Green Dot 2011 Annual Report Download - page 44

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determine the average card lifetime for each pool of homogeneous products (e.g., products that exhibit the same
characteristics such as nature of service and terms and conditions) based on company-specific historical data. Currently,
we determine the average card lifetime separately for our GPR cards and gift cards. For our GPR cards, we measure
the card lifetime as the period of time, inclusive of reload activity, between sale (or activation) of a card and the date
of the last positive balance on that card. We analyze GPR cards activated between six and forty-two months prior to
each balance sheet date. We use this historical look-back period as a basis for determining our average card lifetime
because it provides sufficient time for meaningful behavioral trends to develop. Currently, our GPR cards have an
average card lifetime of nine months. The usage of gift cards is limited to the initial funds loaded to the card. Therefore,
we measure these gift cards’ lifetime as the redemption period over which cardholders perform the substantial majority
of their transactions. Currently, gift cards have an average lifetime of six months. We reassess average card lifetime
quarterly. Average card lifetimes may vary in the future as cardholder behavior changes relative to historical experience
because customers are influenced by changes in the pricing of our services, the availability of substitute products, and
other factors.
We also defer and expense commissions paid to retail distributors related to new card sales ratably over the
average card lifetime, which is currently nine months for our GPR cards and six months for gift cards.
We report our different types of revenues on a gross or net basis based on our assessment of whether we act as
a principal or an agent in the transaction. To the extent we act as a principal in the transaction, we report revenues on
a gross basis. In concluding whether or not we act as a principal or an agent, we evaluate whether we have the
substantial risks and rewards under the terms of the revenue-generating arrangements, whether we are the party
responsible for fulfillment of the services purchased by the cardholders, and other factors. For all of our significant
revenue-generating arrangements, including GPR and gift cards, we recognize revenues on a gross basis.
Generally, customers have limited rights to a refund of the new card fee or a cash transfer fee. We have elected
to recognize revenues prior to the expiration of the refund period, but reduce revenues by the amount of expected
refunds, which we estimate based on actual historical refunds.
On occasion, we enter into incentive agreements with our retail distributors and offer incentives to customers
designed to increase product acceptance and sales volume. We record these incentives, including the issuance of
equity instruments, as a reduction of revenues and recognize them over the period the related revenues are recognized
or as services are rendered, as applicable.
Reserve for Uncollectible Overdrawn Accounts
Cardholder account overdrafts may arise from maintenance fee assessments on our GPR cards or from purchase
transactions that we honor on GPR or gift cards, in each case in excess of the funds in the cardholder’s account. We
are responsible to the banks that issue our cards for any losses associated with these overdrafts. Overdrawn account
balances are therefore deemed to be our receivables due from cardholders, and we include them as a component of
accounts receivable, net, on our consolidated balance sheets. The banks that issue our cards fund the overdrawn
account balances on our behalf. We include our obligations to them on our consolidated balance sheets as amounts
due to card issuing banks for overdrawn accounts, a current liability, and we settle our obligations to them based on
the terms specified in their agreements with us. These settlement terms generally require us to settle on a monthly
basis or when the cardholder account is closed, depending on the card issuing bank.
We generally recover overdrawn account balances from those GPR cardholders that perform a reload transaction.
In addition, we recover some purchase transaction overdrafts through enforcement of payment network rules, which
allow us to recover the amounts from the merchant where the purchase transaction was conducted. However, we are
exposed to losses from unrecovered GPR cardholder account overdrafts. The probability of recovering these amounts
is primarily related to the number of days that have elapsed since an account had activity, such as a purchase, ATM
transaction or fee assessment. Generally, we recover 50-60% of overdrawn account balances in accounts that have
had activity in the last 30 days, less than 15% in accounts that have had activity in the last 30 to 60 days, and less
than 10% when more than 60 days have elapsed.
We establish a reserve for uncollectible overdrawn accounts for maintenance fees we assess and purchase
transactions we honor, in each case in excess of a cardholder’s account balance. We classify overdrawn accounts
into age groups based on the number of days since the account last had activity. We then calculate a reserve factor
for each age group based on the average recovery rate for the most recent six months. These factors are applied to
these age groups to estimate our overall reserve. We rely on these historical rates because they have remained
relatively consistent for several years. When more than 90 days have passed without any activity in an account, we
consider recovery to be remote and charge off the full amount of the overdrawn account balance against the reserve
for uncollectible overdrawn accounts.