Green Dot Corporation (NYSE:GDOT) Q4 2023 Earnings Call Transcript

Green Dot Corporation (NYSE:GDOT) Q4 2023 Earnings Call Transcript February 27, 2024

Green Dot Corporation misses on earnings expectations. Reported EPS is $0.14 EPS, expectations were $0.17. Green Dot Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Green Dot Corp Fourth Quarter 2023 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I’d now like to turn the conference over to Mr. Tim Willi, Senior Vice President, Finance. Please go ahead, sir.

Tim Willi: Thank you, and good afternoon, everyone. Today, we are discussing Green Dot’s fourth quarter 2023 financial and operating results. Following our remarks, we’ll 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. Or additional information concerning factors that could cause actual results to differ materially from the forward-looking statements.

During the call, we will refer 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 the Green Dot Corporation and is subject to copyright protection. Now I’d like to turn the call over to George.

George Gresham: Good afternoon, and thank you for joining our call. I will make some brief comments regarding the proposed consent order we disclosed in our earnings release and my thoughts on 2023 before handing it over to Jess, who will walk through our fourth quarter results and provide our guidance for 2024. I will then spend some time discussing our business and strategy. We have a lot to cover, so let’s get started. You will have noted we are in receipt for proposed consent order from our primary federal regulator, the Federal Reserve. This proposed order relates to matters arising as long ago as 2017 under management in place at that time. And we are very pleased to soon bring these matters to conclusion. I will make some additional comments on this topic in a few minutes.

2023 was a challenging year, but not without its accomplishments. We completed our processor conversion and are beginning to realize the anticipated savings and after spending years preparing for and executing this conversion, the team is now focused on other growth centric initiatives. We successfully onboarded several new partners in our BaaS channel, including Ceridian, now Dayforce, and announced the signing of PLS, which is a significant win in the financial service center vertical within our retail channel. PLS will launch in the first half of 2024. Our business development efforts are gaining momentum and pipelines continue to grow. We have made significant progress integrating disparate processes and procedures, launching new technologies across fraud, disputes and project management, and generally improving business and regulatory controls.

Finally, the processor conversion and other savings initiatives resulted in cost reductions efficiencies across the company. It was a busy year and we made a lot of progress. Jess will detail our forward guidance in a few moments, but we believe we are on the cusp of returning to account growth in the back half of 2024. For the most part, we will have lapped lost partner revenue and impacts of sunsetting various brands by midyear. We will launch new partners and see growth from GO2bank and other product features, and we will see meaningful benefits from other cost management efforts. All of this combined gives us good reason to be optimistic as we exit 2024 and head into 2025. With that, I’ll turn it over to Jess to discuss our results. Jess?

Jess Unruh: Thanks, George, and good afternoon, everyone. I’ll walk you through our key financial highlights, and then I’ll provide color on our guidance for 2024. Our GAAP and non-GAAP revenue for the fourth quarter and full year grew year-over-year by 7% and 4%, respectively, while adjusted EBITDA and non-GAAP EPS were down year-over-year for the quarter and the full year. In addition to the decline in adjusted EBITDA, our GAAP operating income for the quarter full year was further impacted by the $20 million reserve we recorded related to our proposed consent order. George will provide more color on that topic in a moment. As it relates to our non-GAAP results for the quarter, we continue to address transitory challenges that arose during the third quarter related to our processor conversion and transaction losses associated with customer disputes.

We also incurred incremental expenses in connection with our ongoing investments in our anti money-laundering program, including improvements to our compliance controls, policies and procedures. As mentioned in previous earnings calls and SEC filings, we expect to continue to invest in these programs to remediate the matters addressed in the proposed consent order, ensure we have market leading compliance programs and to mitigate and reduce our fraud losses over the long-term. Over time, we believe that this will be a competitive advantage. Despite these near-term headwinds, we were able to meet our revised guidance, and I believe that we are poised to see fundamental performance improve, which I’ll discuss later in my comments about our outlook for 2024.

With that high level context to our quarterly results, I’ll provide color on each of our segments. First is our Consumer segment. Segment revenue in the quarter was down 21% year-over-year and down 20% for the full year, both driven by declines in our retail and direct-to-consumer channels. In the retail channel, revenue in the quarter was down 27%, and for the year, revenue of $339 million was down 17%. Revenue was impacted by declines in actives and the program deconversion, while cardholder activity such as GDV and purchase volume in 2023 was generally flat with 2022, we did see some modest pressure in the second half of 2023. Excluding the impact of the program deconversion, our full year revenue in the retail division was down 14% versus a decline of 20% in 2022.

Consistent with comments on prior calls that I believe we are seeing moderation in the rate of decline. The direct channel saw a revenue decline of roughly 10% in the quarter, and for the year, revenue of $159 million was down 10%. The revenue decline for the quarter the year reflects the impact of sunsetting several brands in Q2, which we have discussed in prior calls. I’ll call out that the year-over-year trends moderated from a decline of 14% in 2022 to 10% in 2023 as a result of our strategy to reposition this division for growth through GO2bank. GO2bank revenue was up just under 20% for the quarter and approximately 30% for the full year. In the Q4, GO2bank continued to have strong year-over-year growth with direct deposit accounts up just over 15%, which resulted in continued growth in revenue per account.

This brand now accounts for 70% of the direct channel and will largely be the driving force behind this division from this point on. It’s worth pointing out that excluding the impact of the products that were sunset in the direct channel, I believe the rate of decline in direct deposit accounts for the consumer segment as a whole continues to moderate. This is fueled in part by some moderating declines in retail, but also in the direct channel as GO2bank builds momentum and the attach rate of direct deposit is notably higher than in retail. Direct deposit accounts are about a quarter of our total accounts in this segment, and these accounts are more engaged with higher volume in revenues than non-direct deposit accounts. Overall, excluding the impact of the program deconversion in retail, the revenue per account in the segment was down low-single-digits during the quarter but was up mid-single-digits for the year as we drive deeper engagement rates, particularly with GO2bank, helping to offset the attrition in legacy portfolios.

As I’ve said many times, this is an evolution, and we are encouraged by what we are seeing from GO2bank and the impact it’s having on the direct channel and the increased likelihood that it can help drive continued moderation in the rate of decline for the overall consumer segment, and I believe we are moving closer to an inflection point. Segment profit was down year-over-year by 30% due to decline in revenue from the headwinds discussed as well as the impact from challenges related to our conversion and transaction losses that I mentioned earlier, partially offset by a full quarter of processing cost reduction from the completion of our processor conversion in Q3. Excluding the impact of the Program deconversion, segment profit was down in the mid-teens for both the quarter the year.

In the B2B segment, which consists of our BaaS and Rapid! PayCard channels, aggregate revenue growth of 40% in the quarter and 30% for the year was driven predominantly by our BaaS channel. Revenue in our BaaS channel was up approximately 45% in the quarter. And for the full year, revenue of $688 million was up 35%. The growth of one of our larger BaaS customers continues to power the top-line, while we faced headwinds on revenue and actives from the roll off of two BaaS partners. Excluding the impact of one of our largest partners, we saw the rest of the BaaS business bottom out in Q2 when deconversions were completed and we’ve now seen solid sequential growth in volumes and actives in Q3 and Q4 from growth in new and existing partners. In the Rapid! PayCard channel, our revenue growth bounced back and was up just under 10% in the quarter, while full year revenue of $85 million was up 1%.

Active account growth has been under some pressure due to macro shifts in the temporary staffing industry, one of our primary verticals, and we believe that wage inflation and recession fears have impacted hiring decisions, which have impacted account and revenue growth. We’ve experienced active declines in this vertical since late 2022. And while we saw some signs of stability during Q2 and Q3, there was a bit of pressure on actives in Q4. That said, the fourth quarter was our strongest quarter of revenue growth due to some modest changes in our fee structure. These changes have resulted in improved revenue yields in the second half of the year that should have a full year benefit in 2024. When those changes are coupled with solid sales momentum, it gives us confidence that growth in this channel should reaccelerate as we move through 2024.

Profit in the B2B segment was down 2% and margins compressed as expected, driven largely by the impact of client deconversions in the BaaS business and the impact of fixed profit structures with certain BaaS partners, while profitability in the PayCard business improved with better revenue performance. Shifting to our Money Movement segment. Revenue was down 11% year-over-year from a decline in cash transfer volume and the timing of tax refund volume. Revenue for the Green Dot Network business was down 10% in the quarter. And for the full year, revenue of $115 million was down 9%, in each case moderating from mid-teen declines in 2022. Revenue declines remain driven principally by the impact of the decline in active accounts in our other segments, partially offset by the continued growth of third-party transactions growing upper-single-digits, accelerating from the mid-single-digits in 2022.

Volume from third-party programs now represent two-third of our total cash transfer volume and continue to grow in proportion to total volume. With numerous new partners slated to launch in the coming quarters, coupled with our launch of PLS in the retail channel, I’m optimistic about returning to overall growth in this segment. Our tax refund volume and revenue were down year-over-year because of timing shifts versus last year. Revenue for the full year of $94 million was down 2% in line with the decline in refunds processed. I would note that annual growth in refunds processed can bounce around in this business. And while refunds were down in 2023, total refunds processed over the last four years are up almost 18%, all through organic growth, giving us the confidence in the outlook for this business to continue to be a steady predictable grower.

Profitability remained solid with some pressure on tax margins impacting the quarter, while the segment saw modest expansion for the year due to improvement in the margins of the network business. And our final segment, Corporate and Other, reflects the interest income we earn at our bank, net of the revenue share on interest we pay to vast partners as well as salaries, technology and administrative costs and some smaller intercompany adjustments. Interest income net of partner sharing was down year-over-year as expected due to a higher rate environment. As a reminder, the rapidly rising rate environment of 2022 and 2023 created an imbalance between the blended yields we earn on our cash and investments and the rate we pay our vast partners and effectively creates a headwind for revenue in this segment.

Salaries and other general and administrative expenses were down notably from last year as we saw the impact of our cost cutting efforts, a reduction in bonus accruals and the benefits of reducing the costs associated with our technology conversions, partially offset by our investment in regulatory and compliance infrastructure. For perspective, in Q4 and the full year, we made investments and incurred incremental year-over-year expenses in connection with our anti money-laundering program of $4 million and $6 million respectively. Now let me turn to our guidance for 2024. Our guidance is as follows: non-GAAP revenue in a range of $1.55 billion to $1.6 billion adjusted EBITDA of $170 million to $180 million non- GAAP EPS of $1.45 to 1.59. Our guidance assumes some modest growth in adjusted EBITDA and a slight decline in non-GAAP EPS as we expect our share count to increase modestly over 2024 and an increase in depreciation expense associated with our technology transformation.

Now let me briefly turn to the segments and provide you some color on our outlook. In the consumer segment, we expect that combination of secular headwinds sunsetting some portfolios in the direct channel and lapping the retail program deconversion to result in low-double-digit revenue declines. This will be most pronounced in the first half of the year when both the first and second quarters will see sharp declines. However, with the launch of PLS in the second quarter, a growing contribution from GO2bank in the direct channel and lapping the aforementioned headwinds, we should see improved momentum and modest revenue growth in the second half of the year. Commensurate with my comments on the revenue outlook, we also expect margins, actives and volumes to exhibit a similar pattern with a full year of processing cost reduction from the completion of our processor conversion in 2023.

In the B2B segment, we look for revenue growth in the mid-20% range with solid growth throughout the year. Growth of new partners launched in 2023 and existing customers in BaaS, coupled with a rebound in PayCard will drive the growth. We expect margins to be down roughly 100 basis points, driven largely by a decline in Q1 of 400 to 500 basis points due to the lapping of tough comps, while the rest of the year should be flat to up as we see the benefits of scale and organic growth. I expect that actives and purchase volume in B2B should be up in line with revenue growth. In the Money Movement segment, I expect mid-single-digit revenue growth. The first half of the year should see slightly lower revenue growth in the low-single-digits with growth in tax, while Green Dot Network is expected to be down modestly.

In the second half of the year, I expect revenue growth in the mid- to high-single-digits due to growth in Green Dot Network stemming from the launch of PLS in our retail channel and the growing contribution from new partner launches over the course of the year. Margins are expected to expand 500 to 600 basis points for the year due to growth of the tax business and the acceleration of Green Dot Network. In the Corporate and Other segment, revenue should be in the mid to upper-single-digits, reflecting efforts to maximize our yields on cash and investments, while also incorporating some modest rate cuts, which will benefit us. Expenses should be up in the mid-teens with an increase in Q1 related to our spending on regulatory infrastructure that I discussed earlier and a pretty substantial jump in the fourth quarter as we compare to Q4 of 2023 where we reversed some bonus accruals as we came up short of our original operating plan in 2023.

Our tax rate is expected to be 23.5% with a fully diluted share count of 54.5 million shares outstanding. Now, I’ll turn it back to George.

George Gresham: Thank you, Jess. We’d now like to spend some time discussing the proposed consent order, the individual characteristics of our distribution channels and describe how they each tie into our strategy and my corporate goals and priorities for 2024. As I noted at the outset, we have been in ongoing discussions with the Federal Reserve regarding a proposed consent order. The proposed order relates principally to various aspects of compliance risk management, including consumer compliance, as well as compliance with anti-money laundering regulations. The matters addressed in the proposed order relate to activities and practices that commenced prior to our CEO transition in 2020 and they back to 2017. We do not currently expect any incremental restrictions to be placed on our business or operations.

However, until the order is finalized, I am not able to comment on its specific elements. I will say this, we take regulatory compliance very seriously, and we have invested considerably in people in time, and process improvement and product improvement and in money to improve our capabilities in this regard. We are not the same management team or the same company that we were in 2017. We have changed our culture throughout the organization to ensure our policies, programs, services, and people make regulatory compliance our top priority, our North Star. We are not now nor will we ever be done as we have adopted an approach of continuous improvement, and we are now making and will continue to make those improvements. Our core value is stewardship.

We hold customer deposits as stewards and must take care of those deposits. We provide a unique service to the American economy given the wide range of clients we serve. We provide access to FDIC insured bank accounts to millions of Americans who are otherwise blocked from accessing traditional banking services as well as providing services to our BaaS clients. Our commitment to this value will not waiver, and we will work to ensure this does not happen again. Now, I’m going to spend some time discussing our business and strategy in a bit more detail than we typically do to help the market understand the distinct assets we own and how we see their long-term prospects as we weave them together. Sitting at the center of our universe is an FDIC insured demand deposit or DDA account.

We distribute DDA accounts directly to consumers and through retail partners in our consumer segment and in a business-to-business to consumer model in our B2B segment. You all know DDA accounts receive particular regulatory protections and are the enabler through which most U.S. financial transactions flow. We tailor our DDA accounts to meet the unique needs of customers in two of our reported segments, consumer and business to business. Let me break each of these segments down so that you understand the underlying business opportunities. In our Consumer segment, comprised of our retail and direct business, our retail channel has been the DNA of Green Dot and is our largest channel accounting for approximately 23% of revenue in 2023 and generally operates at what I would consider to be attractive margins.

Within this channel, we distribute to traditional retailers like Walmart, CVS and Walgreens and to Financial Services Centers or FSC, similar to Community Choice Financial or PLS. Green Dot is the market dominant leader in the distribution of DDA and related products and services in retail, and we work with over 75% of major retailers in the U.S. The retail channel faces secular challenges driven by changes in consumer behavior and the retail consumer experience as well as the entry into the direct consumer market of competitors financed by low cost capital willing to incur marginal losses to build an account base. Despite these headwinds, retail remains a critical and valuable asset for us for these reasons. We have deep long standing relationships with the majority of the market leading retailers in the U.S. We have direct technology integrations with many of these retailers, enabling the provisioning of differentiated services to the many consumers who use retail locations for financial services.

These retailers comprise a major industry vertical looking to offer and embed banking and financial services into their new and existing consumer experiences. They have a large base of consumers using their loyalty and app programs, which generally lack integration with financial services today. We are in a prime position to address this evolution. We are a market leader in the FSC channel with differentiated capabilities and are well positioned to continue to gain market share in FSC over time. Our retail business is tightly linked to our Green Dot Network business, the combination of which is a significant differentiator. Our relationships with these entities provide opportunities to distribute other products and services to them such as PayCard, earned wage access, and other financial products we will launch in the Green Dot Network, for example, over time.

We have over a $100 million in capital in our JV with Walmart, Tailfin, intended to invest in and enhance products and services that mutually benefit Green Dot and Walmart. In 2024, our investments in this channel were largely focused on preparing for a significant modernization in technology and user experience, an investment that is long overdue. We are also focused on simplification of the product set to gain efficiencies and launching new KYC tools to enhance compliance and customer experience. As I consider this channel’s future, we expect continued pressure from the changes I mentioned, but we have seen negative trends moderate, and we are adding a significant partner in PLS 2024. While the channel may not become a growth engine, declines are flattening and we have meaningful opportunities to stabilize and grow its contribution through cost savings and other optimizations gained from operating at scale across multiple channels.

Revenue in our direct-to-consumer channel, aptly named direct, presently constitutes approximately 11% of our overall revenue. Its profit margins are robust, presenting an encouraging foundation for expansion as we navigate a return to growth. In this channel, we engage directly with consumers, furnishing them with modern digital first DDA accounts complemented by an expanding array of features. Our go-to-market strategy is multifaceted, capitalizing on digital advertising and social media as well as traditional channels like TV and direct mail. In recent years, we’ve strategically repositioned and channeled our resources into nurturing the GO2bank brand and phasing out legacy programs. This strategic shift temporarily impacted revenue growth, a narrative we’ve transparently communicated.

While some legacy brands will continue to phase out gradually, we anticipate surpassing the revenue impact of most significant retirements by mid-2024. As of now, GO2bank constitutes about 70% of this division. And as Jess highlighted, revenue growth was about 30% in 2023. I anticipate our direct channel evolving into a pivotal growth driver in the upcoming years, buoyed by what I perceive as an appealing secular growth opportunity. The ongoing generational shift towards digital first financial platforms align seamlessly with our endeavors. GO2bank characterized by its cost effective and consumer friendly features, embodies a product tailored for the digitally inclined consumers seeking a modern banking experience. The customer profile in this channel is particularly attractive, posting over 20% higher purchase volume per active and almost 30% higher revenue per active compared to the retail channel.

Furthermore, a substantially higher percentage of our direct customers use direct deposit, a stable and reliable form of regular deposits versus the retail channel. Our vertically integrated banking and technology platform will enable us to not only drive innovation in this channel, but use that scale to deliver an increasingly robust low cost financial services platform to our market. Beyond its standalone potential, the direct channel serves as a testing ground for innovative products that can later be strategically introduced across our partner channels. I’m optimistic about sustaining the momentum seen in GO2bank, adopting a pragmatic approach to investment and prioritizing high quality profitable growth. With this strategy, I believe we can consistently propel this business forward at a rate that is at least mid-teens over the next several years.

Similar to retail, our investment in this channel will focus on a 2024 user experience refresh. In our B2B segment, we have two channels, BaaS and PayCard. Let me first address the BaaS channel, which comprises about 46% of our 2023 revenue. While we had a bit of a headwind in 2023 due to the deconversion of 2 partners, I continue to believe that this business, which is at the heart of embedded finance movement, has tremendous growth potential. In this channel, we work with non-financial companies, traditionally technology driven companies, to deliver financial services products to their end customers. This can take the form of consumer products like traditional DDA accounts, accounts to receive their wages, savings accounts, or small business products like business checking accounts.

I would note that one nuance of this division that at times has been a point of confusion is its margin structure, which are generally low. The margins in this division are impacted by a unique relationship with a large fast growing partner that has a profit stream that is not linear with revenue growth, and this results in pressure on our reported margins. However, outside of that relationship, the margin structure here is quite solid and would be one of the higher margins in the company. Turning to the outlook for the future, I believe that we are in the early stages of the growth curve with this business. Consider the following. Every business in America has customers and every one of those customers, be it consumer or business, needs financial services.

Companies of all types across the economy are evaluating and considering bringing financial services to their own customers as a way to deepen and monetize their relationships with their customer base. At the same time, consumers and businesses are increasingly receptive to utilizing financial services outside of the traditional delivery channels. Our market reach will continue to expand. I see numerous opportunities as we modernize our technology stack and refine our focus on specific industry verticals where we can build tailored solutions that are easy to deploy at both the high end of the market, but also as we move to the mid-market as well. Our business development organization has been hard at work identifying where those opportunities are, and I am encouraged by the momentum that they are building.

Last, as the embedded finance movement evolves, I believe that our position as one of the only truly integrated platforms with our own bank, technology and the Green Dot Network will increasingly resonate in the market. Our investments in this business in 2024 will focus on building enhancing tools our partners and prospects use to engage our business and adding functionality to our product offerings. One last note on our BaaS business. It is clear to us that there is a fee change coming as it relates to regulatory oversight of the Fintech model. Federal Reserve has launched their novel banking program, we believe, specifically designed to extend regulatory oversight to the entire Fintech value chain, not just the bank sitting at the center of account issuance.

Since we are vertically integrated, we have long experienced examinations from this perspective, so we welcome and encourage the broadening of regulatory oversight to the end to end Fintech model, often seen as one capitalizing on regulatory arbitrage. We believe these efforts will result in increased oversight operating in the Fintech space, oversight that is overdue. Turning to our PayCard business, where our go-to-market brand is rapid, this channel comprised 6% of total corporate revenue in 2023. In this division, we work directly with employers of all sizes to provide them with a convenient way to pay their employees with a Visa or Mastercard branded card that operates just like a traditional bank issued debit card and DDA account. We also offer earned wage access products to existing pay card and non-pay card clients.

This business has grown organically to become, we believe, the third largest in the industry with approximately 15% market share, driven by its industry leading sales force and service organization. On a go forward basis, I believe that this channel should be able to grow at a rate that is at least in the low-double-digit range. And while margins are somewhat depressed at this point, I believe that we will return to a solid payment processing like margin that should scale as revenue growth reaccelerates. There are several things that drive the optimism in my outlook. The core pay card market still has plenty of greenfield opportunity. There are still several million individuals paid by pay per check and between continued adoption of pay card programs and market share gains, there is still ample room for growth.

I believe that the market for earned wage access is in the very early stages, and there’s a product that I believe could represent a market opportunity of approximately $3 billion. With our industry leading sales force and market share, we are in a strong position to sell this product not only to our existing pay card partners, but also companies that are not PayCard partners, which we have done. Longer term, we believe that employers will increasingly focus on how they can aid their employees in building financial security. With the vertical integration of a strong sales force, integrated technology platform, and our bank charter, our organization is uniquely positioned to be trusted partner to employers to help create and distribute additional relevant financial services to employees.

Our 2024 investments in this business are to build in house tools related to customer and client servicing capabilities, mostly along the lines of web portals. These investments set the stage to migrate off of the legacy processor onto our current card management system. Once completed in late 2025, we expect to enjoy savings, which will result in significantly enhanced margins in this business in 2026. Now, let me turn to our Money Movement segment, which is comprised of the Green Dot Network and our tax business, which I’ll refer to as TPG. We do not offer permanent DDA accounts through these channels today, which make them a bit different than the rest. The Green Dot Network represents 8% of consolidated revenue with solid margins that have room for scale as its transaction base and revenue return to growth.

The cash economy is alive and well in the United States, and millions of consumers need convenient locations to conduct financial transactions if they use our or another’s branchless account offerings or they have no DDA account at all. We provide a network of over 90,000 locations and high quality retailers where individuals and potentially small businesses can load and withdraw cash to DDAs, prepaid cards, and digital wallets. We support bill payments made in cash and serve as a convenient cash loading location for financial institutions during hours when banks are closed. This is a unique business that has limited market participants with a very wide moat that is supported by direct integrations to many of the leading retailers. While the division in general has been impacted by the headwinds in our proprietary retail channel, I’d like for it to return to growth in 2024 and see numerous opportunities for growth in the future.

Though the world is growing digital, our network provides an omnichannel delivery platform for digital financial services. The Green Dot Network bridges the divide between finance and the reality that any consumer still has the need to deposit and withdraw cash. The growing number of digital account platforms with a variety of business models are realizing they need to provide an omnichannel experience and they value the convenience of our network. As a result, we have seen third-party transactions grow and now comprise almost two-thirds of the total transaction base and growing. At the same time, we are more closely integrating the network with our BaaS business and establishing this as a competitive differentiator that is helping us win BaaS customers and will drive transaction growth.

Our investments in 2024 in this channel will focus first on maximizing the demand opportunities by ensuring we can materially shorten the client onboarding process, and we are building automation tools to solve that problem and to expand the product offering, building out our capabilities in areas like bill payment, disbursements and small business products and services. This channel has declined in 2023 as a result of declines faced in the rest of our business, but as I noted, the third-party business is growing nicely. Long-term growth rate in this channel has tremendous opportunity, but given the near term headwinds, our current expectations are conservative with long-term rates in the high-single-digits if we execute well. Last but not least, I would like to talk about our tax business, the Tax Processing Group or TPG, which comprised approximately 6% of our consolidated revenue.

TPG is the market-leading player in its space with substantial market share bringing a scale that leads to attractive margins. TPG aids tax repairs in filing over 15 million tax returns and facilitating the payment of the preparation fee to the preparer with the revenue model essentially being a per transaction fee. With its market leading position, this division has steady predictable results that generate attractive free cash flow. TPG is a well-managed business and is benefiting from investments we have made in modernizing its technology delivery platform, TPG Next. Implemented two years ago, we believe TPG Next sets the standard in the industry, allows for additional product and partner integration strategies, and has led to additional market share capture.

TPG is a low to middle-single-digit grower based on its current offerings. However, there are a number of opportunities to drive growth higher in this business. TPG works with 27,000 tax preparers, an exciting customer base of small and micro businesses. We are developing business banking services that are more tailored to their unique needs given our in-depth knowledge of their business. In the past, we opened and closed millions of temporary bank accounts for the taxpayers so that we may provide our services to them. We are now testing the issuance of permanent GO2bank like accounts to these taxpayers and ensuring that we market appropriately to the taxpayers so that they understand the value of using the account on a permanent basis, a significant acquisition channel in waiting.

We have any number of opportunities to develop new products either that we offer directly, like state income tax refund transfers, SMB credit or products we partner with third parties to distribute on their behalf. Our 2024 investments in TPG will be to make some final enhancements to TPG next and to set the stage for future product offerings in 2025 and beyond. How does this all fit together? I believe it is obvious that Green Dot manages a portfolio of assets each individually have significant standalone value. Together, they have the potential to create much more value as we weave our shared services platform into a uniform vertically integrated offering that is unmatched in the market. Sitting below our retail, direct, BaaS, and PayCard offerings are a set of platforms that are or will be provisioning services to these channels at a scale these channels could not obtain on an independent basis.

These platforms include processing and issuing, product development and management, operations, including network disputes and customer care. Complementing these platforms is the Green Dot Network, which is a critical differentiated enabler for all of our channels distributing DDA products. And all of these businesses sit one I have not mentioned, Green Dot Bank. Our bank issues accounts for all of our distribution channels, holds and earns income on billion in deposits and itself has a number as of yet to be developed opportunities we will leverage in the future. I am often asked if I think only the bank is necessary for our business model. Why don’t we rent a bank like so many of our competitors and forego regulatory scrutiny? My answer to that is that, as I mentioned at the outset, the DDA sits at the center of all we do.

Owning a bank is hard, and expectations of performance and consumer care are high for companies that own banks. We need to care for our customers at those standards regardless of whether we own a bank or not. Not owning a bank would not change that. As I mentioned earlier, we look forward to the various state and federal regulators normalizing and equalizing regulatory oversight of the activities involved in issuing and managing DDA accounts regardless of whether it’s done in a bank owned or a bank sponsored model. When I look at the portfolio of businesses that we own and how fit into our strategy, I view it through two lenses, financial and strategic. From a financial perspective, we have a company that has a portfolio of businesses with diverse growth and profit characteristics that I believe complement each other and can drive value.

Business like retail and TPG are substantially generated capital that we allocate to those businesses or we see strong in growth profiles. Having strong sources of capital generation which leading market share is a differentiator and an advantage. Many of our competitors generate cash losses seemingly as a business model and rely upon external capital to fund their growth. At the same time, several of our businesses have attractive secular growth profiles like BaaS, Direct and PayCard, while Green Dot Network has a more modest growth profile but is a key part of the equation in growing our BaaS business and supporting the retail channel. They all operate in growth markets and I believe we have a unique competitive advantage that I discussed in my previous comments.

All of these businesses, which represent 70% of our revenue, are profitable and have attractive investment opportunities in front of them. While I’m on the topic of our financial profile, I believe it is important to point out that our free cash flow generation, while solid, should improve sharply beyond 2024 as we have now made the final $35 million investment into Tailfin Venture, bringing to conclusion the sequence of payments agreed to by prior management. Finally, this collection of businesses provides us with a unique position to be a leader in the embedded finance. The market for embedded finance is built on the premise of non-financial companies delivering financial services. When I think about what we do for our partners and our customers, it’s quite simple in certain respects.

Our partners in our direct channel deliver DDA accounts, payment cards, and facilitate financial transactions, all of which are powered by our vertically integrated platform. Now let me briefly discuss my corporate priorities for 2024. Our first priority is now and will always be ensuring we have in place all the capabilities, technical, organizationally, and operationally to ensure we have state of the art regulatory compliance systems and capabilities. Where the company has fallen short in the past, we have and will correct it, and we have every intention of being a model in the future for others to follow. Second, we’re getting more serious about the business of accelerating revenue growth and continuing to build momentum in our development efforts.

While the first half of 2024 faces some tough comparisons, as we move through 2024, we should see revenue growth reaccelerate. As you have noted, I have commented on various investments in 2024. We will be making a number of investments in our product and servicing capabilities to bring us to par where we are not into lead markets where we can. Third is execution. This is a priority in ’23, and we have gotten better at execution, but I still see room for improvement in how we go about executing our initiatives, both in terms of timelines and improving outcomes associated with those efforts. As we improve here, we should expect further efficiency and margin improvements, which will enable us to continue to reinvest while driving earnings growth.

Finally, we will continue to invest in people. We must operate a high performance culture with high focus on developing management capabilities. With that, I’d like to welcome two new members of the management team, our new Chief Human Resources Officer, Michael Meston and our new Chief Product Officer, Melissa Douros. Michael has a long career with large multinational technology companies, and Melissa brings a wealth of payment, bank, and technology experiences from Discover. Both Michael and Melissa are talented seasoned executives, and I’m excited to welcome them to the team and look forward to the positive impact that they will bring to Green Dot. In closing, we had a productive 2023 and made numerous strides in positioning Green Dot to be the leader in embedded finance.

I would like to thank the team for all their hard work and efforts in 2023. There is still plenty of work to be done, but the team is energized our outlook for 2024 points to accelerating fundamentals. I look forward to updating you on our progress in future calls. And with that, Jess and I will be happy to take your questions. Operator?

Operator: [Operator Instructions] And the first question will come from Tim Switzer with KBW.

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Q&A Session

Tim Switzer : I appreciate all the color you guys provided. I think you guys have been pretty qualitative about how the revenue impact and earnings should improve over the course of 2024, particularly, as we start lapping over last year and you get benefits from new BaaS partners. But can you maybe help quantify for us either revenue or EBITDA or something as we get towards the end of 2024 and enter ’25? Like, what are we looking at here on either, like, a year-over-year basis, growth rate, or anything like that? Can you guys help us out?

Jess Unruh: Let me take a stab at commenting on each of this is buried in a very long script, so I understand some of it may be hard to find. On the consumer business, we talk about first half revenue declines as we’re lapping some program deconversions, et cetera. And then in the back half of the year, things are improving as we launch PLS and we have continued growth from GO2bank. So I would expect in the back half of the year to have sort of mid-single-digit growth rates in the consumer business, that’s revenue. In B2B, we talk about mid-20% growth sort of throughout the course of the year. And then in money movements, I think we commented that in the first half of the year, we would have roughly single-digit revenue growth, and we would have higher more pronounced growth rates in the back half of the year as, the Green Dot Network builds on its business development pipeline, launch of PLS, et cetera.

So you end 2024 with a, call it, mid-teens growth rate in the Money Movement business. Let me stop there and see if I’m answering your question.

Tim Switzer : The other question I have on the expense side. It sounds like you guys, you finish the core conversion so that expense is now out of your run rate. It sounds like you should be able to finish your, AML/BSA investments by mid-2024. Where do you guys want to put your investment dollars after that? Where will you be focusing your investments?

George Gresham: Just a few clarifications on some of the points you just observed. First, it is correct that the conversion was completed by the end of August. There were lingering expenses that trailed in through the fourth quarter. I think those are mostly behind us at this point. So that on a go forward basis, is that in the system. I will point out that although we have heightened BSA/AML investments in the first half of the year relative to the second half of the year. Our overall investment in compliance related activities, BSA/AML, internal audit compliance department, et cetera is up fairly significantly on a year-over-year basis. So it will dip a bit in the back half of the year to a more normal run rate in the back half of the year.

So I wanted to clarify that. But more importantly on a prospective basis, our investments. So there’s a couple categories of investments we’d like to make and are making this year in my discussion, I went through kind of those categories. So, in certain, so in our vast business, for example, we are building out API libraries or sandbox, etcetera, in order to make our product more competitive in the marketplace. Now that needs to be done, that will be done this year. We are building a number of tools and capabilities to accelerate the onboarding of opportunities that we win because it’s, frankly, unacceptably long at this point. So we’re making those investments, and we’re building out our product features and capabilities in order to provide more services for more use cases in our distribution channels.

So in general, those are the nature, that’s the nature of our investments that we’re making, on a prospective basis.

Operator: [Operator Instructions] Our next question will come from George Sutton with Craig-Hallum.

James Rush: Hey, guys. James on for George. Thanks for taking my questions. It’s been about three years since GO2bank launched. Can you maybe talk about how the GO2bank product has kind of evolved, how various customer cohorts have performed, and any key milestones you’re hoping to achieve kind of going forward over the next couple of years?

George Gresham : Yes. Thanks, James. Yes. As you have a chance to go back to that long script, I think you’ll see some, quantification of the size of GO2bank. But what’s particularly important GO2bank is and remains our flagship consumer product. That’s not going to change. To your point, it was launched three years ago. It is due for a user experience update. So to Tim’s last question, I neglected and should have added that, part of our investment structure in ’24 and ’25 is significant UX experience up updates for both, GO2bank, Walmart MoneyCard, and the any other Green Dot product. So those investments are being made. And, as we move through that, we’ll be adding and enhancing features to GO2bank, in order to, make further inroads into our target market, which is depending on how you count it, 70 million, 80 million, 100 million individual consumers that are digital first in the United States.

So the growth rate’s been very good. The profitability of GO2bank’s been very good. We’ve had a lot of success. We’ve been, a bit, burdened by, retiring brands as we focus on GO2bank. So we’re almost through that life cycle. So, GO2bank is doing very well and we expect it to continue that trend into the future.

James Rush: And it sounds like, I mean, you guys are making some more internal investments, but just sort of given where the stock is, some of the commentary about a potential fundamental improvement in the back half of the year, improving free cash flow generation, could you just sort of comment on how you’re thinking about capital allocation and sort of other potential strategic opportunities you might be considering?

George Gresham : Sure. Commenting on a on a stock that’s trading at something like 2x, is kind of beyond my ability to rationalize, frankly. The point of this kind of extended discussion of our assets and our strategy was hopefully to remind our constituents of being amazing and incredible value that underlines the consolidated entity. We’ve got some spectacular businesses that are generating a lot of cash flow. There’s a lot of opportunity to weave these businesses together to create just an amazing offering in the market for embedded and consumer finance products. And that’s the journey we’re on. As it relates to, capital, in the near-term, so the next few quarters, I wouldn’t expect, don’t expect as of today any dramatic announcements with respect to capital allocation if the underlying your question is, for example, a share repurchase or something like that.

We don’t, we’re quite cautious with the use of our capital at this point as we move through this period. As we get into the year, and we’re going to start seeing growth again, I think that will afford us a bit more latitude with respect to some capital choices. So absent big capital moves, we’re going to continue to deploy our capital, in incremental ways to make each of our business units stronger and better and more competitive. And so that’s our approach, until you hear otherwise.

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

George Gresham: Well, thank you, operator. I just want to thank all of you who have chosen to join us today and are along for this journey. I know it’s been some challenges, but the company is making great strides. We’ve got the right team in place. Very excited about the future, and appreciate you taking the journey with us and look forward to talking to you in the near future. Take care. Bye-bye.

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