You are here

Amex Enters PrePaid Too Soon

Adam Rust's picture

Posted June 15, 2011

American Express says that it will offer a new prepaid debit card, but the card's features are not competitive.

Amex has designed a card with some very unusual high-value benefits. The card comes with roadside assistance. The card has a rewards program. I can't think of another prepaid product with those offerings.

Unfortunately, American Express isn't providing basic features that make a prepaid card useful to an unbanked household.

This card is little more than a destination for a MoneyPak load, or a means to withdrawing cash from an ATM.

The card does not offer a real billpay facility. Nowadays, people pay bills electronically. There is this whole system out there where you don't need paper checks! Actually, this account isn't going to offer checks, either.

My representative said that I could not deposit a paycheck on to an Amex PrePaid card, either. She said that they were hoping to have that up in six months, "but no promises." She did say that the card offered FDIC protection and complete protection against fraudulent transactions.

Amex touts that the card is simple and comes with very few fees. This is true. There is no monthly fee to have a card. You can get a card online for free, too. But it is hard to see that the lack of capacity in the card is part of the reason for wy it costs less. You can't pay for services that you can't use. Customers can use the card to get cash - indeed that is one of its few functions - but you will pay $2 for each time you use it, save for the initial free withdraw every month. Card holders can probably expect to pay another free from the ATM owner. Moreover, this is a fee to get cash that came from a $4.95 MoneyPak load.

The card works for free at retailers for PIN and signature transactions. Many cards do charge for one or both of these actions. However, the card is only useful where American Express is accepted. Plenty of merchants don't take Amex. To most merchants, Amex is still and will remain a charge card. A retailer might get the benefit of lower fees from debit swipes post-Durbin, but they will be paying plenty to offer Amex to charge customers.  

Amex needs to add billpay and make it possible to load paychecks on to these cards before it will be able to compete for prepaid.

Unclear about Durbin

The Durbin Amendment imposes cap fees on interchange transactions made through cards issued by some banks. One of the more controversial elements of Durbin, but also one of the details often ignored in reporting about it, is its applicabilty to different issuers. Only financial institutions with more than $10 billion in assets are subject to Durbin and its 12 cent interchange maximum. Prepaid is largely excluded from Durbin, not as a full carve-out, but because most of the big prepaid issuers are too small.

If American Express issues these cards through American Express Centurion Bank, then it will be entering prepaid at a competitive disadvantage. Amex Centurion has $29 billion in assets. To me, the key to creating customer value in prepaid is to make it possible for the consumer to use the card as their main payment tool. High interchange fees allow the issuer to generate substantial card revenue through payments from third-parties. The Green Dot card, for instance, has no monthly fee if you use the card 30 times in one month. Thirty interchange fees brings in plenty of cash per card. The Amex card will get less interchange per transaction and its limited set of features means that it will have fewer transactions to generate fees. The card works for Amex if people use it regularly to get cash out of ATMs.

My representative did not know the name of the issuing bank. Her supervisor did not know it, either. Moreover, my review of their site , including its FAQ and its rules and regulations page, did not have that, either.

All in all, I think Amex has a change to create a new benefits-rich card that attracts customers. Those customers seem likely to be drawn from a different demographic than the ones that normally adopt prepaid. Maybe that will create a unique "moat." This is a Warren Buffett company, and Buffett is all about the moat, but only time will tell if that strategy works in this environment.