Dive Brief:

• Prepaid card company-turned-bank Green Dot plans to buy Republic Bank's tax refund processing unit for $165 million in a cash deal expected to close in this year's fourth quarter, the companies said in a press release Friday.
• The combination would cement Green Dot's place as one of the biggest payment processors of U.S. tax refunds, financial services firm William Blair said. The company processed about 12.5 million tax refunds in 2020, according to its annual filing with the Securities and Exchange Commission (SEC). Green Dot's tax refund business has grown about 14% since ramping up in 2014.
• Green Dot's plan has been to cross-sell other services, which include debit, prepaid, checking, credit and payroll cards, to tax-refund customers.

Dive Insight:

Green Dot has sought to carve out a niche providing financial services to low- and moderate-income Americans, and preparing their taxes reinforces such ties.

The Pasadena, California-based company, founded in 1999, made its first big splash in the tax refund processing space seven years ago, when it bought Santa Barbara Tax Products Group for $320 million. 

Upon completing that deal, Green Dot founder Steve Streit said, "We believe this transaction will provide meaningful earnings diversification and margin expansion, as well as add a new and robust distribution platform for Green Dot's products and services." 

Dan Henry, Streit's successor as CEO, is following that lead but faced financial headwinds last year.

Green Dot's net income dropped 77% in 2020 to $23 million due to increased costs related to the impact of the COVID-19 pandemic, even as revenue climbed 13% to $1.25 billion, the company said in its annual filing with the SEC.

The company's acquisition of the Republic Bank unit will tighten Green Dot's grip on the market for processing U.S. consumers' tax payment services.

"We believe this acquisition makes Green Dot one of the clear leaders in the space as it is one of the largest processors of tax refund disbursements in the United States," William Blair analysts said Friday.

Green Dot spokesperson Whit Chapman declined to say whether the company considers itself the largest processor of U.S. tax refunds today, or what percentage of U.S. refunds Green Dot processes.

The 2014 Santa Barbara deal gave Green Dot relationships to four of the six top U.S. consumer tax preparation companies, the acquiree's law firm, Willkie Farr & Gallagher, said at the time.

Green Dot earns revenue when it processes consumers' tax refunds on behalf of firms that prepare consumer tax returns.

Green Dot's "money movement services" segment, which includes the majority of the company's tax refund services business, posted revenue of $288 million in 2020 and $124 million of adjusted EBITDA, William Blair said.

William Blair, in its report, called the Republic Bank unit acquisition "low risk" and "highly synergistic" with the 2014 Santa Barbara group purchase.