Green Dot Corporation (NYSE:GDOT) Q4 2022 Earnings Call Transcript

Green Dot Corporation (NYSE:GDOT) Q4 2022 Earnings Call Transcript February 23, 2023

Operator: Good afternoon and welcome to the Green Dot Corp Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Tim Willi, Senior Vice President of Investor Relations and Corporate Development. Please go ahead.

Tim Willi: Thank you and good afternoon everyone. Today, we are discussing Green Dot’s fourth quarter 2022 financial and operating results. Following our remarks, we will open the call for your 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 will 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 maybe 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 would like to turn the call over to George.

George Gresham: Good afternoon, everyone and thank you for joining our fourth quarter and full year 2022 earnings call. Today, we will cover the following topics. We will review our fourth quarter and full year earnings along with our accomplishments for 2022. I will provide a preview of our 2023 guidance and priorities for the coming year. Jess will provide you more detailed 2022 results and 2023 guidance. And I will share some closing comments before opening it up to your questions. Let’s jump in. Our fourth quarter financial results came in at or above the high-end of our guidance range. Non-GAAP revenue of $337 million was up 5% year-over-year, EBITDA margins were 10.5% and non-GAAP EPS of $0.34 per share was up 26%. For the full year, we finished with non-GAAP revenue of $1.43 billion, up 3% year-over-year, EBITDA margins of 17%, non-GAAP EPS of $2.59 per share, up 17%, and free cash flow of $193 million.

As I recap 2022 first, let me say I am proud of our team and the focus and hard work they put into moving Green Dot forward. Let me take you through a few highlights. First, our fundamental performance. We finished the year ahead of initial guidance due to a combination of solid revenue performance, diligence in managing costs and improvements in key operational areas such as fraud and customer care. Second, our technology transformation. We completed our first platform conversion in the fourth quarter and are moving forward on remaining conversions. The first conversion went well and we intend to complete the rest of the conversions by midyear. Third, we had notable business wins. We had a significant business win in our BaaS division in late 2022, which we look forward to announcing soon along with continued wins in our Green Dot network and rapid! PayCard channels.

This was a result of hard work and coordination by our teams over the course of 2022 as they work together to ensure that our new customers fully understood the vision and capabilities we will have when we complete our technology conversions. Our focus on business development will accelerate with the previously announced appointment of Chris Ruppel as Chief Revenue Officer and as we move beyond our intense focus on technology changes. Given the significant roll-off of stimulus in 2021, the tremendous work and investment we put into our technology platform and the changes in CEOs during the year, again, I am very proud of what our teammates at Green Dot accomplished in 2022. Before returning to our plan and priorities for 2023, I want to address our guidance.

As you have seen in our press release, we have provided our 2023 guidance at the midpoint for revenue of $1.4 billion, EBITDA of $185 million, and EPS of $1.85 per share. This guidance is disappointing. And I want to address the underlying drivers upfront. First, we previously announced the loss of certain partners and those accounts started rolling off in the fourth quarter of 2022, but will have their most significant impact on 2023. While we have won accounts that are meaningful; they will not start contributing until late 2023 and into 2024. Second, our classic retail businesses underperformed our expectations in the second half of 2022 causing us to recalibrate the outlook for the business in 2023. Third, we are seeing changes in consumer behavior likely resulting from heightened inflation.

A greater percentage of purchase volume is going to core needs like groceries and fuel. This lowers our interchange revenue and consumers appear to be more actively seeking out surcharge free ATM networks weakening our ATM revenues. Fourth, the movement in the short end of the yield curve as we move through the back half of 2022 will result in less benefit and will pressure net interest income in 2023 versus 2022 due to the legacy nature of our partner agreements. Thus, the cost savings from the technology conversion will be less than expected as we have adjusted our conversion schedule to accommodate partner needs and new account onboardings. We continue to expect cost savings in the back half of 2023 with substantial benefit in 2024. Last, we will continue to invest in compliance-related activities, GO2bank and the capture of earned wage access business within our rapid! PayCard channel.

We are intensely focused on managing costs, including headcount, other non-employee costs and third-party vendor management. We undertook the unpleasant task of reducing our headcount in early 2023 and are continuing to work on all areas of our cost structure. Several issues negatively impacting our outlook have a clear line of sight to resolution, with several directly under our control. We expect to exit 2023 as a leaner, more nimble operation with much heavy lifting behind us operating in a marketplace that offers boundless opportunities for growth. Our efforts today in reducing our cost structure, enhancing our technology platforms, onboarding new customers along with the abatement of inflationary pressures on consumers and a moderating interest rate environment each serve to position our company well as we head into 2024.

Our specific priorities and goals for 2023 are to meet or exceed our financial targets and to put the company on track to grow both revenue and earnings in 2024. This means 2023 must and will be all about execution. In prior calls, I have talked about our vision and the vast market opportunity that is in front of us. We are focused on leveraging our differentiated assets and new technology infrastructure to be a next generation financial services platform, but we must have more than a vision. We must execute and deliver on the initiatives that move us toward that vision as efficiently as possible. That is what 2023 is all about, executing. I have made it clear to my executive team and the company as a whole that execution will be our number one focus.

Our execution must improve and we will build on the momentum that has been generated in 2022. The market and our investors deserve transparency and the ability to understand the accountability that we will hold ourselves too. I am often asked by investors, how do I judge your success? How do I know when you are accomplishing goals? As we move through 2023, I intend to continually update you on these key operational initiatives and how we are doing. It is my firm intent to make sure that you know what we are working on, when we intend to complete it, when it’s completed, and what it will mean. I will walk you through my checklist as we move through the year. These are complicated undertakings and it won’t be easy. But we have been doing this work to prepare ourselves for this moment.

Many Green Dot employees and the executive management team are listening to this call. I have consistently spoken with him about the topic of execution as we worked through our planning for 2023. They are now hearing me share it with you. It’s clear what we need to do this year. So, let’s summarize my priorities and the boxes that we need to check as we go through 2023. First, it is our technology transformation. This is our number one priority for the year and is essential to us achieving our vision. The transformation is a complicated process that requires the focus and effort of the entire organization. We completed the first conversion in the fourth quarter and had the remaining conversion slated for the first and second quarters. When completed, this will result in a minimum $35 million in annual expense savings, which will become visible as we exit 2023 and more fully realized in 2024.

Also and more importantly, on a longer term basis, we will have a platform that will provide us with much more robust and efficient product development, risk management and customer care capabilities to leverage across our franchise. Second is expense management. While we made progress in 2022, there is still work to be done. We are stewards of shareholder capital and I take that very seriously. Building a culture of stewardship, which includes accountability and expense management, is central to that evolution. Beyond the initial cost savings of the technology conversions, I am focused on maximizing the scale and cost advantages of our vertical integration and using that as a tool to win customers and gain market share. Last, a more disciplined approach to expense management and capital allocation will enable us to make investments in the company that will drive attractive growth in shareholder returns.

I am focused on earnings growth and return on capital. They are both central to the creation of shareholder value. Next up is the onboarding of new business. As mentioned previously, we signed a significant new customer in the BaaS business. We have also signed almost 1,300 new clients in our PayCard business and we signed 16 new partners under Green Dot network. And we still have a strong pipeline in both of these channels. Onboarding these relationships is an important priority as it will demonstrate to the market our ability to bring new customers onboard. Fourth is to build business pipelines and win more customers. While we win in the marketplace, particularly in our Green Dot network and rapid! PayCard channels, we need to build stronger pipelines around our BaaS and retail embedded finance offerings.

We are committed to optimizing how we build our business pipelines and winning more business. As our Chief Revenue Officer, Chris Ruppel’s top priorities are to better understand and manage our business development efforts and to create more alignment and collaboration across Green Dot to more fully leverage our assets to win business. This entails not only better managing our teams when pursuing and pitching business, but also identifying where there are new market opportunities and allocating resources to capitalize on those opportunities. It is our people who will accomplish these priorities. So, we need to ensure we are building a world class high performing workforce aligned on our mission, purpose and priorities and fiercely committed to achieving the goals we have set forth as an organization.

A strong culture of high performance, diversity and accountability translates to a talented workforce that is committed to serving our customers and partners while being responsible stewards of shareholder capital. We will be focused in 2023 in building this culture at the company with a particular focus on management leadership competencies. With that, let me turn it over to Jess to discuss the numbers and go through our guidance. Jess?

Jess Unruh: Thank you, George and good afternoon everyone. With the press release and slide deck, you should have all the necessary financial numbers and metrics. Let me provide some qualitative commentary about each segment to help you better understand the quarter and what’s going on in the business. Turning first to the Consumer Services segment comprised of our retail and direct-to-consumer channels. Like prior quarters, aggregate revenue declines largely remain a function of the decrease in active accounts in both channels. As a reminder, the declines are driven by very distinct dynamics within each channel as well as a small amount of stimulus benefit that still had a lingering impact in the early part of the fourth quarter that we believe is now fully behind us.

I covered the unique channel dynamics last quarter and I will quickly repeat those today. We believe our retail channel is facing headwinds associated with a secular change in consumer foot traffic and the competitive environment as consumers now have numerous direct-to-consumer options. In our direct channel, the declines are driven by two factors. First, we made a very deliberate decision at the beginning of 2021 to deemphasize legacy brands while we invest solely in the GO2bank brand from scratch. Second, we pulled back our marketing spend for GO2bank in the first half of 2022, which had a negative impact on account growth plans for 2022. With the natural attrition of the legacy brands and muted first half marketing spend overall accounts are down year-over-year in our direct channel.

That said we put the marketing dollars back to work, while many of our competitors have pulled back and we are encouraged by what we are seeing in the GO2bank brand as we exited the year. Now turning to the results and some color around the metrics and performance. The year-over-year decline in active accounts moderated a bit in the fourth quarter as we have essentially lapped the impact of stimulus payments in 2021. The sequential year-over-year improvement came from our direct channel as we are able to put the marketing dollars back to work in the second half of 2022. The year-over-year decline in revenue in the consumer segment also moderated in the fourth quarter. As we see the rate of decline in actives moderate, we are also seeing encouraging trends in the average revenue per active account and associated metrics like GDV and purchase volume per active account.

For the consumer segment, revenue per active account was up 15% both in the quarter and for the full year in both direct and retail posting double-digit growth. The growth in revenue per active account remains driven in part by the retention of accounts that are more highly engaged and drive more volumes as well as continued growth in our overdraft product. I would also like to point out that there is a favorable shift in our account mix between direct and retail. The direct channel is now approximately 30% of revenue in the consumer segment versus 24% at year end 2020 prior to our launch of GO2bank. Direct accounts have higher GDV and purchase volume and a direct deposit attach rate that is approximately 10x that of retail channels, resulting in more favorable economics.

As the direct business becomes a larger part of the consumer segment, it should continue to be positive for revenue per active account. Turning to segment profit and margins, while revenue was down double-digits, segment profit in the fourth quarter was down just slightly year-over-year. We continue to work diligently to manage the cost structure in the retail business relative to its revenue trajectory, while still being able to invest in key initiatives with our retail partners. Overall, the entire consumer segment continues to benefit from improvement in areas such as customer care and risk as well as growth from our overdraft product. As a result, margins were up in both channels, although to a lesser extent in our direct channel, as we continue to invest in growth of GO2bank.

And I will maybe provide a bit more color and insight into the performance of the direct channel. As I mentioned earlier, the decline in revenue and accounts is a function of a deliberate strategy to focus on building the GO2bank brand and deemphasize legacy brands. As a result, the growth of GO2bank is more than offset by the attrition in legacy portfolio. However, as we have mentioned on our last call, we are encouraged by what we are seeing in this channel, which comprises 30% of the overall consumer segment revenue. Since being launched in January 2021, GO2bank has gone from literally contributing nothing to representing approximately 45% of direct channel revenue in 2022. Revenue generated from GO2bank was up 80% in 2022 from double-digit growth in both active accounts and direct deposit accounts.

It’s a dynamic market and we are still early in the journey, but we remain encouraged by what we see with GO2bank, its potential impact on the direct channel and the overall consumer segment in the coming years. Now, let me turn to the B2B segment, which is comprised of our BaaS and PayCard channels. Revenue growth was driven by BaaS and PayCard, while margins remain impacted by certain BaaS contracts that have a fixed profit component. Growth of one of our large BaaS customers continues to power the top line in the BaaS channel, while the remaining portion of the business is still lapping the deconversion of a customer in early 2022, which also accounts for the bulk of the year-over-year decline in active accounts. Additionally, in the fourth quarter, we started to observe the roll-off of accounts from the non-renewal BaaS partners that we previously announced.

In our PayCard channel, we continue to experience strong year-over-year growth in active accounts, GDV and purchase volume. As we have indicated in prior calls, the impact of the BaaS fixed profit structure continues to weigh on the aggregate segment margin. If we look at the rest of the segment excluding these arrangements, margins remain quite healthy, including margin expansion in the BaaS channel as we continue to see improvement in areas such as customer care, risk management and supply chain. The PayCard business had margin compression during the quarter from lower interchange rates due to the mix shift and higher ticket sizes, coupled with lower ATM fees and higher costs to support the solid growth in accounts and volume. We saw some of these trends reverse in January 2023.

Now, let me turn to the money movement segment, which is comprised of our tax processing business and the Green Dot Network, which serves our own account base, but is seeing an increasing amount of volume in third-party partners. Overall revenue in the segment was down year-over-year from the decline in cash transfer volume to the Green Dot Network, principally from the impact of a decline in active accounts in our other segments, while tax revenue was very modest in the quarter due to the seasonal nature of the business. The rate of cash transfer declines for the Green Dot Network is less than our active account base as this channel is seeing momentum from growth in new and existing partners. The pace of decline has been moderating. And on a sequential basis, transaction volumes and revenue have been reasonably consistent throughout the year, which is encouraging.

Transactions from third-party programs had quarter-to-quarter growth throughout the year and now represent just over 50% of total transactions versus 45% in 2021 and 33% back in 2019. As we said before, we believe the Green Dot Network is a unique asset that is under monetized and other entities, some of which you may view as our competitors see the value in joining this network in providing convenient cash in, cash out access to their customers. Despite the decline in revenue, segment margins were up across both channels. It’s worth pointing out that the margin expansion for the full year was driven by the Green Dot Network division, while tax margins remain consistent. Our final segment, Corporate & Other, reflects the interest income we earn in our bank, net of the revenue share on interest we pay to our BaaS partners as well as salaries and administrative costs and some smaller intercompany adjustments.

For the quarter, interest income, net of partner interest sharing, was up year-over-year from the increased yields on our cash and investment portfolio. As a reminder, our investment portfolio represents two-thirds of the interest-earning assets on our balance sheet. The average yield on that portfolio in the fourth quarter was approximately 185 basis points. Meanwhile, our cash earned an overnight rate of approximately 370 basis points. We have arrangements with certain partners that result in us sharing a substantial portion of the overnight rate on the associated deposits. Given our mix of investments in cash that means we are paying out a higher rate on revenue share than we are earning on those deposits. It takes time for our investments to roll off and as overnight rates rise, so does the pressure on the net earnings of interest.

With respect to salaries and general and administrative expenses, we were roughly flat year-over-year. Salaries and related compensation were down, while expenses tied to our technology transformation were up. Before turning to guidance, I also want to let you know that we intend to post an investor deck to our IR website in the near future. This deck presents 4 years of annual data not only for our three main operating segments, but the six divisions that make up those segments. We believe this should be informative and help investors better understand the dynamics, economics and trends in the business. This information will only be updated annually. So I intend to continue to provide color each quarter on the various segments and divisions.

Now, I would like to turn to our guidance. As George mentioned in his opening comments, we are disappointed with our guidance and we are working diligently to ensure that we position the company for growth in 2024 and beyond. As George mentioned, our guidance for fiscal year 2023 is a revenue range of $1.38 billion to $1.46 billion, adjusted EBITDA in the range of $180 million to $190 million, and non-GAAP EPS of $1.77 to $1.93. I will discuss guidance in three areas. First, I will give color on 2023 and the moving parts. So you can have some clarity about how we think about the opportunity to elevate core earnings power beyond 2023. Second, I will provide color around the outlook in terms of its cadence throughout the year and how we think about the segments.

Last, I will touch upon guidance and communication policies on a go forward basis to ensure we are consistent with our communications to the market. With respect to 2023, our guidance reflects a reduction in adjusted EBITDA of approximately $55 million at the midpoint. There are a handful of discrete factors that really drive this decline and we believe that several of them have a path to resolution as we exit the year and headed to 2024. My comments are not intended to provide guidance for 2024. But we know that many analysts and investors tend to build out estimates over a 2-year period. This commentary is intended to help you understand some of the major puts and takes between 2022 and 2023 that can help inform you as you think about building out your models for 2024.

The first headwind is the loss of two BaaS partners and the non-renewal of a program in retail. In aggregate, these loss programs represent a revenue and EBITDA headwind of approximately $90 million and $40 million respectively, split roughly in half between our B2B and consumer segments. We have one sizable new partner BaaS coming on in 2023 and the prospective revenue and earnings should replace what is being lost over time. However, we only get a small portion of this in 2023 and a greater benefit in 2024 as this new program ramps up. Second is the timing of cost savings from our technology conversions. Timing and the realization is being pushed back 2 months versus our prior thinking. However, our thinking has not changed on the annualized cost savings, while we’re pushing our 2023 cost savings back a bit further in the year.

We still expect to realize incremental savings in 2024. Last is the impact on interest rates. As I mentioned previously, we earn net interest income off our cash in investments. And we also share with certain BaaS partners a substantial portion of the overnight rate on the associated deposits, with the short end of the curve moving up fast and our investment portfolio running off slowly. The amount we pay out the assuring arrangements is growing at a much faster rate than the amount we are earning. This has resulted in pressure on the net interest income that falls to our bottom line. As a result, we now face a headwind between $15 million to $20 million in 2023. Assuming that the Fed is reasonably close to the end of its rate hikes, future hikes being more moderate than what we’ve seen in the second half of 2022.

The growth rate of what we pay out will also moderate. Over time, our investment strategy will balance out this headwind. In summary, we believe there’s a past result some of the headwinds that we faced this year. We are successful in executing the operating plan that George outlined, we expect to exit 2023 with visibility to higher level of core earnings power in 2024 and beyond. Now, the details on the primary headwinds, I’ll provide context on how we currently expect the year to unfold to help you with models. On a consolidated basis, we expect slight declines in revenue for each of the first three quarters and the possibility of a bit of growth in the fourth quarter. While we face headwinds, as I discussed previously, we continue to look for growth in other parts of the business, including onboarding new partners to minimize the revenue impact.

We are slated to onboard a large BaaS partner in the second quarter, as well as numerous other small partners across the business. These programs will contribute to accounts revenue and earnings modestly as they begin to ramp throughout the second half of the year. Looking at adjusted EBITDA about two-thirds of EBITDA will occur in the first half of the year and one-third in the second half generally in line with our seasonal patterns. I’d like to point out that Q1 should represent a higher percentage of the first half earnings than we typically see. Considering the loss partner programs, our tax processing business will likely become a larger percentage of our Q1 earnings. Of course, this is contingent on the IRS and the timing of regional payment.

From a margin perspective, we believe the first three quarters could have notable declines and the fourth quarter roughly flat, the impact of our reduced marketing in the first half of 2022 and subsequent investment in the second half will play a part in margin mix across the year, particularly in the second quarter of 2023. Additionally, you may remember that in 2022, the first two to three quarters benefited from very focused efforts on our part to work with vendors to reduce a variety of costs, as well as the notable improvement in risk in customer care. We believe the fourth quarter of 2023 will benefit from our cost reduction efforts and have more normalized comparisons versus the first three quarters. Now turning to segments. In the Consumer segment, the continued secular trends in retail combined with the loss of a retail program will create a headwind in 2023.

We anticipate full year revenue to decline in the low double digits reasonably consistent throughout the year. We are encouraged by the growth of GO2bank and the direct channel and we believe you will see modest full year revenue growth in this channel is GO2bank begins to outweigh the decline in the legacy brands. Segment profit is expected to be down in the low to mid-teens with margin compression, particularly in the second and third quarters. Turning to the B2B segment, we expect revenue growth in the high single digits. continued growth from our PayCard channel, growth from our remaining BaaS partners and the onboarding of the new BaaS partner offset the loss of the two BaaS partners that began to roll off in late Q4. Our bass business should see upper single digit growth and revenue while we look for PayCard to see growth in the upper teens.

Despite the modest revenue growth, actives will be down sharply for the year with the most pronounced declines in the first half from the two BaaS partners we lost. Before moderating in the second half, our new BaaS partner begins to ramp. Segment profits is expected to be down mid single-digits, most pronounced in the first half of the year and a moderate decline in the second half of the year. In our Money Movement segment, we estimate revenue growth in the low single-digits reversing 2 years of declines. The Green Dot Network business is expected to have modest growth as third-party volumes continue to grow. And we anticipate our tax processing channel to have a good year and continue to enjoy the low single-digit organic revenue growth as they have become accustomed to.

Segment profit is anticipated to be flattish with margin compression coming from our tax business as the borrowing cost of taxpayer advances has increased in 2023. In our Corporate & Other segment, the interest income dynamic comes into play. As I mentioned, the headwind this year is in the range of $15 million to $20 million and that will be reflected in the revenue of this segment with the partial offset coming from our cost reduction efforts. In our full year EPS guidance, we expect our non-GAAP effective tax rate to be 23.5% and the diluted weighted average share count to be approximately 52 million shares. Last thing I’d like to briefly address is our guidance policy. We want to be helpful and make sure that investors understand our business and we recognize that guidance is an important part of the relationship.

There have been different approaches utilized in the past several years, we believe it’s important to have a consistent approach going forward, one that has a clear focus on the full year’s results. Like any other public company, near-term decisions, such as marketing spend, and other initiatives can impact a quarter and create noise from one quarter to the next. As such, our policy will revise full year non-GAAP revenue adjusted EBITDA and non-GAAP EPS ranges, while providing appropriate commentary and color about the quarters and how the U.S. expected progress. With that, I’ll hand it back over to George.

George Gresham: Thank you, Jess. 2022 was a good year for Green Dot and we should not forget that. Despite a sizable headwind from the impact of stimulus in 2021, we were able to modestly grow revenue and we grew EBITDA 10% and adjusted EPS 17%. I’m very proud of those results and the work of the team. We have plenty of work to do in 2023 that I believe will benefit us tremendously. There is no doubt in my mind that a tremendous opportunity for growth, it’s in front of us and I am quite excited about the company we will be and our positioning as we exit 2023. Every one of our divisions as opportunities to introduce new products and strategies to drive growth and we are seeing it in several of them already. The market for embedded finance solutions is immense and growing, including within our existing retail client base.

GO2bank continues to build momentum. Our rapid! PayCard business continues to grow nicely and will move aggressively to capture the emerging opportunity for multibillion-dollar market of early way to access. Our Green Dot Network is a unique asset in the market that will enable our embedded finance solutions and our TPG Tax businesses poised to offer a variety of new credit and SMB products since 2024, which should expand its already healthy margins. But there are some near-term headwinds that impact our 2023 guidance. As we have discussed throughout this call, there are numerous avenues to higher core earnings power as we move through the year and head into 2024. We will begin to realize the cost savings from our technology conversions which will bring us substantial savings.

We will onboard a significant new customer and BaaS as well as numerous other partners across our business and the headwinds from rate hikes should subside. In closing, while we are focused on the task at hand and we have hard work to do in 2023 it’s what lies ahead that really gets me energized. We have vast end-markets with unbound opportunities. Thank you for your interest in Green Dot. And now I’d like to turn it back to the operator for questions. Operator?

Q&A Session

Operator: And our first question will come from Ramsey El-Assal of Barclays. Please go ahead.

Unidentified Analyst: Hi, this is for Ramsey. I had a question on your B2B pipeline. Could you give us some insight into the developments there and how your strategy has changed since the partner non-renewals, whether it’s a heightened focus on contract structure or trying to find specific types of partners? Thanks.

George Gresham: Sure. Thanks for the question and the participation. I would say the way we’re thinking about embedded finance, I guess I’ll broaden the nature of your question as we think about embedded finances, providing financial solutions to businesses that are providing financial solutions to their customers. Our technology roadmap, our capabilities that we’re building across various vertically integrated capabilities bank, technology etcetera, are all designed to meet the objective you’re asking about, that could be around BaaS related opportunities that we think of traditionally, like SMB or gig, wealth type opportunities in those industries, or they could be within our own retail customer base, as retailers also are seeking solutions that better serve their customers as customer behaviors change.

So the way we are changing over time is we’re integrating these capabilities into a packaged set of solutions that will have modularity to them, so that we can offer different types of solutions to different partners, and do that at a very low marginal cost. So there’s two elements to our strategy is to be able to provide flexibility to the end user business that we’re providing services to, so that they can customize solutions for their consumers and do that at a low cost, important to be able to do at a low cost is the fact that we own our own bank. And we will have a technology platform that will have a significantly lower marginal cost in the market than what we have today. And then, of course, it’s incumbent upon us to package that and deliver that in appropriate marketing structures so that our end user partner can understand those capabilities in the right way.

So that’s how we think about building the pipeline in that market. And that pipeline will grow because of those efforts, and because of the general environmental changes that are happening to businesses that drive their need to consume this sort of service. So I’ll pause there. I’ve said a lot and see if you have a clarifying question to get me back on track.

Unidentified Analyst: No, that’s super helpful. Appreciate it. Thank you.

George Gresham: Sure.

Operator: The next question comes from George Sutton of Craig-Hallum. Please go ahead.

George Sutton: Thank you. George, could you just walk through what the first conversion specifically was, and what it might enable you to do? Where might it limit you? And what we should expect, for example, for the second conversion?

George Gresham: Sure, George. So we offer a number of different types of products and services and capabilities were most I think, well understood to be associated with DDA accounts, traditional banking accounts, etcetera. That’s certainly the key the product that we’re selling today. We also have some gift programs that are not particularly strategic for us and therefore, those programs provide the right kind of test case for us to start the conversion work on. And so the first conversion that we did in the fourth quarter was a significant but minority portion of our total gift program and that was done in November of 2022. The next conversion, which is imminent, will be the remainder of that gift population. And then we will start the process of migrating our DDA account portfolios through Q1 and Q2.

And then towards the end of that we you may be familiar with a small secure card credit portfolio which will also be converted before June. So that’s the sequence of conversions by product, what does it do for us? So for example, today we have 10s of millions of active gifts accounts, but we have many more gift accounts are inactive. So dormant legacy accounts, because of the legacy contractual relationships we have with our current processor, we pay fees for the account, whether they’re active or inactive. For us, there is different fee structures, but nevertheless, there is a financial consequence for us to be maintaining legacy accounts. And so when we migrate those activities onto our own processing platform, of course, we don’t have a variable cost structure with respect to active accounts on processing.

But as importantly, we don’t pay for dormant accounts in that environment. And that will be true for gift and DDA and secured credit products as well in any other future type of account that we put onto these platforms. So I’ll pause there and see if I’ve answered your question. If I can clarify further.

George Sutton: Well, that’s helpful. It sort of relates to my next question. So you guys have privately told us this that Chris Ruppel is a rock star for lack of a better term. And greatly executed on the PayCard business and scaled it. At what point will he have a technology platform that he can really aggressively sell against?

George Gresham: Well, he has a technology platform today that he can sell, and we are selling, and we are selling it with success. And as we move through our migrations, we will, of course, be consolidating legacy accounts onto that new platform, the platform is in place, obviously, we put activity onto the platform, I don’t want to suggest that’s the end state of our technology and best investment. I’ve mentioned in previous calls that migrating a processor is one important element. And that’s what you and I have been talking about. For the last couple minutes, we have also implemented and now have active contemporary modern fraud and risk management, BSA/AML tools that have been implemented and are operating. So that’s an important element, we will continue to invest in technology around creating better API structures and more flexibility in our systems in order to drive out cost and drive flexibility in the future.

So Chris has a full quiver of arrows to sell today. I think he’s going to be immensely successful in his new role, selling what we have, and what we have to sell is going to improve over time.

George Sutton: Perfect. Thanks for the details.

George Gresham: Sure. Thank you, George.

Operator: The next question comes from of Truist Securities. Please go ahead.

Unidentified Analyst: Hi, guys. Thanks for taking my question. I just had around the BaaS pipeline. So just to clarify, baked into the guidance is just the impact of the two previously announced non-renewals right there. And it we don’t think there’s going to be kind of anything else sneaking up on us?

George Gresham: That’s if I understand, let me let me rephrase it, make sure I’m getting your question correct. Baked into the guidance or the roll off of the two previously announced account losses and the roll-on of announced but as of yet unnamed partner that we’ve won and we are currently implementing. So those three accounts are all incorporated within to €“ within our guidance for 2023 although the roll-on of the new account is pretty modest as to its impact in 2023, because of the timing of implementation?

Unidentified Analyst: Right. Okay, that makes sense. Thank you. And then, just as a question around context of the two previous non-renewals, are you guys able to provide any color like was that the result of competition or just because you didn’t think the economics were that compelling there?

George Gresham: Well, first, it’s important to understand each partner and each type of BaaS relationship has its own peculiarities. So for example, certain partners might be financial €“ providers of some sort of financial solution unrelated to DDA account, for example. And so if that type of partner, they may have entered into BaaS relationship in order to on the short-term facilitate their provisioning of services to their broader client base, okay, they want to add some features to their core offering, which might be an investment account or something like that. If you have a partner of that character, they are inevitably going to want to tighten their control over the entire value chain because they are offering a suite the value of financial services value to their clients I think that’s an example of the sort of circumstance that at least in one of those cases we found ourselves in.

And we have some relatively in these cases these two cases aged type relationships that had economics in the renewal phase that were probably disadvantageous from our point of view. So I’d say it’s a mix of a client’s own particular strategic direction and their view of financial services, and our willingness to price products that we might not be interested in the market.

Unidentified Analyst: Okay, thank you very much.

George Gresham: You’re welcome.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to George Gresham for any closing remarks.

George Gresham: Well, I just want to thank the audience, our employees, our investors, our Board for your support as we move through 2023. We have an amazing future ahead of us in a lot of exciting milestones to accomplish this year, and we’re looking forward to updating you in our next call. Thank you very much.

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