (GDOT) Q2 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Green Dot Corp. Second Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Shaun Rowan, Senior Vice President of Marketing. Please go ahead.

Thank you, and good afternoon, everyone. On today’s call, we’ll discuss Green Dot’s second quarter 2020 financial and operating results. Following the remarks, we’ll open the call for questions. For those of you who haven’t accessed our earnings release that accompanies this call and webcast, it can be found at ir.greendot.com. As a reminder, our comments include forward-looking statements and 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 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 to 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.

Thank you, Shaun. Welcome, everyone, to the Q2 earnings call for Green Dot. I have had the pleasure and responsibility of being CEO here for just a bit more than four months and we have been pretty busy. In addition to dealing with the occasional pandemic, we have been moving very quickly to realign the organization, bring in some great new leaders and focus on driving efficiencies and uncovering opportunities, even with some legacy issues and a few negative surprises as one would expect. I’m very pleased with all the early signs of the progress we are making. During our last earnings call, we were still in the early stages of the coronavirus pandemic. Green Dot really came through in dealing with such unprecedented challenges. We enacted business continuity plans in Shanghai and across the U.S., mandated work from home for all employees and implemented strict travel restrictions to help protect the health of our employees and their families. Our employees have been successful in maintaining our operations in a remote work environment, and our offices in Shanghai have since reopened. During all of this, employee engagement and productivity have been high. Like most other financial institutions, we did experience a disruption in staffing levels at our third-party call centers across the globe during March and through the second quarter of 2020, resulting in longer than average wait periods for our customers and increased costs for the quarter. I’m pleased to report that we and our partners have since restored our staffing to appropriate levels and are currently meeting or exceeding SLAs established for our call centers. During this incredibly unfortunate pandemic, we are proud that our products and services were used and relied upon by millions of consumers and small businesses directly and through our partners to receive much needed funds and support from various government entities, and to do so safely with limited to no contact. This unprecedented crisis also clearly illustrates the strength of the diversified business at Green Dot, as well as the long-term opportunities for widespread digital payments adoption. While Jess will provide you with the specific details related to our financial results, I’d like to start by providing my perspective. Overall, non-GAAP revenue increased 13% compared to the second quarter of the prior year. This higher revenue and increase in active accounts are primarily due to new and existing customers using Green Dot products to electronically receive COVID-related government stimulus payments. Non-GAAP revenue also benefited from significant growth in our BaaS business. It is important to note that COVID would cause revenue pressure in other areas of our business, namely one of our more significant BaaS partners and our PayCard program. Our total operating expenses for the second quarter of 2020 increased by $64.4 million compared to the second quarter in the prior year. It is important to highlight that a big component of such an increase is related to growth of our BaaS business, as well as increased revenue share with one of our key retail partners. They also suffered from COVID-related operational expenses and transaction losses. We expect the COVID-related operational expense and losses to be temporary and related expense lines will revert back to normal by the end of this year. I’m very optimistic about the potential we have and thrilled about the leadership team we have put together over the past three months. We are focused on five key initiatives here at Green Dot, with the overall objective of delivering bottom line growth and strong free cash flow. I will speak more about this after Jess provides more detail on our financial results. Jess, over to you.

Thanks, Dan. Good afternoon, everyone. Overall, our consolidated results significantly exceeded our expectation. We’re pleased that the scale of our platform and our market reach enabled us to help consumers directly and indirectly through our partners to receive financial support through the government programs and weather the effects of COVID-19 on their livelihood. The continued uncertainty regarding the duration and the related impact of COVID-19 on our economy and any government response limits our ability to provide a thoughtful forecast at this time. As such, we won’t be reinstating our guidance for the year. However, I will provide color on recent trends during the call. As Dan mentioned, our Q2 2020 non-GAAP revenues grew 13% to $300 million, and we delivered adjusted EBITDA of $45 million and non-GAAP EPS of $0.43. We experienced a few significant tailwinds as well as headwinds in the quarter that I’ll walk you through. Overall, we were pleased with the strength of our consolidated performance. Our revenue results for the quarter were largely bolstered by significant growth in our BaaS business, as well as new and existing customers utilizing our platform to receive stimulus funds and unemployment benefits. As we discussed in our Q1 call, we experienced a slowdown in our business in March, as the impact of COVID-19 intensified, customer acquisition and spending levels were adversely affected, and we experienced delays in certain initiatives and BaaS product launches. During Q2, we saw strong recovery from the combination of stimulus funds and incremental unemployment benefits provided under the CARES Act and the acceleration of many of the digital payment trends that have existed pre-COVID. This resulted in a higher demand and usage of our products and services as persisted into July. During the second quarter, many of our KPIs experienced accelerating growth, specifically, the number of direct deposit active accounts grew year-over-year by 35% and our gross dollar volume and purchase volume grew by 51% and 31%, respectively, The year-over-year revenue headwinds we expected in our retail and direct consumer channels were largely offset by strong growth in account acquisition and gross dollar volume. Likewise, we experienced growth in our BaaS program through a significant influx of gross dollar volume and BaaS fees we charge our partners, despite one of our key BaaS partners in the ride-sharing business being significantly disrupted by the effect of COVID-19. It is important to note that the percentage interchange rate we earn on purchase volume declined despite a shift in purchase volume to online spend. This is due to the fact that the average ticket size per transaction increased by approximately 20%. As we discussed on our prior call, we experienced the year-over-year decline in net interest income due to lower yields on our cash and investment balances as a result of rate cut by the Federal Reserve earlier this year. In terms of our Processing and Settlement Services, the number of cash transfers grew 11% year-over-year, as customers of our reload network partners utilized our cash transfer services and is attributable to the accelerated digital payment trends we’re seeing in the industry. The number of tax refunds processed was down 25% year-over-year as a result of the deferral of the tax return deadline. We do not expect the deferral to materially impact the total number of tax refunds we will process in 2020. The deferral was the timing matter and some of the volume that we would typically see in Q2 will shift to the second-half of 2020. Let me turn my attention to our expenses and margins. Our total non-GAAP operating expenses in Q2 grew by $64 million, or 35% year-over-year. Of this increase, 38% related to volume increases and processing expenses, which is in line with corresponding revenue increases in our BaaS business. Approximately, 25% related to transactional losses from higher volumes of customer disputes and reserves for credit to be issued for previously denied disputes. COVID-19 created operational challenges that negatively impacted our ability to address dispute volumes. And as a result, the basis points of loss on purchase volume increased. We believe these transactional losses will normalize in future quarters. Approximately 22% related to volume increases in revenue and supply chain costs and increased revenue share rate associated with the renewal of the Walmart MoneyCard program and an 8% increase in marketing spend. Our marketing spend in 2019 was concentrated in the back-half of the year, whereas we’re spreading the spend across 2020. And during the second quarter, we took advantage of the stronger environment for customer acquisition. Approximately 6% of the increase related to incentive compensation for our employee net of cost reductions we made during the quarter. We recorded a bonus accrual for non-executives in light of our employees’ efforts to serve our customers and execute on our priority during these unprecedented times. In Q2 2019, we had the bonus accrual. The remaining 9% of the increase related to smaller items that grew for a variety of reasons. We continue to be disciplined with our spending and focused on reducing the overall complexity of our operations with the goal of providing operating leverage in the years to come. Depreciation expense in Q2 increased 19% year-over-year due to increased capitalized 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. I want to spend a few moments on liquidity. We generated operating cash flows in Q2 of $58 million. In March, we drew down the $400 million available to us under our revolving credit facility as a precautionary measure. We have since repaid the entire balance drawn as of June 30, 2020, as we feel comfortable about our cash forecast and the strength of our debt syndicate. At June 30, our cash at the holding company was $143 million. The $100 million revolver is available to us should we need to invest in strategic initiatives. Now, I’d like to focus on expectations for the remainder of the year. While we’re not in a position to reinstate guidance, I’ll briefly share a few trends that we’re observing through general fees. Key metrics, such as account acquisition and gross dollar volume have continued at a strong pace, growing double digits in July. However, the incremental federal unemployment benefits are set to expire in July. And it is unclear whether the government will extend this benefit or take additional action, such as another round of stimulus funding. We’ll be monitoring the level of gross dollar volume per account during August to determine there’ll be a slowdown in the year-over-year growth of gross dollar volume. While historically, Q3 is typically a lower-margin quarter than Q1 and Q2, principally because of the seasonality of tax refunds, it is difficult to predict the overall impact on margins without an assumption related to an extension of government benefits and whether the soft opening in various markets is sustainable. Indeed there are many moving pieces that are out of our control. We’ll continue to have margin compression from known headwinds, such as the revenue share increase at Walmart and the loss of high-margin interest income. Additionally, on our Q1 call, we mentioned that we expected to reduce our planned SG&A spend by $30 million. The decision to reduce such spend was predicated on the uncertainty surrounding COVID-19, with the strong momentum we saw on our key metric in Q2 and July. We will claw back a portion of those cost reductions in order to improve our operational capabilities around customer service, invest in the future growth of the business, and incentivize our non-executive employees for the great work they’re doing. As a rough framework, absent new stimulus funding, or an extension of federal unemployment benefits, we believe Q3 2020 will look something like current consensus, with an upside bias on revenue at approximately $240 million of non-GAAP revenue in a mid to high single-digit margin. With that, I’ll turn it back to Dan.

Thank you, Jess. Okay. Now, let’s talk about some of the key things we accomplished in the second quarter. In the past few weeks, you may have seen a number of exciting announcements by some of our newest BaaS partner programs. Last week, Intuit formally announced their QuickBooks Cash bank account, an industry-leading small business bank account as uniquely integrated into the QuickBooks ecosystem. We’re very proud to be working with Intuit to give small businesses faster access to funds, great account visibility and convenience, as well as an industry-leading interest yield. Kabbage also announced our new partnership to launch Kabbage Checking. We are thrilled to be partnering with Kabbage, a company that has done so much to help the small business community during these particularly trying times, facilitating nearly $6 billion in PPP loans this year. The new product offers convenient and modern money management tools and high-yield interest for their customers. Through these new partnerships with Intuit and Kabbage, we are positioning Green Dot to serve America’s 30 million-plus small businesses. We’re also pleased to share that in the last quarter, we launched our innovative new product with Wealthfront, linking our issued debit cards and bank functionality with their high-yield cash account for their investors. It’s a beautiful and seamless user experience integrated into the Wealthfront app. And we are very encouraged by the initial feedback on the product. Working with all these partners not only grows and diversifies our business, but all of our partners make us at Green Dot better. I would like to thank QuickBooks, Kabbage, Wealthfront and all of our partners for their trust and giving us the opportunity to work with them. Last quarter, on my first earnings call for Green Dot, I laid out five key initiatives in areas of focus. Number one, keep the bank, grow it, integrate it, and leverage its capabilities; number two, get much more efficient, resulting in bottom line growth and free cash flow growth; number three, our core businesses, tax processing, money processing and PayCard, growth and stability; number four, consumer business, both direct and retail, renewed growth; number five, BaaS partnership business. Here, we want to be an innovator, not an order taker. Declaring these five areas of focus is easy, executing on such is much tougher. It requires hard work, driven and maintained by a lot of dedicated people. Pretty simple, right? Just get clear on what you’re going to focus on, then make sure you have the right people to get the job done, simple but not easy. The most important thing we accomplished in the second quarter was a complete rebuild of the leadership team here at Green Dot. Through internal promotions and external hires, we have fielded one of the strongest teams I’ve ever had the pleasure of working with. We started with Daniel Eckert. He used to run financial services at Walmart to come in as our Chief Product officer and help us deliver innovative solutions to our BaaS partners. We added Philip Lerma, our new Chief Risk Officer, with experience from great companies such as PayPal, Netspend and EML. We then brought in Greg Quarles, former CEO of H&R Block Bank to focus on our first initiative of growing and better integrating Green Dot Bank. We then added Brandon Thompson as Executive Vice President of Retail, Tax, PayCard and Money Processing to help us focus on delivering renewed growth into our consumer retail business. I’ve worked with Brandon before both Euronet and Netspend, and he has always delivered above and beyond. We also made many internal changes and promotions in legal, IT, project management, compliance, operations, marketing and others. So much so that as our leadership organization stands today, the only senior executive leader still in place as when I arrived, is my Head of HR, Jason Bibelheimer. And boy, is he tired? He has done a tremendous job over these last two months assisting me rebuilding this leadership team. A lot of credit goes to him and his team in assisting me in delivering this much needed change so quickly. Now, keeping that momentum in mind, this last piece of the people side of the equation is very exciting. Last week at Green Dot, we declared a work from anywhere approach for the remainder of 2020. We have found that with our current work from home environment, we are maintaining a high-level of productivity. As we embrace this new normal, we are developing guidelines and practices, keep our sense of teamwork strong, while reinforcing a performance-driven mindset. For the past 25 years of building companies, I have said that people are not our most important asset, the right people are. From a recruiting standpoint, work from anywhere has dramatically increased the quantity and caliber of applicants we are receiving for open positions. As I just described, over the past three months, we have built a tremendous leadership team here at Green Dot. Now add to that, our ability to hire talent from all over North America without requiring relocation. I got to tell you, I’m ecstatic about the powerful team we’re going to put on the field. Every company on the planet, big and small, is made up of people. And every company deals with the same challenges, be it pandemics, economic pressures, the climate, competitive challenges. And at the end of the day, the degree of long-term success always comes down to the people in that organization, their attitude, their commitment, their capabilities, their performance. I’m thrilled to be working with and supporting this tremendous team we have put together, and I can’t wait to see the talent we can add to our ranks as we continue to recruit the work from anywhere approach. Bind the energy and focus of our team with a valuable assets at Green Dot, and we have an opportunity to create some tremendous value. I want to thank all the great employees at Green Dot, the Board of Directors and the investors for this opportunity. I look forward to what we can accomplish together. With that, I’ll hand it off to the operator for questions. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Bob Napoli of William Blair. Please go ahead.

Good afternoon, Dan and Jess.

Good afternoon.

Dan, you come on Board and all of a sudden, revenue growth goes to 20%. That’s a pretty nice acceleration you put in, in a few weeks during the pandemic to help out, I guess. But…

Magic, Bob.

…yes. So of the five, I guess, your five key points in growth. Congratulations. I mean you built really a rebuilt team. And what is – what are you most excited about? I mean, there’s a lot going on. I mean, partnerships with Wealthfront expansion with Intuit and Kabbage new. The – what – from what you see, what are you most excited about on the growth front? Where do you see the biggest opportunity to enhance growth and profitability over the next couple of years?

Bob, thanks. I can take no credit for this revenue growth. You know that. Yes, but thanks nonetheless. If you’re talking like significant growth over the next two or three years, I kind of look at things like short-term, medium-term and long-term. And I think, in the short-term, just kind of getting some of the fundamentals back in order on our, what I call the tried and true businesses we have here of tax and PayCard and retail and even the Green Dot reload network. So I think I’m very excited about with Brandon here, that new leadership and the things that he has seen and able to kind of quickly turn some dials is really helpful. And medium-term, what we’re going to be doing in terms of just kind of driving growth through traditional retail that we have, as well as what I mentioned on the last call, kind of reclaiming the banner, if you will, of a direct-to-consumer digital offering, predominately to low to moderate income consumers in this country. That’s going to give us most of the growth next year, and that’s a long-term grower for us right there, just in and of itself. And then why I gave size and stack on top of that, really the potential on the BaaS partnership initiative. We are very uniquely positioned that we own the bank. We’ve got 20 years of experience of digitally opened up accounts for consumers, providing the customer service, having the platform to run the transactions and then having 100,000 locations, where consumers – no matter how digital the world gets for quite a while, you’re still going to have the need for physical locations to load cash. And that combination is unique to anybody in the country. And so – and I think that the – our existing partners and conversations we’re having with other potential partners just tells me that we’ve – we execute well. We’ve got lots of growth for years to come at Green Dot.

Great. And just one follow-up question. I see a number of unlimited commercials, I guess on what that would consider to be probably expensive time slots, whether it’s on CNBC or I think some Sunday morning shows. Is that – is the unlimited product, I think, you’re going to simplify the products? Are you simplifying the unlimited product and then that is going to be like the key marketed retail product for the company?

Yes. We’re not disclosing our detailed strategy on that right now. But we – as you can – the unlimited product is now a two and two, not at three and three. So it’s a better product for – economically and it’s still having really good uptake. As for the cost of commercials, to run a TV is surprisingly affordable. And so we are – so we – the way they run the TV, you buy blocks and you don’t necessarily pick and choose, which shows you get on. So I don’t think you’re our target market, Bob. But I’m glad you got a chance to see the commercials.

Yes. Thanks, Dan. I appreciate it.

Okay. Thank you.

Our next question comes from Ramsey El-Assal of Barclays. Please go ahead.

Hi, guys, this is Damian on for Ramsey. Thanks for taking the questions. I just – that’s helpful that you provided the framework for Q3. I’m hoping maybe you can talk maybe more broadly about how you think about the stickiness of the customers that may have been acquired through government stimulus? And maybe how you’re attending to keep some of those longer – those customers longer-term. And maybe if – that sort of leads us to how we can think through Q3 as well. Just give your high-level thoughts on sort of the stickiness of those customers?

Sure, sure. So certainly, we don’t want to squander the opportunity that we’ve had around customer acquisition. So we’re – lots of efforts internally trying to lifecycle market to folks retain them as long as possible. I would say in terms of stickiness, one observation would be our balance sheet as of the end of Q2. The deposit balances are up roughly $1 billion year-over-year. So what we’re seeing with customers is, we’re seeing influx of customers. We’re seeing influx in GDV, and then those balances are a little more sticky. So I think people are being prudent about their spending habits. So at some point in the future, that positive balance will come off in the form of purchase volume, et cetera, which will earn interchange. So there’s a bit of stickiness in the fact that people are holding on to balances longer. I wouldn’t say there’s a material trend in uptick or trend in churn, for example. So I think you’re going to see probably a bigger active set in Q2 than you will in Q3. But I think you’ll still see year-over-year growth, which is something we haven’t seen in the total active base in quite sometime.

That’s great. Yes. And maybe a follow-up, I think, I’d ask about the cost levers here. I know, again, just you gave some helpful breakout in the sort of contribution of the expense growth. But maybe for Dan as well, you can speak more broadly about how you think about the cost levers that are available to you? And you spoke about the work from anywhere imitative, maybe can that lead to longer-term cost savings on the real estate consolidation? Or now that you’ve had more time in the seat, if you have uncovered any new cost savings initiatives? I would just love to hear about that? Thanks.

Yes, Damian, thanks. Yes, go ahead, Jess. Go ahead.

Okay. I just got to quickly say, I mean, with the work from home or work from anywhere, certainly that’s providing additional opportunities, not only from the recruiting side of the house, but also from a cost perspective. And as you can imagine, we’re taking a hard look at all of our properties and leases and trying to come up with the best possible model. So I think there could be leverage there in the future. And look, and I think we talked about in Q2, we had a heightened amount of what we call transaction losses or dispute volume. It was at such a level that higher than anything we’ve seen in prior years, I don’t expect that level of disputes to continue. And so that should help out with margins on a go-forward basis. And then, yes, look, we have some continued headwinds in Q3 and Q4 related to the rev share for Walmart and the high – loss of high-margin interest income. But as you can imagine, we’re still sort of uncovering cost opportunities. We’re looking at a whole slew of vendor negotiations in the hopes of providing operating leverage in the future. And I think the big thing that I’ll call out, and I think Dan touched on this is, there’s a fair amount of complexity in the system that’s built up over the years and there’s plans internally to streamline some of that and that will help out with operating leverage as well. Dan, do you want to add any color?

No, I think you covered it, Jess.

I appreciate it. Thanks.

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

Hi, good afternoon. I appreciate you taking the call. Dan, I wonder if you could spend a couple of minutes talking about the Walmart relationship, inclusive or exclusive of TailFin, and what you’d expect from the retail business, which I think is predominantly Walmart. Is there a change in the go-to-market and strategy and how you plan to monetize? And can that still be a growth driver for Green Dot?

Yes, Andrew. Yes. Well, in the world of retail and especially when you talk to retailers, they kind of look at the world, there’s Walmart’s and then there’s everybody else. And this, of course, as bricks and mortar retail. And so I think that it’s – with Green Dot, we have a very meaningful retail business outside of Walmart. We have Green Dot – and I – when I say outside of Walmart, that includes Green Dot cards that are sold through Walmart stores, as well as our other 95,000 retail locations. So there’s growth with both in retail and total, with Walmart MoneyCard, in partnership with Walmart together with retail in general. Brandon Thompson, who I’ve already mentioned a couple of times on this call, he ran retail for Netspend. He’s very knowledgeable, hits the ground running, fresh at eyes and knows the assets the Green Dot has. And we’re in really interesting conversations with not just Walmart, but with other retail partners about what can we do for them in payments beyond just the plastic card. And so, again, if you think about leveraging the skills and capacity of Green Dot with the bank and with the platform and our expertise, we – we’re excited with the discussions we’re having with Walmart where we can move with payments, like I said, just beyond the plastic card. And there has been changes at the leadership at Walmart. So we’re very encouraged with the new President of Walmart U.S. and – as well as the product team that he is building there and some of the early discussions that we’re having.

So stay tuned in that regard. And then I wonder if, Jess, maybe you can help out and elaborate and maybe talk about the BaaS business it evolves. I’m inferring from the press release and maybe some of your comments that there may have been a shift in mix in BaaS in terms of those customers to generate interchange versus those generating program fees. And I just wonder if you could elaborate on that and talk about, which is more scalable if there’s a strategy going forward as to the way you structure contracts around the mix?

Yes, it’s a good question. Yes, there’s quite a few flavors within BaaS in terms of the contractual agreements, some look very standard like similar to a Walmart relationship, where we earn cardholder fees and then there’s a rev share on the back-end. Whereas the other side of the spectrum is really going to be us as a platform behind the scenes powering it, but really the BaaS partner is the one sort of fund facing with the consumer and earning the cardholder fees and interchange, et cetera. So there’s quite a few different models underneath the hood. And certainly, what we’re seeing is, in particular, that platform business is really expanding and growing. You’re seeing that in some of the results here as BaaS fees increase. And so I think, look, I think, it’s fair to say now with the new leadership team in place that is going to take a hard look at what we want to do from a contract structure perspective and how we want that to evolve over time.

Is one business more – one type of revenue more scalable intrinsically than another?

I would say, they’re different. So one is – one, where we’re earning fees from the BaaS partner, I would say that more, I would say traditional subscription base. They control the acquisition funnel. We’re behind the scenes earning the fees for transactions versus the other model, where it looks similar to what we do on our retail and consumer side, direct-to-consumer side where we’re trying to incentivize cardholders. But we don’t necessarily control customer acquisition, which is a bit of a challenge when you think about how to model and price those programs. So I think our thoughts on BaaS will continue to evolve and we’ll share some more as the quarters go on.

Okay. I appreciate it. Thank you.

Our next question comes from George Sutton of Craig-Hallum. Please go ahead.

Thank you. On QuickBooks, first, congratulations. I would scare you, if I explain what we came up with as the TAM for that opportunity. I wondered if you could address that opportunity from your perspective?

All right. I’m not going to take a shot at quantifying the potential size of it. But now we’re – as you alluded to 30 million small businesses in partnership with Intuit, QuickBooks is very exciting for us. And I – to be able to serve just a low-income individual consumer and build our expertise around that and then thinking about how we can leverage a lot of those tools and learnings to serve small business, especially if we’re able to leverage the power of our bank together with partners, like Intuit, QuickBooks and even Kabbage. Yes, I think, there’s some real growth potential for us there.

I wondered if you could bifurcate the impact that you were seeing from the stimulus money going to consumers versus the government benefits through the employment – unemployment side. And I ask that in the sense that as we look forward to whatever the next stimulus is going to be, where do you benefit more?

It’s – I kind of look at it all as like one large stimulus. If you think about the increased amount that – of unemployment benefits, combined with any sort of one-time benefits, it’s all to me a very welcome and noble effort of folks in D.C. to keep a lot of employees in this country in a good state as we get through this hopefully, once in a lifetime event. So it’s – George, it’s the question of that’s kind of out there, I think, across all companies in terms of if COVID didn’t happen, what would the world look like and vice versa? So, there’s another version of that CARES Act or stimulus, if that comes out later this month, well, of course, that’ll be better for us and if it didn’t come out at all. But I think probably like most everybody, I would have preferred the COVID never happened.

I understand. We probably not all be sitting at home right now?

Yes.

Thanks for your help.

Sure. Thanks, George.

Our next question comes from Andrew Schmidt of Citi. Please go ahead.

Hey, Dan. Hey, Jess, thanks for taking my questions. The calculus in the quarter, I was wondering if you could break that down between BaaS and consumer. I know you had some comments in your prepared remarks. And then as a follow-up to that, whether there’s a difference in retention that you see on the consumer platform versus BaaS platforms? I know the program is carrying fast, but just at a high-level, that would be helpful?

Yes. We haven’t broken out consumer versus BaaS. I will say that if you were to go back to our commentary at the beginning of the year and what we thought about expectations. So this is even before COVID happened that we expected the consumer business, which is retail and direct-to-consumer channels to be down on revenue double digits, while the platform business was just made up of PayCard and BaaS and money processing and tax processing will be high high double-digit. The expectation there was that the consumer business would be down in active and then start to moderate, while the BaaS and our PayCard business continue to accelerate. Now, obviously, COVID has disrupted some of those trends. I would say that at a high level, the stimulus activity has helped to mute some of those headwinds we thought we would see in the consumer business. Secondarily, I would say, BaaS continues to grow at a healthy clip. And I would say that stimulus was continued to be helpful not only for the consumer business, but for the BaaS business. We have a few programs that were dedicated to sort of the tax space, and they’ve benefited greatly from stimulus funding. And then we’ve had some other programs that continue to grow healthily. PayCard obviously was impacted from unemployment issues across the U.S. And so that slowed down quite a bit. But I would say without giving you specific numbers, I would say, the year-over-year trends in active on consumer business were way better than we thought they would be and BaaS continues to grow certainly offsetting any headwinds we had on PayCard.

Got it. That’s helpful. And then maybe a higher-level question on pricing. Obviously, there’s a variation of pricing out there for other products in the marketplace. But many other digital banking products don’t offer account fees, things like that. Just wondering if whether an existing or new products you see the mix of pricing changing going forward, whether maybe relying more on interchange versus account fees or other value-added services, other types of products can maybe account for more revenues versus account fee? Just curious just how are your thoughts on potential evolution and product pricing?

Yes. So, Andrew, I appreciate the question. And I’m going to try to like be open with you, but I also don’t want to be tip of my head in terms of what will be going out with at some point. Customers, in my opinion, don’t always value free. And so from our experience of many, many years of being in this space, if you want to drive numbers that show you’ve got a lot of accounts, or a lot of cards issued, you can lead with free, and you can have a lot of “customers and accounts with very little to very limited engagement.” So my belief philosophically is that there’s – a BMW is worth more than a bicycle. So if the consumer really wants a product that serves their money needs and their financial needs, and it’s not just a simple transaction tool or mad money tool, then they are more than happy to pay a monthly fee of $5 or $9 for that product. And even in a neobank space that’s out there, you see a lot of very companies, I think, are making great traction, where they have a monthly subscription model, where they may charge $1, $5 or $9, may they call it a subscription. But it’s still a cost that consumer pays for getting a great service in that great product. So I’m rambling a little bit. But really, I think the message is that, I don’t ever want to be in a business where I’m only competing on price. And as far as I can tell, it’s – we’re really one of the few digital banks, I can really claim that we truly are a bank and not a marketing company. So I think people are willing to pay for value and we’re going to offer real tremendous value for our customers.

Okay. It make sense, Dan. Thank you very much.

All right. You’re welcome. Thank you, Andrew.

Our next question comes from Mayank Tandon of Needham. Please go ahead.

Hey, good evening. It’s actually Kyle Peterson for Mayank. Thanks for taking the question. Just wanted to see if I could get an update on – and then you’ve established some more leadership within the Green Dot Bank, talk about kind of taking advantage of that to what are its launch with additional products just overdraft protection? Just want to see if there was any update on some of the traction you guys are getting with that?

In terms of rolling out an over – a consumer-friendly overdraft solution that requires a technical build on our side in terms of Intuit. So that – that’s the long pole in the tent there. As Green Dot Bank as a bank, we feel that we have the ability to roll out that product. And Greg Quarles, who I’ve mentioned on the call, he has been – he is still relatively new, I think, about a month into the job. He has done numerous meetings with our regulators and with our team at the bank. And I’m feeling very optimistic about the value and discipline the Grey can bring to Green Dot Bank.

All right. That’s helpful. Thanks. And then just one quick follow-up on the competitive environment, particularly with some of these neobanks. Have you guys seen any shakeout or disruption? Obviously, your account trends have looked really strong this quarter. It’s fun to try to tease out what stimulus and what might be some of these smaller start-ups, maybe experiencing a little bit of pressure with some of the market volatility caused by COVID?

Yes. I can’t really comment on what other neobank startups feeling. I’ve gotten a couple of pitches from bankers about some start-ups in the fintech space or need of some capital. But I know it seems to me like the capital markets is still working really well. And I don’t think COVID just brought positive or negatives to the space. I think it’s across the Board, is almost neutral.

All right. Sounds good. Thanks for the color. Thanks, guys. Nice quarter.

Thanks, Kyle.

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

All right. Thanks for taking my question. Congrats on the solid results. I was just wondering if it’s possible to quantify the benefit of the stimulus and unemployment in the quarter? Or maybe another way to think about it would be just the indicated framework for the third quarter, which implies like a $60 million sequential decline, like what – how much of that is seasonality versus some of that benefit that you’re not accounting for right now in your – in the framework? Thanks.

Well, I’ll take a stab at that. I think if I want to talk about stimulus funding GDP associated with it during the quarter, that was roughly $2 billion. So that’s $2 billion of the $5 billion year-over-year increase. Unemployment benefit, certainly something what we’re looking at in Q3 is whether it sounds like Congress is making some progress here around the unemployment benefits. If they are successful in doing so, then clearly our Q3 framework will improve on a revenue basis. Now, there’s always a sequential step down in both revenue and margins when you go from Q2 to Q3, because there’s a fair amount of – in a normal time, there’s fair amount of tax refund volume that still comes through in Q2. Now you’ve added on stimulus funding. You’ve added on an additional $600 per week from the federal government on unemployment benefits. And then as we head into Q3, right, that stimulus funding is gone. Potentially, the federal unemployment benefits will be gone. But all that could change in a matter of a week here. So I’m not sure if I’m answering your question, but that’s probably the best I can do for you.

So that’s very helpful. Thanks. And maybe just, Dan, a quick question on capital allocation priorities. The company has a good amount of cash. How do you think about capital allocation priorities going forward? Thanks.

We have a handful of initiatives here at the company. What we’re focused on one is, stabilizing our TPG platform stores investing some capital there. The other is building our – we’re calling the challenge to challenger banks, call it, Green Dot 2.0, 3.0, 4.0, whatever you choose. And we’re spending a good amount of time in energy on really improving our customer experience anywhere from IVR to card services to sign up for the products across the Board. But most all of that effort and work is being done by existing employees in the company. So from a capital allocation standpoint, as we are generating free cash flow, my intention is to bank that free cash flow and not try to find ways to spend it. I really think that we have just really at our doorstep tremendous opportunities. And all we need to do is execute on those opportunities with our existing resources on hand to really see some meaningful growth for the company. That’s it. It’s actually quite a nice position to be in.

That’s helpful. Thanks, Dan. And again, congrats on the color as well.

Okay. Thank you very much, Ashish.

Our next question comes from Steven Kwok of KBW. Please go ahead.

Hi, thanks for taking my questions. Just the first one I have is just around the operating margin. I know you guided to the mid to high single digits for the third quarter. I was just wondering like once all of the third-party activities like normalize, like what’s the appropriate normalized margins that we should be looking at? And I guess, as a follow-up is just around like what’s the incremental margins on your business? To the extent that stimulus does happen and unemployment does happen in the third quarter, how should we think about the incremental margins on that piece of revenue? Thanks.

There’s a lot to unpack there. Let me see if I can answer your question. I would say, maybe just a focus on the stimulus funding. So absent and we don’t expect to have the same issues we had operational challenges with dispute volume in Q3. So, we – the margin on the flow-through of the – any stimulus funds that would come through and any additional federal unemployment benefits, we certainly get a higher margin than what we experienced in Q2. There’s also some, I would say some, call it, some headwinds and tailwind in Q3. You’ve got the headwinds of rev share on Walmart interest income. You’ve got some tailwinds from the shift in some of the tax volumes in Q2, Q3. You’ve got some marketing timing, et cetera. So I would say, a fair amount of puts and takes there. Normalized margins, look, we’re going to lap the rev share on Walmart in 2020 – 2021, excuse me, and we’ll go off that base. I would say, Steven, a lot of the initiatives we have underway is obviously about increasing free cash flow, that means more profitable products and services. One example of making sure we’re right-sizing economics is the unlimited changing from three and three to two and two. Clearly, the – that was – the focus there was to increase the economics for us and make it a more profitable product. So I would say, look, it’s hard to say right now, standing for, I’m [[ph] to tell you what the normalized margins will be. But clearly, the focus internally is about profitability and free cash flow. And so our goal clearly is to drive margins up. Dan, if you have anything else you want to comment on?

Yes. I just think it’s – we’re going to be working on this over the next couple of quarters to make the job easier for you guys. But we have a different margin in our BaaS business than we do in our Walmart business, which is a different margin than we have in our direct-to-consumer business, which is a different margin than we have in our Green Dot retail business. And so depending on which one of those is growing faster kind of has an impact on our margins. So I think that, again, if we were to provide you with some guidance to make your job easier, but it is – I just want to make sure, yes, we’re not dodging the question here. It’s just hard to just kind of simplify it to, "Hey, your sustained margin we get on every dollar of revenue.”

Got it. Understood. I was just wondering, is there a target of margin expansion going forward on a yearly basis? And how should we think about the pace of improvement?

Yes. There’s not a target in terms of – it’s just not that, I guess, this is one of the things that don’t teach you business school. I mean, you just can’t say to, "Hey, let’s do a target margin increase of x.” But what I can say, the target is that, every year our cash flow – our free cash flow grows and our margin expands over the prior year. That’s what I’m used to doing. That’s how I’m used to operating. I’ve said 100 times is that the beautiful thing about a payments business is once you get to a level of fixed costs, where you can serve the customers at scale, just keep your fixed cost fixed. If you keep your fixed costs fixed, your margins will expand. And so back to your question about capital allocation, I’m sure, but I seem that – I suspect that there was a time before I showed up that, hey, whenever there was profit or free cash flow, everybody came out with ways to spend it. That is a mindset that I’m in just emphatic about changing around Green Got. We’re going to keep our fixed costs fixed. If we do that and then we pay attention to variable costs, whether we’ve got a contribution margin from a deal, that’s 3% or 30%, we keep our fixed costs fixed, our overall margins will grow. But I can’t – I’m not going to endeavor to predict by how much, but growth is what we’re going after.

Got it. Thanks for your time.

Thank you.

Our next question comes from Georgios Mihalos of Cowen. Please go ahead.

Hey, good afternoon, guys. Thanks for taking my question.

Hey, Georgios.

I just wanted to ask, if we look – hey, Dan, if we look at direct deposit as a percentage of your accounts outstanding first-half of the year, it’s north of 50%. It’s up meaningfully from the first-half of last year. Is that above 50% sustainable? And where do you think you can go as you kind of look out over the next couple of quarters?

Yes. I’ll start with that. And Dan, if you can add color. I would say, look, in the quarter, certainly, the direct deposit base was bolstered by unemployment benefits, and to some degree, stimulus funding. But I think, look, our goal internally is to be hyper-focused on direct deposit, direct deposit customers, because they’re, by and large, the longest lifetime revenue and lifetime contribution for us. So I think, maybe Q2 was a bit anomalous, but I would suspect that the direct deposit penetration in the overall active base will continue to grow, especially as we get into next year, we have additional products that were sort of designed for long-term usage with additional functionality for the consumer.

Yes, Georgios, and I guess, I look at. When it comes to direct deposit accounts, I’m going to be focused more just on the actual net number of those accounts as opposed to percentage of total. The reason being as we move into more and more BaaS partnerships and the – there’s going to be – the number of accounts could grow pretty substantially if we just become an embedded account in one of our partners’ apps. So that’s where I would just kind of caution from the standpoint of a percentage of total is not, to me, as important as the actual net number of direct deposit accounts. And that number, I fully expect, we will be seeing that growing year-on-year for many, many years.

Okay. That’s very helpful, Dan. And just one more, if I could sneak one in. Just going back to the competitive question, maybe asking it a bit of a different way. You sort of had the neobanks that have been competing against you. It seems you’ve got some, I guess, with the digital wallet operators now that are making a more aggressive push, if you will, around direct deposit layering more functionality kind of core payments functionality. Curious how you’re thinking about the game competitively in the market? And maybe not so much how you defend against them, because that’s a big model, but how much of a challenge will that be on maybe some of the more traditional…?

Yes. So, Georgios, you cut out a little bit the question, but I think I get the gist of it. If I look back, I think, I’ve been kind of in this space started and that’s been 12-plus years ago. And even then what I saw was our – some of our biggest impediments to growth was ingrained consumer habits in terms of utilizing cash, lack of awareness in terms of the product and what it could do, and also maybe kind of lack of credibility, if you will. And so, what we found back then, when folks like American Express and Chase jumped into this space was they spent hundreds of millions of dollars educating the market on the value of prepaid card. Again, today, what I see, which I’m very encouraged by is really the number of players jumping into the space either directly or kind of around the rim competing with us. That way you see them as much as competitors, because the total available market is so large. I see them as helping us communicate the message that there are very viable and useful and competitive alternatives out there to traditional bricks and mortar banks and financial institutions. And I think we’ve all seen just over the last three months of what COVID has done to drive digital adoption by a lot of consumers who basically had been making purchases in cash. And so I really – I – to be honest with you, I had mix of motions when I read the same things you do about other companies kind of jumping into the space. On one hand, I believe in competition, I’d rather not have it, to be honest. But that competition, they take some of their funding, they spend marketing dollars, they build awareness in consumers’ mindset of other ways to do your payments and your banking. And that benefits all of us as rising tide lifts all boats. And I go back to what I’ve had for years and years. If you look at the size of the total available market, it’s not a zero-sum game. There’s plenty of room for a number of companies in the space to be very, very successful. I guess, I cut you, Georgios.

Our next question comes from Bob Napoli of William Blair. Please go ahead.

Sorry. Thanks for the follow-up. A quick one. The revenue per account – active accounts has gone up the last two quarters by like 14% every year, even as the active accounts went up. They mean the first quarter, even before COVID, much effects in COVID. I just wondered if you could give any color on why the revenue per account is up as much as it is?

Yes, Bob, I would say, I wouldn’t give a ton of credence to revenue practice. And the reason I say that is, because we have certain programs in our BaaS channel where we don’t report actives. But if you look at the pace of the P&L, for example, when you’re taking card revenues and other fees and interchange, or you’re looking at the account services segment revenues and you’re dividing that into active base, there’s both some BaaS programs, as well as like gift card revenues, for example, that don’t have a corresponding active. So I wouldn’t get a lot of credence to revenue practice.

Okay, great. Thanks. I appreciate it.

All right. Thanks, Bob.

This concludes our question-and-answer session. I would like to turn the conference back over to Dan Henry for any closing remarks.

Thank you, operator. I want to thank everybody for the call. And, again, I just want to thank all the new tech team members at Green Dot and all those that are still here showing up, and everybody know I’m really excited about what we’re going to be able to do. Thanks, everyone.

The conference has now concluded. Thank you for attending today’s presentation and you may now disconnect.