Green Dot - Earnings Call - Q3 2020
November 4, 2020
Transcript
Operator (participant)
Good afternoon and welcome to the Green Dot Corp Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Alison Lubert, Vice President of Communications. Please go ahead.
Alison Lubert (VP of Communications)
Thank you and good afternoon, everyone. Today we are discussing Green Dot's third quarter 2020 financial and operating results. Following remarks, we'll open the call for questions. Our most recent earnings release that accompanies this call and webcast can be found at ir.greendot.com. As a reminder, our comments may include forward-looking statements and 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 with 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 Green Dot Corporation and is subject to copyright protection. Now I'd like to turn the call over to Dan.
Dan Henry (CEO and President)
Thank you, Ali. Welcome everyone to Green Dot's Q3 2020 Earnings Call. It's been a busy and productive few months since we last gathered. We are pleased to report a better-than-expected third quarter, which we attribute to a number of factors, including our continued work to drive efficiencies and lower costs and increased demand for our products across our consumer, retail, and B2B offerings. We remain focused on unlocking new opportunities and capitalizing on the accelerated shift from cash to digital banking and payments, which was further illuminated by the pandemic and other dynamics taking place in the marketplace. We are already seeing benefits from our Work From Anywhere initiative from both a cost savings and talent recruitment perspective.
In a few minutes, I'll pass it over to Jess to walk you through the details of our financial results, but I'd like to start by sharing a few highlights and my perspective on what contributed to a solid third quarter. I'm going to focus on three key areas of progress that stem back to the objectives I laid out earlier this year. These will include improving our financial performance and execution, refocusing and enhancing our BaaS strategy, and launching our new and lasting Challenger Bank initiative. While Jess will cover the financial performance in detail, let me provide you with my take on the results for the quarter. Non-GAAP revenue increased 22% compared with the third quarter of the prior year.
This higher revenue was driven by a combination of new and existing customers using Green Dot products to electronically receive their income, elevated deposit balances from stimulus funds received in Q2, growth in our BaaS partner fees, and accelerated demand for digital banking and payments products. We also started to see recovery in areas of our business that were negatively impacted by COVID-19. Our total operating expenses for the third quarter of 2020 increased by $42 million compared to the third quarter of the prior year, and our margins expanded by approximately 100 basis points. A big component of the increase in operating expenses was related to growth of our BaaS business. We also had lower marketing expenses in the quarter. If you recall, Green Dot spent a majority of its full 2019 marketing budget in the second half of 2019.
Finally, we had a few headwinds to margins, especially an increased revenue share with one of our key retail partners, higher transaction losses on our purchase volume, and the timing-related expenses associated with incentive compensation for our employees. Moving on to our BaaS business. As we previously announced, we officially kicked off new relationships with Intuit and Kabbage in the third quarter, which further positions Green Dot to serve and empower America's 30+ million small businesses and entrepreneurs. Leveraging Green Dot's capabilities, Intuit announced their plans to launch a QuickBooks Cash account, and Kabbage announced plans for Kabbage Checking. We're also very excited about Kabbage's accelerated potential now that they're a part of American Express. Through these products, small business owners will now have access to more seamless, safe, and value-driven banking and cash management for their businesses.
We're incredibly proud to be a part of this movement and look forward to deepening our partnerships with Intuit and Kabbage and doing more for small businesses in the future. We believe the opportunity for Green Dot to offer its services to the vast SMB segment is immense, and we look forward to providing you with more updates regarding this opportunity. On that note, you may have seen an exciting announcement last week about a new strategic investment and partnership with Gig Wage, which, for those who may not be familiar, is a very impressive and fast-growing startup focused on creating a better financial ecosystem for the rapidly expanding gig economy. When I met Gig Wage's founder, Craig Lewis, earlier this year, it quickly became clear that we have similar goals and visions for the industry and for our customers and that we could do a lot together.
Green Dot led Gig Wage's Series A funding round, and we will serve as their infrastructure bank partner, enabling Gig Wage to launch a number of new financial solutions designed for 1099 workers and their employers. As a strategic investor and BaaS partner, Green Dot has an exciting opportunity to grow this vertical and capitalize on the growing demand for better banking and payment solutions for the gig economy. Also, we have a few new partners we will be announcing soon, brands that everyone will know and recognize.
One thing I want to reiterate is our commitment to partnering with select high-impact and high-potential companies, meaning they are highly respected brands with very impressive reach or they're startups with tremendous potential, which we will differentiate ourselves as a BaaS provider by acting not just as a bank sponsorship but also a true partner providing end-to-end support spanning technology, program management, call center support, fraud, and our reload network, and more, which we consider a huge differentiator for Green Dot. Last but certainly not least, one of the most important and exciting areas of focus and progress has been unlocking our potential as a powerful Challenger Bank. Earlier this year, one of the goals I set for the company was to introduce a new direct-to-consumer bank, and that vision will come to fruition very soon.
Last week, we officially launched our waitlist for Go2bank, which is an entirely new and simplified digital banking experience that will offer meaningful value and features designed to save people time and money and manage and move money effortlessly. We chose Go2bank as our new brand by doing some pretty extensive research and because we want this product to be the go-to destination for modern banking and money movement for everyone wherever they go. Go2 will be a solution designed primarily for low to moderate-income consumers who are looking for and can benefit from a better way to bank and transact, and we plan to expand the target market as we enhance the product features and services over time. As one of the only Challenger banks to actually be a bank, Go2bank will position Green Dot to compete aggressively and profitably.
When we launch early next year, Go2 will offer a compelling value proposition to a wide range of customers, including the security and protection that comes with a member FDIC bank, an intuitive mobile app and experience where you can quickly set up and manage your account, no monthly fees when you use direct deposit, free in-network ATMs, 10x national average APY, and other valuable features and rewards. Our plan is to expand on those features quickly. This new brand and product set represent a meaningful and long-term commitment and strategy for Green Dot, so you can expect to see a lot more of this in 2021 and beyond. While we intend to spend to develop the Go2bank brand and acquire customers, our marketing dollars will be based on a data-driven marketing strategy driven by thoughtful and rigorous return on investment requirements and expectations for lifetime value.
Green Dot has a proud 20-year history of serving over 33 million customers through our retail direct-to-consumer products and many more through our banking partners like Walmart, Apple, Uber, and other well-known innovative brands. We know how to build products that make money movement and access more seamless, intuitive, and safe for everyone. We also know there is a significant segment of our population that continues to be underserved by the financial services industry, and we have the opportunity to change that with Go2bank. I encourage you to visit Go2bank.com and join our waitlist. As you may be able to tell, we have been incredibly busy laying the foundation to deliver value-added products and services to our customers directly as well as through our valuable BaaS partners.
At the same time, we are delivering on our commitment to right-size the cost structure and establish sustainable operating leverage, which will create value to you, our shareholders. I would like to thank our valuable employees who have been working tirelessly through these challenging times. With that, I'll pass it over to Jess to walk through our numbers.
Jess Unruh (CFO)
Thanks, Dan. Good afternoon, everyone. Overall, Green Dot had strong financial results in the quarter and significantly exceeded our internal expectations from three months ago. The momentum we saw in Q2 from stimulus funds, unemployment benefits, and new users on the platform carried into Q3. We are pleased that the scale of our platform and our market reach puts us in a position to benefit from the accelerated adoption of digital payments. Our Q3 2020 non-GAAP revenue grew 22% to $279 million, and we delivered adjusted EBITDA of $34 million and non-GAAP EPS of $0.25. 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 the consolidated performance.
Focusing on our top-line results for a moment, non-GAAP revenue growth in the quarter was driven primarily by our account programs, with strong performance in key metrics such as account acquisition, gross dollar volume, and purchase volume. The growth in gross dollar volume was driven in part by the extension of federal unemployment benefits and higher levels of tax refund deposits onto our account programs due to the extension of the tax filing deadlines to July 2020. Altogether, this resulted in increased management service fees from our BaaS partners, increased monthly maintenance fees from elevated deposit balances, and growth in interchange revenue. Consistent with the previous quarter, the interchange rate we earned was down year over year in Q3 due to a 30% increase in the average ticket size per transaction.
Since interchange fees have both fixed and variable components, we earned smaller fees in percentage terms on larger transactions, partially offsetting the increase in revenue in our account segment with an increase in cash rewards related to Green Dot Unlimited accounts. We also experienced revenue growth in our money movement services, primarily due to a 9% growth in the number of cash transfers, a significant growth in tax refunds processed from the shift in the tax filing deadline, and continued growth in new tax processing services we introduced this year. Partially offsetting this growth was a year-over-year decline in Simply Paid disbursement transactions as a result of the disruption in the ride-sharing business from the effects of COVID-19.
Another headwind discussed on prior calls was the year-over-year decline in net interest income due to lower yields on our cash and investment balances as a result of rate cuts by the Federal Reserve earlier this year. Let me turn my attention to our expenses and margins. Our total non-GAAP operating expenses in Q3 grew by $42 million, or 20% year over year, and our margins expanded approximately 100 basis points. Sales and marketing expenses declined by 5% due to lower marketing expenses year over year. Our marketing spend in 2019 was heavily concentrated in the back half of the year, whereas we are spreading the spend more evenly across 2020. The lower marketing expense was partially offset by an increase in revenue share with our partners, including an increased revenue share rate associated with last year's renewal of the Walmart MoneyCard program.
Compensation and benefits expenses increased 18% due to incentive compensation for our employees. Consistent with our commentary on our prior earnings call, we reinvested some of our planned SG&A saves to incentivize and reward our non-executive employees for their extraordinary efforts to serve our customers and execute on our priorities as we navigate through the pandemic. Processing expenses increased 60% in line with corresponding revenue increase in our BaaS fees and interchange revenue. Other general and administrative expenses increased 43%, mainly as a result of an increase in transactional losses from higher volumes of customer disputes. In Q2, we experienced a significant increase in transaction losses, primarily due to operational disruptions caused by COVID-19.
In Q3, and likely for the remainder of this year, the basis points of loss on transactions will be a headwind to margins as we continue to work diligently on improving the customer experience and align our fraud prevention processes with the industry's best practices and performance. We expect loss rates will begin to normalize in 2021. Depreciation expense in Q3 increased 15% year over year due to increased capitalization 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. From a liquidity perspective, we generated $37 million of operating cash flow during Q3 and $199 million year to date.
Our cash at the holding company at quarter end was $152 million. The $100 million revolver is available to us should we need it to invest in strategic initiatives. Now, I'd like to focus on expectations for the remainder of the year. As we look ahead, while our business remains very healthy, it is important to remember that Q2 benefited from approximately $2 billion of gross dollar volume from stimulus funds, and Q3 had a follow-on benefit from elevated deposits. Additionally, Q2 and Q3 in aggregate benefited from approximately $2 billion of incremental federal unemployment benefits afforded under the CARES Act. While we are well-positioned to continue to benefit from the accelerated adoption of digital payments, we expect our KPIs to continue to normalize as stimulus disbursements roll off and the enhanced federal unemployment benefits expire.
While each of account acquisition, gross dollar volume, and purchase volume were in Q3 above long-term historical trends, we do anticipate that normalization will occur throughout Q4 2020. One item to note for Q4 is that we expect a year-over-year decline in cash transfers. We decided to not renew an agreement with a large reload partner because the proposed renewal terms and associated margins did not meet our expectations. Thus, our cash transfer volumes and the related top-line revenue will be impacted, but given the lower profitability of this contract, we actually expect the overall percentage contribution margin in our money processing channel to improve. As we think about the full year 2020, we expect our non-GAAP revenues will be in the range of $1.175 billion-$1.185 billion.
We expect adjusted EBITDA to be in the range of $195 million-$200 million, and non-GAAP EPS to be in the range of $1.95-$2. These ranges do not anticipate another significant federal stimulus program, nor do they anticipate a further economic slowdown from the impact of COVID-19. In conclusion, we remain focused on reducing the overall complexity of our operations with the goal of generating consistent operating leverage in the years to come. We believe decisions made this year will begin to benefit us in 2021 and beyond. Speaking of 2021, we expect to provide formal guidance for the year when we report our Q4 2020 results in February. While we're still in our budget process, we would like to provide some insights for you to consider as you build your models.
First, we will have positive impact from initiatives discussed earlier, including new BaaS partnerships and Go2bank, as well as various cost and capital efficiencies. We will also have year-over-year headwinds associated with the government benefits that positively impacted our 2020 results, as we discussed earlier. We look forward to providing more detailed discussion on our next earnings call. With that, operator, let's open the line for questions.
Operator (participant)
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue. At this time, we will pause momentarily to assemble our roster. The first question comes from Bob Napoli of William Blair. Please go ahead.
Bob Napoli (Senior Director)
Thank you. Good afternoon.
Jess Unruh (CFO)
Hey, Bob.
Dan Henry (CEO and President)
Hey, Bob.
How are you doing?
Bob Napoli (Senior Director)
A lot going on. Just maybe a first question, just on direct deposit. I mean, you all had your prior roles, I mean, direct deposit was a big focus. I know it's a big focus here. The penetration rate currently is about 40% on direct deposit accounts. Is there a strategy around building the direct deposit customer base at a faster rate? If so, what is it, and what kind of a penetration rate or other metrics would you judge the success of that program on?
Dan Henry (CEO and President)
Yeah, Bob, I think your question, I think, illustrates the knowledge awareness of for what we do, the direct deposit customer is an extremely valuable customer. When we launch our Challenger Bank initiative early next year, we will be very focused on driving that direct deposit growth with that product. In terms of any sort of metrics or levels of success, can't give those to you at this point, but yeah, it's going to be a cornerstone to our strategy and our focus on growth.
Bob Napoli (Senior Director)
Great. Thank you. Maybe just as a follow-up, the new partners, it sounds like you have a pipeline of new large and small partners, as you mentioned, startups and well-known brands. Is there a different approach to those new partners versus what Green Dot has had in the past, or is it more partnership as you view, and would this generate higher ROIs maybe than some of the partnerships in the past?
Dan Henry (CEO and President)
No, the approach, Bob, is different. I don't know what was shared publicly, but from my understanding is, or my approach is very much of a quality instead of a quantity in terms of partners. If you think about what we have at Green Dot, we have a very unique collection of assets. I mean, I'll say right now, I don't like the BaaS acronym for us because we do a lot more than just give access to our BIN. I think of banking as a service. We can bring to our partners, our partnerships at bank. We can bring logistic expertise in terms of issuing plastic. We've got a tech stack. We have a reload network. We have customer service call centers, management expertise. We've got fraud management expertise. We bring a whole collection of services.
Our new approach is not to just let any fintech come along and kind of take us one piece at a time of our service, but more look for large partners, like many of the ones we have, that are looking for kind of an all-encompassing solution and relationship, work to deepen that relationship and bring powerful products and solutions that really nobody else can offer because nobody else has a collection of the assets we have. Bring those to large partners who can really drive scale for us and adoption of the masses with those solutions. On the other side of the spectrum, more partnerships with companies like Gig Wage. It's Craig Lewis, the CEO and founder of that business. He's a tremendous entrepreneur, hard-charging. He's built a great little platform.
He's got some great prospects in terms of a growing wave of the gig economy. We want to play in that. We see being able to invest in a company like Gig Wage, truly be their partner and help them grow and grow with them in the gig economy. That's the strategy we want to do on our partner approach. As I said, what I just read is it's either large partners with tremendous reach or small, very powerful partners with tremendous growth potential.
Bob Napoli (Senior Director)
Great. Thank you. Appreciate it.
Dan Henry (CEO and President)
Yep.
Operator (participant)
The next question comes from George Sutton of Craig-Hallum. Please go ahead.
George Sutton (Senior Research Analyst)
Thank you. Congratulations to me. I'm the latest waitlist customer for the new Challenger Bank offering. So excited to see you on that.
Dan Henry (CEO and President)
All right.
George Sutton (Senior Research Analyst)
Exactly. Exactly.
Dan Henry (CEO and President)
We will be your go-to bank for all your seamless and frictionless financial services. So glad to have you on board.
George Sutton (Senior Research Analyst)
If you can handle all my wife's needs, very impressed. Question competitively. Goldman Sachs just announced entrance into the BaaS market. Axos had to give up a customer because they had reached too large a size and could not work with revshare. I think Goldman will have the same issue. Curious how your—and I am happy that you are defining some of your capabilities a little bit more specifically. I am curious, competitively, when I look at that larger landscape and issues that some might run into, and then look at sort of some of the bigger opportunities in the space, just help us understand when you are building up this pipeline how competitive it is.
I would also like to add, and I do not need a follow-up question, so this will be my follow-up question, the renewal deal that you did not go forward with and how that demonstrates customers you might be moving away from.
Dan Henry (CEO and President)
Sure. The renewal we passed on was with a partner that was only using our reload network. What we saw there was somebody who was demanding high volume of service with next-to-no margin, sometimes negative margin, and we were not willing to go there, especially as I said, they were just doing an à la carte solution where all they wanted to use was our reload network. We walked from that partner. In terms of the other thing, your other question in regards to how we, as our bank grows with all these new partners, how do we maintain the asset level? I really do not want to get into a lot of detail on that, but I would just share that we are very confident that as we have structured our business, Craig Quarles, who is now the CEO of our bank, we can run our bank.
We can stay below the $10 billion asset level for a long, long time with very significant volume coming across our institution. If you compare that with, say, a Goldman Sachs Bank or whatever banks are out there now jumping on the BAS wagon, those banks are entirely different types of banks than we are. Those are traditional finance institutions that do all sorts of banking and lending, and they want to be $300 billion-$400 billion in assets. That will have a different issue. We will be able to protect our revenue with higher interchange by maintaining our $10 billion or less asset size.
George Sutton (Senior Research Analyst)
Awesome. Thank you.
Dan Henry (CEO and President)
Yep.
Operator (participant)
The next question comes from Andrew Jeffrey of Truist Securities. Please go ahead.
Andrew Jeffrey (Managing Director)
Hi. Good afternoon. Appreciate you taking the question.
Dan Henry (CEO and President)
Andrew, sure.
Andrew Jeffrey (Managing Director)
I wonder if I could maybe build on Bob's question with regard to, I guess, more specifically with regard to unit economics, taking a look at the Go2bank site. I may be a little bit behind George as far as getting on the waitlist, but I'll get there. Looking at cashback and some other products, the consumer incentives seem competitive, quite rich. I appreciate the focus on direct deposit. Dan, can you just give us some comfort that these are really good ROI products despite whether it's 6% or 7% cashback? Those are pretty juicy returns or rewards, I should say.
Dan Henry (CEO and President)
I'm really glad to hear you ask that question with that kind of, with a weird almost skepticism. No, seriously, because yes.
Andrew Jeffrey (Managing Director)
I'm not skeptical often.
Dan Henry (CEO and President)
It's not how you make your living. I know. Oh, no, absolutely. The economics on this product are going to be stronger than I think any product that we have at Green Dot currently. Those 6% and 7% cashback rewards, those returns are funded by the merchants who are issuing those reward programs. Those do not come as a cost to us. It is really about how we can be creative in designing really value-rich opportunities, propositions for the consumer that they love and embrace, and we still preserve the very good economics on our product.
Andrew Jeffrey (Managing Director)
Okay. I mean, as a follow-up, I guess I'll press my luck again as a skeptic. With a product that, for example, that hasn't been announced, but we got maybe a little bit of a sneak peek around yesterday, the Amazon Flex product. I mean, do you feel like—that's just one example—I mean, do you feel like there's a means of pressing the advantage over the long term in terms of getting customers like that to participate in funding rewards? I mean, that's obviously a clear positive. I just wonder if you could frame up if that's a sort of sustainable economic model given the size of the customers.
Dan Henry (CEO and President)
Yeah. I think that's just an example of the sort of things that we're going to want to explore with our partners. It is part of our new approach around our partner strategy of how can we create compelling solutions. Let's say we have a partner who is a retailer. We have a bank. We have the ability to—we can open up with very little friction a digital wallet that can reside in the apps of our partners. That's what we do now. We could create credit-building tools for consumers with our partners. We can actually even create small, low-risk loan products with our partners. We can, together with our partners, just as you mentioned, create rewards products for the consumers.
That's where I get real excited about what we're doing here is if you think about with Go2bank, we are very focused in creating powerful products and solutions for our direct-to-consumer business. Those products and solutions that we create, we can easily expand and offer those to our partners. Whereas we can market and we can reach a couple, two, three, four, five, six, 10 million customers on our own. We can take some of the products and solutions that we have created, bring them to some of our partners, and we can then be reaching consumers in the tens to hundreds of millions at a time. Yeah, you're spot on in terms of from a long-term perspective of being able to work with and engage with these partners. We have the opportunity to reach a very, very large number of consumers in this country.
Andrew Jeffrey (Managing Director)
Thank you.
Dan Henry (CEO and President)
Thank you.
Operator (participant)
The next question comes from Ramsey El-Assal of Barclays. Please go ahead.
Ramsey El-Assal (Director and Equity Research Analyst of Payment,Processors, and IT Services)
Hi. Thanks so much for taking my question tonight. I wanted to ask you about 1099 and gig economy and the opportunity for the company. I mean, given your investment in Gig Wage, the Amazon product, you already have an Uber product out there. Should we view this as sort of almost the primary opportunity for BaaS when you talked about those kind of pipeline was full and potentially announcing new partners soon? Is this a real strategic pivot for the company kind of into that developing products specific to that kind of opportunity spend?
Dan Henry (CEO and President)
No, it's not, Ramsey. It's not a pivot. It's not a new direction. It is an important growth channel for us. I kind of—I'd rather ride a wave than paddle a canoe. I look for waves. To me, the gig economy is a wave. It's a growth wave. If you think about our partnership with Uber, this investment partnership with Gig Wage, other potential solutions that are out there, we're becoming well-equipped to serve the gig worker, just as we are very well-equipped to serve a low- to moderate-income consumer, just as we are working to be very well-equipped to serve a small business. All of those avenues will leverage the common denominators that we have of a bank, reload network, customer service, bar controls, etc. It's absolutely a great question.
I want to be clear that this is not a—I am not schizophrenic. This is not a switch or pivot. It is a way to basically take these assets that we have and the skills that we have built over decades, and how do we stack new opportunities on top of them to just drive incremental revenue with attractive margin.
Ramsey El-Assal (Director and Equity Research Analyst of Payment,Processors, and IT Services)
That makes a ton of sense. My follow-up is on Go2bank. I am just wondering if you could kind of encapsulate for us what is different about this offering relative to other kind of prior mobile-first Green Dot products like Unlimited and GoBank. Is it more the distribution? Is the product structure itself sort of different? I was just wondering if you could elaborate there a little bit.
Dan Henry (CEO and President)
Yeah. Thank you for this question, Ramsey. The big difference is our commitment. Go2bank is very different from all products that have been launched in the history of Green Dot because Go2bank is it. From this point forward, there's no more NASCAR. There's no more puppy dog cards. There's no more Unlimited cards. It's Go2bank. With Go2bank, it's going to be Go2savings. There's going to be Go2 other solutions that are feature functionality tied to this Go2bank account for our consumer that we want to take this product. Oh, and by the way, it's a real bank account because it's issued by Green Dot Bank. It's not a marketing company who's hanging off of someone else's BIN. This is a Go2Bank-issued product so that we can—we will really be able to create products and solutions to serve the full financial needs of our customers.
Our goal here and our intent is you will not be hearing a new product launch every single year from Green Dot. You will be hearing about feature functionality additions to the GoBank product on a regular basis for years to come.
Ramsey El-Assal (Director and Equity Research Analyst of Payment,Processors, and IT Services)
Okay. All right. Thanks so much. That's super helpful.
Dan Henry (CEO and President)
All right. Thank you, Ramsey.
Operator (participant)
The next question comes from Andrew Schmidt of Citi. Please go ahead.
Andrew Schmidt (Equity Research Analyst of Fintech,Software and Payments)
Hey, Dan. Hey, Jess. Thanks for taking my questions here.
Dan Henry (CEO and President)
Sure, Andrew.
Andrew Schmidt (Equity Research Analyst of Fintech,Software and Payments)
First question on new customer acquisition. Now that we have a couple of quarters post-stimulus under our belt, what if you talk about what you're seeing in terms of organic account growth in the quarter, for lack of a better term, meaning are you seeing an elevated level of net new ads from non-stimulus, non-unemployment benefit customers? Any help there would be much appreciated.
Jess Unruh (CFO)
That's a good question, Andrew. I think it's hard to really pull apart what's not stimulus and what is stimulus. I can't say that we have seen an elevated amount of new customers coming into the system. Again, it's sort of hard to dissect whether they're coming in for non-stimulus versus stimulus reasons. Across Q2 and Q3, we saw a significant amount of new acquisition both in retail and then the strength of the direct business, which is in part the better marketing efforts we have and the better cost-per-funded, but also in large part to additional stimulus funds and just the attractiveness of our products given this digital acceleration.
Andrew Schmidt (Equity Research Analyst of Fintech,Software and Payments)
Understood. Okay. That's good context. Just my follow-up, I might as well ask it. There's obviously a lot of news about M&A out there. Dan, I was hoping to get your view about just philosophically how you feel about scale acquisitions versus capabilities, just philosophically, just interested to kind of get your viewpoint on just the M&A front.
Dan Henry (CEO and President)
My viewpoint in terms of what are we looking to grow through acquisitions or just—I am not real clear what you are asking.
Andrew Schmidt (Equity Research Analyst of Fintech,Software and Payments)
Yeah. The question is how much of a priority is M&A versus growing organically? Then for M&A, are you open to more scale acquisitions or would it be more capability-focused?
Dan Henry (CEO and President)
Got it. Got it. What I really like about what we have in front of us at Green Dot is we have real significant growth opportunities and potential without any acquisition. I've always said that your ROE on organic growth is much higher than acquired growth. I'm a big fan and believer of organic growth. To me, it comes with a lot fewer problems. You're not trying to integrate a new culture or whatever out there. You know what you've got when you are signing customers and growing customers and laying them upon your existing infrastructure and using your core competency. We do not need acquisitions to grow. I want to make sure that's perfectly clear. However, from a standpoint of are we open? Absolutely.
We're absolutely open to acquisitions that will enhance our functionality, accelerate our ability to grab some opportunities, or just that kind of incrementally add to our current volume. Yeah, those would be from small add-ons to larger that might be even transformational.
Andrew Schmidt (Equity Research Analyst of Fintech,Software and Payments)
Okay. Understood. Thanks, Dan. Thanks, Jess. Appreciate the help.
Dan Henry (CEO and President)
Yep. Yep. Thanks.
Operator (participant)
The next question comes from Steven Kwok of KBW. Please go ahead.
Steven Kwok (Managing Director)
Hi. Thanks for taking my question. The first one I had was just around the early look into 2021. I know you called out roughly $4 billion of stimulus and unemployment benefits. Should we think of that as being around a $40 million revenue headwind if you just use a roughly 1% interchange rate? Is there any early indications around what the margins on that could be? You mentioned there's a positive headwind, positive tailwinds around the new businesses. As of right now, do you feel like those can offset essentially what the headwinds could be for next year? Thanks.
Dan Henry (CEO and President)
Sure. Good question. Jess, you want to take it? You want me to take that?
Jess Unruh (CFO)
Yeah. Yeah, I can take it. Look, I think there's been a lot of puts and takes associated with COVID in 2020. Portions of our business were negatively impacted. We had higher dispute and call center costs. While other portions of our business were positively impacted by accelerated demand for digital payments and the government benefits. It's really hard to sort of isolate the direct impact of the government benefits specifically. I think as you think about 2021, trends in gross dollar volume per active will really start to normalize from what you've seen in Q2 and Q3. Ultimately, we believe we'll be in a better place for the long term because of that digital adoption.
I think the way I think about sort of what that GDV means, I think about it in GDV yield as opposed to necessarily just interchange because there's fees and other things associated with it. We can speak more to our 2021 guidance on the next call.
Steven Kwok (Managing Director)
Got it. Separately, there was an article out there around where perhaps buying the Credit Karma tax business. I was just wondering, is this something that you guys would possibly look at? Separately, given that there would be helping input around that, I know you guys have a relationship with Intuit as well. Just wondering in terms of your relationships with Intuit, how long are those contracts locked up for? Thanks.
Dan Henry (CEO and President)
I believe we announced that we recently renewed the Intuit contract. We have a number of years now on that new contract remaining. We do not want to get in the tax preparation business. Again, that opportunity did come across the desk, but we decided that is not in our sweet spot of skills, capabilities, and where we see our growth potential.
Steven Kwok (Managing Director)
Great. Thanks for taking my question.
Dan Henry (CEO and President)
Absolutely. Thank you, Steven.
Operator (participant)
The next question comes from George Mihalos of Cowen. Please go ahead.
George Mihalos (Managing Director of FinTech and Equity Research)
Hey, guys. Thanks for taking my questions. Just going to ask two quick[crosstalk]—hey, Dan. Ask two quick modeling questions, and then I'll hop off. I guess the first, can you quantify, or maybe I missed it, how much of an impact the non-renewal from the reload partner will be? How much of an impact that's expected to have in the fourth quarter? The lower interchange yield, which I think was attributed to larger transaction size, would you expect that to sort of tick back up in the fourth quarter and sort of be more in line with what we've seen over the first half of 2020? Thanks. I'll pop off.
Jess Unruh (CFO)
Yeah. I'll take that one. Yeah, on the latter question around interchange yield, we're already starting to see some of that normalize back to what we've seen in the past of, say, 120 basis points. The further we get from those stimulus funds coming on, the more the interchange rate is normalizing. To your first question around the reload partner, we're obviously focused on generating strong cash flows and margins. Sometimes that means you need to walk away from deals. I think of Q4, we expect cash transfer volume to be down year over year. We expect the margins of our money processing business to be up. As we think about the future, we have a pretty active BD pipeline for new reload partners and intend to add new partners next year.
As you think about Go2bank and our consumer products in general and us bringing them back to health as we grow our BAS partnerships, etc., we believe the reload network profit and margin will improve despite losing some third-party reload volume because we make more money off of reloads on our own products than we do on our third-party products.
George Mihalos (Managing Director of FinTech and Equity Research)
Thank you.
Operator (participant)
The next question comes from Ashish Sharma of Deutsche Bank. Please go ahead.
Ashish Sharma (Director and Regional Head of KYC Periodic Reviews,Remediation,and EDR)
Thanks for taking my question. I wanted to focus on the small business accounts. You talked about Intuit and Cabbage. I was just wondering if you could help if you can talk about how big that addressable market is and your strategy going forward. Do you expect to work with more partners, or is there also a strategy to go direct and try to address the small businesses directly? Finally, is the GoToBank thing also the solution for the small business customers? Thanks.
Dan Henry (CEO and President)
Yeah. Hey, Ashish. Go2bank is not the solution for the small business customers. However, if you think about it, a lot of small businesses in this country are sole proprietors and individuals. With the feature functionality on Go2bank, it is very possible that small independent operators, sole proprietors may pick up our Go2bank product and make it their account. That's definitely not the intent or the design of the product. Our opportunity around small business in the country, I mean, it's very large. There's millions of small businesses in the United States. Our partner, QuickBooks, they have 8 million small businesses alone that use their solution. As we talked in the last call, I was in a press release, and you could do your research and see those numbers.
QuickBooks is offering a QuickBooks Cash account, which is basically a bank account that's operated by Green Dot Bank. We receive income off of that account. We're very enthusiastic about that growth potential with QuickBooks. If they can just get 12%-15% penetration into their base, there will be a million customers, a million small business accounts on our platform. There is a similar opportunity with Kabbage, where we have a bank account and debit card issued for Kabbage small businesses. With Kabbage now being part of American Express, the growth potential there, the marketing impact of American Express behind that product is very exciting. I can't quantify it for you right now, but it is bigger than a bread box.
Ashish Sharma (Director and Regional Head of KYC Periodic Reviews,Remediation,and EDR)
That's great. That's good. Maybe just a question on election outcomes and potential for a small second stimulus. How should we think about impact, if any, on Green Dot just because a lot of the customers are unbanked, underbanked, or at the lower end of the credit segment?
Dan Henry (CEO and President)
Green Dot customers, by the nature of having Green Dot product, are no longer unbanked. Another stimulus check, like the prior ones, would be a positive to Green Dot. It will be positive in ways the others have been positive. It will be positive in the immediate term of just additional funds to our customers will come onto the account and will be spent and generate revenue for Green Dot. It will also create additional impetus for cash-based consumers to adopt our product and engage in electronic payment methods, which we believe is—we believe and we are already benefiting from kind of an accelerated change in consumer behavior around electronic payments.
Ashish Sharma (Director and Regional Head of KYC Periodic Reviews,Remediation,and EDR)
Okay. Thanks. That's very helpful.
Dan Henry (CEO and President)
Yeah. Thank you, Ashish.
Jess Unruh (CFO)
Thanks, Ashish.
Operator (participant)
The next question comes from Jeff Cantwell of Guggenheim Securities. Please go ahead.
Jeff Cantwell (Managing Director of Fintech Equity Research)
Hey, Dan. Nice to see you guys performing well this quarter. Can I just touch on a couple of the key themes here by asking you two very simple questions? I hope to get a serious response. First, can you tell us what some of the learnings have been this past quarter as you're managing through this pandemic? Where are you growing more confident about Green Dot's revenue opportunity going forward? We've certainly noticed your comments about small businesses, which I think are very timely, for example. Where are you getting more confident, and where are you, conversely, thinking more pragmatically about the company? I have a follow-up after that. Thanks very much.
Dan Henry (CEO and President)
You said you're going to ask a question, and you hope to get—I think you said a serious or maybe a non-flippant answer. I mean, I feel more confident about all areas of the company. I'm feeling we still have a lot of work to do. I will not—I'm not going to sugarcoat that. We've got a lot of bad ingrained habits that we have to change across the organization. I'm feeling really a seismic shift inside the company to where we have a tremendous amount of talented people who really care about what we do, or they care about doing a good job.
As myself and other leaders are providing clear direction in terms of, "Here is what we need to do and why, and here's how we generate revenue, and here is why margin is important," the light bulbs are going off, and people are really starting to do the right thing. I see we've got growth potential in all areas of our business. I'll pick on retail because I think everyone kind of believes just in America today, with the shift to so much being online, that retail, as an entire sector across the economy, has a headwind. For our business, we're not immune from the challenges if foot traffic is dropping in retailers. We're in some very interesting conversations with a number of our retail partners now.
How can we expand our footprint, not just in their store, but into the daily lives of their consumers? How can we expand financial services and offerings to their customers and partnership? I believe that we've got growth potential in our pay card business, in our tax business, in our retail business, certainly in our direct-to-consumer business. What I love about all that is you think about the competitive advantage that that affords us in terms of striking out on powerful, disruptive, large opportunities with a lot of our BaaS partners. We've got a bank. All the assets I've already rattled off: reload network bank, call center operations, fraud controls, technology stack. All of those solutions are "bought and paid for" with our existing core businesses, which are all growing.
If we want to get creative and aggressive with some major partners so we can "collectively change the world," we've got that opportunity.
Jeff Cantwell (Managing Director of Fintech Equity Research)
Okay. That's great color. That leads to my follow-up. With Go2bank, can you drill down a little bit for us on the strategy there for customer acquisition? I'm hearing you on the Go2bank value proposition. I'm understanding the strategic rationale for making this the Go2 product. Dan, if I'm a consumer in the year 2020, I have a number of options, right? I have these NeoBank options. I have traditional bank options, and I have Green Dot. My question to you is, and given all your experience in the industry, I wanted to ask if you can help investors understand how you're going to drive new customers to Green Dot. Thanks.
Dan Henry (CEO and President)
Sure. Yeah. I think that what's important to say, and I feel I've said it for the last 10 years or 15 years, I mean, the total available market is tremendous, okay? It's not a zero-sum game. Just as there is Chase and Wells Fargo and Bank of America and Compass and BBVA, I mean, there is room for a significant number of FIs, if you will, offering solutions to consumers. We will market in our traditional fashion that we have done. We're going to do it much—in my opinion, we're going to do it better, smarter. We're going to do a significant amount of research so we spend our money effectively. We've done a tremendous amount of research around the name Go2bank and the design of Go2bank and our research around the products we're offering and how we're pricing them.
We will get a better return on every one of the marketing dollars that we spend. I know this—I just know this. I know this from my days at NetSpend. I know this from sitting on the board and being an investor in other prepaid companies over the years, that if you build a good, solid product and you market it effectively, you will get your fair share of customers. We will get our fair share of customers. Yeah, customers will have to choose between us and a few other offerings. Our fair share of customers will choose our solution over others, and we will grow that business.
Jeff Cantwell (Managing Director of Fintech Equity Research)
Okay. Great. Appreciate it. Thanks very much.
Dan Henry (CEO and President)
Absolutely. Thank you.
Operator (participant)
This concludes our question and answer session. The conference has now also concluded.