What changed in this filing

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Item 1A. Risk Factors

2024-08-09 compared with 2024-05-10 · 35 added, 34 removed, 328 unchanged (17% of the section changed)

2 unchanged sentences

A significant portion of our operating revenues are derived from our BaaS partners and the products and services sold at our largest retail distributors.

Approximately 46% of our total operating revenues for the three months ended March 31, 2024 was generated from a single BaaS partner.

Additionally, as a percentage of total operating revenues, operating revenues derived from products and services sold at the store locations of Walmart was approximately 10% for the three months ended March 31, 2024.

Approximately 54% and 50% of our total operating revenues for the three and six months ended June 30, 2024, respectively, was generated from a single BaaS partner.

We expect that Walmart will continue to have a significant impact on our operating revenues in future periods, particularly in our Consumer Services segment.

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In addition, any publicity associated with the loss of any of our large retail distributors, significant BaaS partner or third-party processors could harm our reputation, making it more difficult to attract and retain consumers, BaaS partners, third-party processors and other retail distributors, and could lessen our negotiating power with our remaining and prospective retail distributors, BaaS partners and third-party processors.

The term of our Walmart Money-Card agreement (which governs the MoneyCard program) expires on January 31, 2027, unless renewed under its automatic renewal provision, which provides for a one-year extension.

The term of our Walmart MoneyCard agreement (which governs the MoneyCard program) expires on January 31, 2027, unless renewed under its automatic renewal provision, which provides for a one-year extension.

Our contracts with Walmart and our other largest retail distributors can in limited circumstances, such as our material breach or insolvency or, in the case of Walmart, our failure to meet agreed-upon service levels, certain changes in control, and our inability or unwillingness to agree to requested pricing changes, be terminated by these retail distributors on relatively short notice.

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To the extent these competitors continue to take market share at our expense, we expect that the purchase and use of our products and services would decline.

If GO2bank is not successful in the long-term or our competitive position deteriorates further, we may have to increase the incentives that we offer to our retail distributors and our tax preparation partners, or directly to consumers, and decrease the prices of our products and services, any of which would likely adversely impact our results of operations.

In order to compete across the markets served by our Consumer Services and Money Movement Services segments, we may have to increase the incentives that we offer to our retail distributors and our tax preparation partners, or directly to consumers, and decrease the prices of our products and services, any of which would likely adversely impact our results of operations.

We may not keep pace with the rapid technological developments in the industries in which we compete and the larger electronic payments industry.

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However, our ability to develop or transition to new services and technologies may be inhibited by a lack of industry-wide standards, by difficulties encountered in our development of new services and technologies, by resistance from our retail distributors, BaaS partners, third-party processors or consumers to these changes, or by the intellectual property rights of third parties.

For example, we recently elected to discontinue a new core banking system under development in connection with a change in strategy.

These and other initiatives are inherently risky, and they may not be successful or may have an adverse effect on our business, financial condition and results of operations.

Investments in new services and technologies or enhancements are inherently risky, and may not be successful or may have an adverse effect on our business, financial condition and results of operations.

Fraudulent and other illegal activity involving our products and services could adversely affect our financial position and results of operations.

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Our fraud detection and risk control mechanisms may not prevent all fraudulent or illegal activity.

To the extent we incur losses from disputed transactions, our business,

results of operations and financial condition could be materially and adversely affected.

Additionally, our accountholders can incur charges in excess of the funds available in their accounts, and we may become liable for these overdrafts.

We offer an optional overdraft protection program service on certain demand deposit account programs that allows eligible accountholders who opt-in to spend up to a pre-authorized amount in excess of their available card balance.

For accountholders who are not enrolled or do not meet the eligibility requirements of our overdraft protection program, we generally decline authorization attempts for amounts that exceed the available accountholder’s balance, however, the application of card association rules, the timing of the settlement of transactions and the assessment of the card’s monthly maintenance fee, among other things, can still result in overdrawn accounts.

To the extent we incur losses from disputed transactions, our business, results of operations and financial condition could be materially and adversely affected.

Additionally, our

accountholders can incur charges in excess of the funds available in their accounts, and we may become liable for these overdrafts.

For accountholders who are not enrolled or do not meet the eligibility requirements of our overdraft protection program, we generally decline authorization attempts for amounts that exceed the available accountholder’s balance, however, the application of card association rules, the timing of the settlement of transactions and the assessment of the account’s monthly maintenance fee, among other things, can still result in overdrawn accounts.

Our overdraft exposure in these instances arises primarily from late-posting.

A late-post occurs when a merchant posts a transaction within a payment network-permitted time frame, but subsequent to our release of the authorization for that transaction, as permitted by card association rules.

Under card association rules, we may be liable for the transaction amount even if the accountholder has made additional purchases in the intervening period and funds are no longer available on the card at the time the transaction is posted.

We maintain reserves to cover the risk that we may not recover these amounts due from our accountholders, but our exposure may increase above these reserves for a variety of reasons, including our failure to predict the actual recovery rate accurately.

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If a retail distributor or other banking partner becomes insolvent, files for bankruptcy, commits fraud or otherwise fails to remit proceeds to our card issuing bank from the sales of our products and services, we are liable for any amounts owed to our customers.

As of March 31, 2024, we had assets subject to settlement risk of $876.1 million.

As of June 30, 2024, we had assets subject to settlement risk of $915.8 million.

Given the possibility of recurring volatility in global financial markets, the approaches we use to assess and monitor the creditworthiness of our retail distributors or other banking partners may be inadequate, and we may be unable to detect and take steps to mitigate an increased credit risk in a timely manner.

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Worsening economic conditions, high rates of inflation, or other potential causes of economic distress could materially and adversely impact our business and financial results.

Global and macro-economic factors have resulted and may continue to result in high inflation rates, interest rates, and unemployment rates, leading to economic challenges for consumers and our retail distributors and other partners as well as reduced transaction and spending volumes on accounts.

Global and macro-economic factors have resulted and may continue to result in high inflation rates, interest rates, or unemployment rates, leading to economic challenges for consumers and our retail distributors and other partners as well as reduced transaction and spending volumes on accounts.

Additionally, these effects increase the settlement risk from our retail distributors and banking partners and could cause us to experience contraction in the number of locations within our network of retail distributors due to store closures or other developments, with attendant negative impacts to our operating revenues and results of operations.

If current market conditions persist or deteriorate, we may decide to adjust pricing to account for an increasing cost of funds and increased credit risk in a down economy, and thereby erode our margins and negatively impact our future financial performance and the price of our Class A common stock.

If current market conditions persist or deteriorate, we may decide to adjust pricing to account for an increasing cost of funds and increased credit risk, and thereby erode our margins and negatively impact our future financial performance and the price of our Class A common stock.

Additionally, significant inflationary pressure increases borrowing rates, and we may not be able to fully offset such higher costs through rate increases.

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The electronic payments industry, including the prepaid and debit card financial services segment within that industry, depends heavily upon the overall level of consumer spending.

An economic recession may result in us experiencing a reduction in the number of our accounts that are purchased or reloaded, the number of transactions

involving our cards and the use of our reload network and related services.

A sustained reduction in the use of our products and related services, either as a result of a general reduction in consumer spending or as a result of a disproportionate reduction in the use of card-based payment systems, would materially harm our business, results of operations and financial condition.

An economic recession may result in us experiencing a reduction in the number of our accounts that are purchased or reloaded, the number of transactions involving our cards and the use of our reload network and related services.

A sustained reduction in the use of our

products and related services, either as a result of a general reduction in consumer spending or as a result of a disproportionate reduction in the use of card-based payment systems, would materially harm our business, results of operations and financial condition.

We must be able to operate and scale our technology effectively.

9 unchanged sentences

As the financial services industry evolves, consumers may find prepaid financial services or demand deposit accounts to be less attractive than other financial services.

Consumers might not use prepaid financial services or demand deposit accounts for any number of reasons, including the general perception of our industry, new technologies, a decrease in our distribution partners’ willingness to sell these products as a result of a more challenging regulatory environment or other factors outside of our control such as an economic recession.

If consumers do not continue or increase their usage of prepaid cards or demand deposit accounts, including making changes in the way such products are funded, our operating revenues may decline.

66 unchanged sentences

If regulators believe that we or Green Dot Bank have not complied with any of these requirements, we may become subject to formal or informal enforcement actions, proceedings, or investigations, which could result in regulatory orders, penalties, restitution, restrictions on our business operations or requirements to take corrective actions, which may, individually or in the aggregate, affect our results of operations and restrict our ability to grow.

For example, we and our subsidiary bank received a proposed consent order from the Federal Reserve Board relating principally to various aspects of compliance risk management, including consumer compliance and compliance with AML regulations.

The proposed consent order includes proposals for civil money penalties related to these issues and while the amount of any monetary penalty and the nature of any other relief the Federal Reserve Board may seek to obtain from us have not yet been determined, we accrued an estimated liability of $20 million related to the proposed consent order during the three months ended December 31, 2023 and estimate that the aggregate range of reasonably possible losses is up to $50 million as of March 31, 2024.

However, there can be no assurances regarding the timing, terms, and conditions of any final resolution of these matters with the Federal Reserve Board.

For example, in July 2024 we and our subsidiary bank received a consent order from the Federal Reserve Board relating principally to various aspects of compliance risk management, including consumer compliance and compliance with AML regulations.

The consent order included a civil money penalty related to these issues in the amount of $44 million which was subsequently paid in July 2024.

We previously accrued an estimated liability of $20 million related to the consent order during the three months ended December 31, 2023, and the remaining portion was accrued during the three months ended June 30, 2024.

Additionally, in response to enhanced regulatory scrutiny, we have increased our investment in our regulatory and compliance infrastructure and will continue with further increases.

11 unchanged sentences

As a result of the final rule, Green Dot Bank reclassified most of its deposits as non-brokered.

If our reclassification is deemed non-compliant, we could be subject to regulatory fines and penalties, increased regulatory oversight, restrictions on our activities, and increased litigation risk.

Failure by us and our business partners to comply with applicable laws and regulations could have an adverse effect on our business, financial position and results of operations.

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In particular, our products and services are subject to an increasingly strict set of legal and regulatory requirements intended to protect consumers, such as various disclosure and consent requirements, mandated or prohibited terms and conditions, prohibitions on discrimination based on certain prohibited bases, prohibitions on unfair, deceptive or abusive acts or practices, or to help detect and prevent money laundering, terrorist financing and other illicit activities.

For example, we are subject to the AML reporting and recordkeeping requirements of the BSA, as amended by the PATRIOT Act.

Monitoring and complying with all

applicable laws, regulations and licensing requirements can be difficult and costly.

For example, we are subject to the AML reporting and

recordkeeping requirements of the BSA, as amended by the PATRIOT Act.

Monitoring and complying with all applicable laws, regulations and licensing requirements can be difficult and costly.

Failure to fully comply with these requirements exposes us to the risk of being required to undertake substantial remediation efforts and to the risk of, among other things, enforcement actions, lawsuits, monetary damages, fines, penalties and reputational harm, any one of which could have a material adverse impact on our results of operations, financial condition or business prospects.

15 unchanged sentences

Furthermore, a material portion of our operating revenues is derived from interchange fees.

For the three months ended March 31, 2024, interchange revenues represented 11% of our total operating revenues, and we expect interchange revenues to continue to represent a significant percentage of our total operating revenues.

For the three months ended June 30, 2024, interchange revenues represented 12% of our total operating revenues, and we expect interchange revenues to continue to represent a significant percentage of our total operating revenues.

The amount of interchange revenues that we earn is highly dependent on the interchange rates that the payment networks set and adjust from time to time.

The enactment of the Dodd-Frank Act required the Federal Reserve Board to implement regulations that have substantially limited interchange fees for many issuers.

While the interchange rates that may be earned by us and Green Dot Bank are exempt from the limitations imposed by the Dodd-Frank Act, federal legislators and regulatory

authorities have become increasingly focused on interchange fees, and continue to propose new legislation that could result in significant adverse changes to the rates we are able to charge and there can be no assurance that future regulation or changes by the payment networks will not substantially impact our interchange revenues.

While the interchange rates that may be earned by us and

Green Dot Bank are exempt from the limitations imposed by the Dodd-Frank Act, federal legislators and regulatory authorities have become increasingly focused on interchange fees, and continue to propose new legislation that could result in significant adverse changes to the rates we are able to charge and there can be no assurance that future regulation or changes by the payment networks will not substantially impact our interchange revenues.

If interchange rates decline, whether due to actions by the payment networks or future regulation, we would likely need to change our fee structure to offset the loss of interchange revenues.

7 unchanged sentences

Plaintiffs or regulatory agencies or authorities in these matters have sought and may seek recovery of very large or indeterminate amounts, seek to have aspects of our business suspended or modified or seek to impose sanctions, including significant monetary fines.

However, there can be no assurances regarding the timing, terms, and conditions of any final resolution of these matters with the Federal Reserve Board.

The consent order included a civil money penalty related to these issues in the amount of $44 million which was subsequently paid in July 2024.

Additionally, the monetary and other impacts of these actions, litigations, proceedings or investigations may remain unknown for substantial periods of time.

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We may unknowingly violate the intellectual property or other proprietary rights of others and, thus, may be subject to claims by third parties.

Because of the existence of a large number of patents in the mobile technology field, the secrecy of some pending patents, and the rapid rate of issuance of new patents, it is not economically

practical or even possible to determine in advance whether a product or any of its elements infringes or will infringe on the patent rights of others.

Because of the existence of a large number of patents in the mobile technology field, the secrecy of some pending patents, and the rapid rate of issuance of new patents, it is not economically practical or even possible to determine in advance whether a product or any of its elements infringes or will infringe

on the patent rights of others.

Regardless of the merit of these claims, we may be required to devote significant time and resources to defending against these claims or to protecting and enforcing our own rights.

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This would adversely affect our ability to implement our operating strategies and would have a material adverse effect on our financial condition.

Our revolving facility is set to mature in October 2024 and we continue to evaluate alternative sources of funding, which may subject us to similar covenant requirements in the future.

GENERAL RISKS

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Our net goodwill and intangible assets represent a significant portion of our consolidated assets.

Our net goodwill and intangible assets were $414.1 million as of March 31, 2024.

Our net goodwill and intangible assets were $407.9 million as of June 30, 2024.

Under generally accepted accounting principles in the United States, or ("U.S.

18 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors