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What They Forgot to Mention: Amex Bluebird in Wal-Mart

Adam Rust's picture

Posted October 9, 2012

Everyone seems to have forgotten an important thing about American Express prepaid debit cards.

They cannot accept a federal benefits payment.

I think that investors and the press have both over-reacted to the news of Amex's new contract with Wal-Mart to put their Bluebird prepaid cards on the shelves of the world's largest retailer. Immediately after opening, Green Dot shares fell fifteen

percent. By the end of the day, Green Dot shares were down twenty percent and NetSpend shares - which are not sold in Wal-Mart anyway - fell almost eight percent. The media's response was much the same; glowing reports on future profits and plenty of praise for the card's low cost.

I don't doubt that the Amex card can cost a person less, although I do think those savings are significantly overstated given that you still can't take out money at the point-of-sale with their cards.

However, I think the media missed a big flaw in the Amex/Green Dot dynamic. As long as the thirty percent of America that shops at Wal-mart continues to include a hefty share of the group now known as the 47 percent, then Amex's offering of a card that won't accept government benefits is going to face headwinds in taking away Green Dot's appeal. If they've addressed the issue of not having FDIC insurance for their prepaid cards, then it would pose more of a threat to Green Got. As it is, though, Amex will be blocked from getting some of the most profitable customers in those stores. It is a good thing - and possibly a great thing - for a card issuer when they can capture federal benefits recipients.

In general, all prepaid card companies want a greater share of their customers to set up direct deposit. It matters so much that Green Dot and NetSpend always update that metric to investors every quarter. It is hard to make money from a short-term customer. Fixed costs (setting up account, customer service calls, the card itself) regardless of how long a person uses their card. Industry says that one in four prepaid card holders use their card fewer than five times before they throw it away. This is why the direct deposit customer is so important. For many, making a decision to automatically deposit your paycheck on to a prepaid card signals a commitment to make that your primary transaction account. With that, the issuer and program manager can expect a regular flow of interchange revenue and possibly even fee revenue. Amex Bluebird will encounter plenty of fixed costs from its Wal-Mart contract, but they will not see any of the federal benefits gravy.

I would go so far as to say that direct deposit enrollment by a federal benefits recipient is the cream of the cream. Not only do those folks use the card as a primary account, but they never change payors. Workers change jobs, but people recipients of Social Security, VA, or federal pensions get checks for life. Without a doubt, accounts are lost when people change their job. Accounts are lost when people lose their job and remain unemployed.

I would also take Amex to task with their terms and conditions.  I mentioned to a reporter that I had read Amex's T and C for its prepaid cards. He interjected to say that Amex's management told him that a new terms and conditions would be coming out soon. Apparently, Amex intends to publish the new updated Bluebird T & C in the future.