Amex’s aggressive move into prepaid cards

By Felix Salmon
June 15, 2011
Amex prepaid card is a huge improvement, from a consumer perspective, over any prepaid alternative.

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The new Amex prepaid card is a huge improvement, from a consumer perspective, over any prepaid alternative. It’s free to buy, there’s no monthly fee, and there’s no fee for making purchases: compare the competition, things like RushCard’s $9.95 per month, or Walmart MoneyCard’s $3 per month, or BanXcard’s $2.95 per month. And that’s just the beginning of the charges you find with such cards — charges which are increasingly resulting in subpoenas and other attacks on opacity.

The Amex card is so attractive, indeed, that it’s even beginning to start being compared to checking accounts. A checking account is still a better bet than a prepaid card if you’re good at avoiding nasty fees, of course. But the Amex card is never going to surprise you with something nasty and unexpected in the way that checking accounts are prone to doing.

Amex isn’t doing this for love, of course — the idea is that it’ll be able to make enough money on interchange fees to make the product profitable. (For reasons which are a bit obscure, prepaid cards were exempted from the Durbin interchange-fee reduction.) But the fact is that no one has managed to come up with a product this attractive in the past, and none of the other prepaid-card merchants have been able to produce a card with no monthly fee. (Well, there’s the pay-as-you-go RushCard, but that costs $1 per transaction, plus $1.95 per ATM withdrawal.)

It can’t possibly be a coincidence that Amex is launching this product just as Durbin is slashing debit interchange fees. But there’s nothing in Durbin which makes this product any more profitable for Amex — the income that Amex gets will be the same now as it would have been if they launched this a year or two ago. So what’s going on here? Why is Amex launching this now?

My feeling is that Amex is looking at this as a game with an asymmetrical payoff. Amex has been pushing gift cards for a long time; this is basically a glorified reloadable gift card, and as it starts getting adopted by people who would never normally use an Amex card, it increases the pressure on merchants to accept Amex as payment. And there’s always a chance that this product could become hugely popular — if banks start making their current debit cards extremely unattractive in the wake of Durbin.

I don’t believe that banks will start charging for debit cards, or applying fees to debit-card transactions, or the various other horribles which they threatened during the big debate over debit interchange. But it’s possible. And if that happens, people with checking accounts are going to start looking for alternatives to their current debit card, and Amex will be right there waiting for them. The prepaid card is also safer than a debit card, in that it’s easier to contest fraudulent charges and have them refunded.

More generally, we’re entering a world where there’s going to be a lot of disruption in the payments space, with clearXchange going up against PayPal and many other dot-com startups, including Square. No one knows who’s going to win this war. It’s possible that no one will: payments might simply fracture into dozens of different systems with relatively small market share. Given the huge uncertainty in payments, it’s probably a good idea to have as many different products as possible and push them hard during this rare period of upheaval and change. You might not make a lot of money in the short term. But if you’re not aggressively in the game, you’ll never have a hope of winning.


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“But there’s nothing in Durbin which makes this product any more profitable for Amex”

Of course there is; a product is always going to be more profitable if its close substitutes are crippled or outlawed. Amex may well have decided that the volume it can achieve with this product in a post-Durbin world is big enough to cover fixed costs while in the pre-Durbin world it was not.

Posted by dWj | Report as abusive

If there is no collusion, if there is no government protection provided to payment processors via political means, then the price of electronic payments will be driven by the cost to the processors, just like any other commodity consumer product. Which will be a lot less than it is today, because there is collusion and government protection of the credit and debit cartels that should be prosecuted runder the RICO act.

Posted by KenG_CA | Report as abusive

The odds are this is just a play on traveler’s checks and all prepaid cards.
By making a prepaid card that can grab market share, they
1) Do exactly as Felix stated and grab higher interchange fees then they can on their normal cards

2) They collect interest on all outstanding balances on the cards that people have, which is a SIGNIFICANT sum of money on all such types of transactions.

Basically, they are trying to make a road for people to follow to their most profitable lines of business. That is ALL this is.


Posted by REDruin | Report as abusive

IIRC, Amex already has, by a significant margin, the highest interchange fees in the industry. That’s why so many merchants refuse to accept them. I don’t understand what about these cards is so compelling that retailers will willingly give up ~2% of their revenue when they accept them. For the sake of the marginal customer? I don’t see it.

Posted by dyaseen | Report as abusive

Felix’s point, dyaseen, is that there’s a chance there will be a lot of marginal customers. If the banks follow through on their threats to riddle debit cards with extra fees, and AMEX offers a product which doesn’t need those fees because it is exempt from the Dodd-Frank fee cap, you may see a lot of people move to AMEX.

Felix doesn’t think its likely, but its a possible outcome.

Posted by AnonymousChef | Report as abusive

I take your point, AnonymousChef, but I was looking at it from the other side of the equation. Felix was examining the motivations of the consumers, and I the retailers. I could see how a mass uptake of this product would indeed “[increase] the pressure on merchants to accept Amex as payment,” but there we run into a chicken-and-egg problem. Before the retailers could feel this pressure, there would first have to take place a mass uptake of the cards by consumers who would at first have relatively few places to use it. In order for this to happen, these consumers would have to be persuaded to tie up their cash in an inconvenient vehicle.

Given all of this, if bank debit card fees became truly onerous (imho), either consumers would switch to cash, or some new entrant would enter the market and massively undercut Amex with cheaper traditional checking accounts. With so much potentially at stake, Amex’s notion that they’re going to have their cake (sky-high interchange fees), and eat it too (take all the float on everyone’s captive cash) seems utterly fanciful.

Posted by dyaseen | Report as abusive

Several companies have been in this space for a long time, hidden partially however, in the payroll conduit. Amex is just copying a business plan that has been operating very well for a 1/2 dozen years or longer! As for the fuzzy bank exemption for this slice of pre-paid- look no further than fee’s enjoyed by gov’t entries themselves, they pay back interchange monies to themselves for a lot of internal use of pre-paid, unemployment, SSI,etc.

Posted by PHIPP | Report as abusive

Banks no longer issue their own banknotes, as they did in the nineteenth century. On the face of it, this makes our present monetary system quite different from what it was formerly. But it is not so different after all: pre-paid cards are quite similar to banknotes (with exchange fees as an extra kicker).

Posted by Philon | Report as abusive

I like the AmEx prepaid card. They have their own reasons, but the card is actually very good, especially for consumers with no access to credit cards and bank accounts. mexs-new-prepaid-card-shows-how-issuers- will-fight-debit-fee-limit.

Posted by gstanski | Report as abusive