(AXP) American Express Diversifies with Prepaid Card

Diversifying its scope of operation beyond affluent customers, American Express Co. (AXP) (AmEx) is expected to introduce a new convenient prepaid debit card on Tuesday, which will operate out of the Dodd-Frank regulatory premises.

Moreover, this new revenue-generating platform is created to target the customers of the bank giants such as JP Morgan Chase & Co. (JPM), Wells Fargo & Co. (WFC) and Bank of America Corp. (BAC), who have been snipping off their debit-reward programs owing to the effect of the regulation.

According to the provisions of Dodd-Frank Act signed in July 2010, prepaid cards and banks with less than $10 billion of assets do not come under the debit-interchange fee zone that has been capped in the US. The Act, however, restricted the interchange fees on debit transactions, charged by banks on the merchants, should be  about 7–12 cents, drastically scaling it down by 72%–84%. These fees constitute a major component of card issuers’ revenues.

Hence, AmEx has taken this clever step of operating in the exempted category and draw customers toward the prepaid card usage. To make the offer more lucrative, AmEx will be providing the prepaid card online at nil cost, although it will carry a purchase price of $5 once it’s available in retail locations by late 2011.

Management of AmEx proclaims that with more than 1 billion transactions, the usage of such prepaid card has grown by over 35% last year and is expected to accelerate expansion going ahead, given the recent legislation in the US that limits the scope of debit and credit cards now.

AmEx also aims to tap the less-affluent group of the society through prepaid cards as these cards do not have an expiry, are low on cost and can be easily refilled through checking or savings account. Prepaid cards can also be used for online shopping and other normal spending, while keeping a good watch on one’s pocket. This kind of a budgetary tool will further attract consumers as they have grown more cautious in spending after the recent recession and credit market crisis.

The company is initially offering the prepaid cards only a couple of fees rather than a number of fees that consumers have to pay for other type of cards. One of these is a $4.95 charge on loading money in the card from financial providers such Wal-Mart Stores Inc. (WMT), Western Union Co. (WU) and Walgreen, the other is a charge of ATM withdrawals. While the first withdrawal from an ATM is free every month, the rest is followed by a $2 charge. However, consumers need not incur any fee to transfer money in their cards through a checking or savings account.

Overall, we believe this simplified cost structure along with a competitive pricing will help AmEx expand its scale of operations and leverage, while also opening up a new revenue-generating medium.

Moreover, this appears to be a crucial step for AmEx to augment its core processing capabilities now that an increasingly complex payments environment has been created as a result of the legislations.

Hence, the card processing companies such as AmEx, Visa Inc. (V) and MasterCard Inc. (MA) are vigorously seeking newer opportunities in order to maintain their competitive and market position by diversifying through mobile banking, eCommerce and prepaid cards, among others.

AMER EXPRESS CO (AXP): Free Stock Analysis Report

BANK OF AMER CP (BAC): Free Stock Analysis Report

JPMORGAN CHASE (JPM): Free Stock Analysis Report

MASTERCARD INC (MA): Free Stock Analysis Report

VISA INC-A (V): Free Stock Analysis Report

WELLS FARGO-NEW (WFC): Free Stock Analysis Report

WAL-MART STORES (WMT): Free Stock Analysis Report

WESTERN UNION (WU): Free Stock Analysis Report

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