That's funny, I hadn't heard of Green Dot until a couple weeks ago. I received a Green Dot card as a gift and was frustrated with the required phone registration process. They immediately asked for name, DoB, and SSN, apparently because the PATRIOT act requires it. This seemed like a pretty big invasion of privacy for something I didn't personally opt into. They will also kindly deduct $5.95/month from the balance every month that it goes unused (which is illegal in many states, as far as I know).
Fortunately they will cut you a refund check if you ask for one on the phone. Note to (monetary) gift givers out there: cash is still king.
the problem, I think, is that anyone offering 'private' electronic money is going to go the way of e-gold. The government simply won't tolerate it.
(I'm not making any statement about the legitimacy of the government blocking private currencies... I'm just pointing out that the historical evidence has been that the government won't tolerate private electronic money.)
I don't think the government minds alternative currencies. The possibility of easily shifting large amounts of currency anonymously, I think, is what the government has a problem with. Because green dot checks id, etc... it's not a problem. If E-gold asked for your ID, your SSN and reported things as a bank would from the beginning, I don't think e-gold would have had an insurmountable problem, either.
By "private" I meant "allows anonymous users" not "owned by someone other than the government." which is very unclear. I've been up all night working and my grammar is degraded.
If someone could buy a prepaid debit card for cash without showing ID, and add money to it without showing ID, and spend from it without showing ID, then Alice could buy a card, Bob could load $5000 onto it, and Carol could read the card number over the phone to David. To achieve the same kind of anonymity today, someone would have to accumulate $5000 in cash and put it in David’s physical possession.
In 2007 the proprietors of the e-gold service were indicted by the United States Department of Justice on four counts of violating money laundering regulations. In July 2008 the company and its three directors pleaded guilty to charges of "conspiracy to engage in money laundering" and the "operation of an unlicensed money transmitting business" in the U.S. District Court for D.C.[1] The company faces fines of $3.7 million.
As of November 2009 the company's website states "As e-gold Users are aware, by agreement with relevant authorities including the U.S. Department of Justice, e-gold has suspended all e-metal Spend activity subject to meeting certain licensing requirements. As a result, e-gold Users have been unable to engage in any transactions, including exchanges, that would require either receiving or making an e-metal Spend from the accounts they control. We are, however, working diligently to develop a means by which account Owners will be able to access the value in their account".
I don't get it. Did they actually do something wrong (on purpose?) or did the gubment make up the charges because they didn't want competition for the dollar?
Could someone start a legit service like this today?
>Did they actually do something wrong (on purpose?)
I personally believe the e-gold guys were working in good faith to produce an alternate currency, one that functioned like cash, but that was backed by actual gold. However, it is generally agreed that the majority (or at least a significant portion) of the business transacted with e-gold was illegal in nature, and much like cash, once you spend your e-gold, you can't call up the e-gold company and tell them to reverse the transaction. you have to get the other party to return the money, and much like cash transactions in the real world, that can be quite difficult. In fact, the anonymous and electronic nature of e-gold made it better suited for many criminal activities (especially fraud) than cash, as the fraudster never had to actually meet his mark.
Obviously, all this caused a lot of complaints. Add in the fact that the anonymous nature of E-gold meant that most people weren't paying taxes on the transactions in question, and the government was going to step in and shut them down.
Now, I'm no lawyer, but I'd bet that if you set up something like e-gold tomorrow and made it non-anonymous, that, by itself, would make the thing largely acceptable. You would probably need to set yourself up as a bank or something, and you would probably need to set up something to make it easier for your customers to figure the taxes they owe, (and for the IRS to figure the taxes they owe) but I think the big barrier was anonymity.
As a secondary step, some sort of dispute resolution protocol like paypal has would probably also help, but I believe that is secondary to the first concern.
It isn't specifically the Patriot Act, it is a Treasury Regulation called "Know Your Customer (KYC)" aimed at preventing money laundering. We've had similar requirements for essentially forever, but they became more explicit recently. The specific mechanism is up to the individual bank / financial services firm.
Yes. Another prepaid card company called NetSpend filed to IPO this year too. The original founders of NetSpend, Roy and Bertrand Sosa, are hispanic immigrants and pioneered the prepaid model before GreenDot after recognizing a gap in the industry. As the story goes, they created NetSpend with only $750 in their apartment living room.
They later left NetSpend to found MPOWER Group in 2007. Our company was acquired by one of the MPOWER companies this year, and we couldn't be happier about the leadership and long-term vision here. The Sosa brothers are extremely genuine people. This time they're taking a closer look at banking and underserved markets, and it's a great time for the right kind of innovation in this industry if you ask me.
Last ~2 years have been spent building out product and a multinational infrastructure, I think you'll start hearing more about MPOWER in the near future as they ramp up marketing and social media efforts here in the States.
Simon Malls sells non-refillable American Express cards for $2.99; no monthly fee. There is no billing address associated with the credit card and in person at their malls they don't check ID for orders under a certain dollar amount.
They are able to do this because the amount of balance on the card, and the features of the card (not certain which ones) allow them to operate this card as a gift card, rather than a "Bank Account" which is what the PATRIOT ACT defines the other such cards as.
AccountNow is another one and has a much higher limit for how much you can fund to your account and keep there ($10,000 vs $2,500.) These services are quite valuable for people who are unable to get checking accounts because they got themselves reported to the "chex system" which is basically the equivalent of a bad credit report but only used by banks.
There are some negatives to Green Dot's business model. Here are a few things that were pointed out to me last week:
-Barriers to entry are pretty low. Walmart has already lowered fees from $9 to $5 for a new card and from $5 to $3 for monthly maintenance. NetSpend, AccountNow, Russell Simmons' RushCard are all in this business and more competitors appear to be sprouting up. Blackhawk Networks (owned by Safeway) just announced they are entering this business.
-50% quarterly churn rate. That means every 6 months Green Dot has to find an entirely new customer base to replace the one that left. My guess is the rate is high because of the monthly fees.
-A lot of people will be wowed by the company's massive growth rate (722k stores in 2006, 3.1M stores in 2009). But it is all almost entirely due to Walmart adopting their product. I am not sure if depending on Walmart for your future success is entirely beneficial, they have a reputation for bringing costs to the bare minimum. The variable costs for issuing a new card are so low that I think this is a major possibility.
-Then there is the outrageous valuation. 46x earnings, 25x book value. This is a pretty pricy company and I think competitors are going to pounce on their space, bringing down margins and customer activations. A 10% drop in pricing with a 30% drop in customer activations makes the company barely profitable.
In Jan 2011 the lock up on insider sales goes away. I expect during that time we'll see a ton of selling.
Also if you want to learn about this industry here are some great resources:
paybefore (magazine)
www.cfsi.org (Center for Financial Services Innovation)
I wrote this in the TC comments, and will echo it here:
"This article was not very well written IMHO. The big exit was for the Tech Coast Angels investors who had over 100x. Criticizing Zappos for their 1B+ exit vs Green Dot's 2B exit is an awful argument. Not only are they both in the low billion dollar range, but Sequoia forced Zappos to sell. This was widely publicized in Tony's blog post about it.
I've heard Steve speak give a keynote, and he had a standing ovation. Truly an inspiring entrepreneur. He deserves every cent he earns from the IPO."
I hate this product. My relatives give them as gifts because our culture needs to wrap actual money in some level of indirection in order to make it feel "gifty."
The cost of that -- $2-6/mo -- is too damn high, and is the basis of the profit of this company.
What always boggles my mind about about startups like this is the fact that their very existence is dependent on a giant company that could roll over and squash the life out of them. Their first product was a pre-paid Mastercard...which implies that they actually had to approach Mastercard with their idea. The idea makes sense and is a bit of a no-brainer...and one can suppose that Mastercard themselves had both the technical capability and resources to do it on their own...so what stopped them? How can a small idea guy feel comfortable exploring ideas like this with large corporate giants?
As I understand it: Mastercard's customers are the banks, and not the end users who hold the cards with their logos on them. Their job is to operate a network that interconnects the banks so they can process transactions for each other.
Them offering prepaid (or even straight-up credit) cards to end users directly would be a huge shift in how and why they do business.
Fortunately they will cut you a refund check if you ask for one on the phone. Note to (monetary) gift givers out there: cash is still king.