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Financial institutions have been on the defensive since their balance sheets melted down during the housing bust. Government bailouts have turned public opinion completely against them. Yet while many banks have responded by grabbing for more profits, one company is taking a longer-term view with a product that actually makes sense for some customers.
The prepaid card you shouldn't leave home without
This week, American Express (NYSE: AXP ) announced that it would offer a prepaid card to consumers. The move represents a significant strategic initiative for the company, as AmEx has long lacked exposure to the debit-card market that Visa (NYSE: V ) and MasterCard (NYSE: MA ) have used as a growth vehicle. With the debit-card market representing $1.85 trillion in sales for Visa and MasterCard last year, AmEx couldn't afford to leave it untouched.
The AmEx offering is far from the first available to customers. Small companies including Green Dot (Nasdaq: GDOT ) and NetSpend Holdings (Nasdaq: NTSP ) are the biggest prepaid processors and have been hugely profitable, thanks in large part to activation and maintenance fees. One of the most egregious examples of prepaid cards was the short-lived Kardashian Kard, with its $100 annual membership fee and numerous additional charges for everything from paying bills to using ATMs.
What makes the AmEx card stand out is that it charges very few fees. Fund the card from a checking account, and you won't pay a reload fee. You get one free ATM transaction every month. The card never expires, and it lacks foreign currency conversion fees. Even more impressively, AmEx will offer credit-card-style perks like purchase protection and roadside assistance.
Hitting competitors where it hurts
Hearing these customer benefits, you might figure that the idea behind the AmEx card is to hammer home fees on retailers who accept their cards. After all, high debit-card fees have made plenty of money for issuers like JPMorgan Chase (NYSE: JPM ) and Wells Fargo (NYSE: WFC ) , and they've led to Congressional scrutiny and a proposed cap on those fees. In fact, some banks are hoping to use prepaid cards as a way to circumvent debit-card legislation.
But AmEx is cutting merchants some slack with its offering, too. Although actual fees weren't disclosed, AmEx said that a lower rate structure will apply to its prepaid cards than merchants pay for AmEx credit cards.
Good news for customers?
I've long wondered what the big deal is about debit and prepaid cards. Call me old-fashioned, but the benefits of using credit cards -- including the best rewards programs and the ability to float expenses for a month or longer -- are just too good for responsible cardholders to pass up.
But with fees disappearing, there are definitely some legitimate uses for prepaid cards. First and foremost, using the cards as budgeting tools or methods to help children learn how to handle money makes a lot of sense. Moreover, for those who don't have access to banking services and would otherwise carry substantial amounts of cash around, a prepaid card is a definite improvement from the standpoint of personal security.
Where's the money?
The key question is whether prepaid cards will ever offer the same levels of rewards that many credit cards do. Given that prepaid cards aren't going to be subject to the same limits on transaction fees as debit cards -- or at least not yet -- companies like AmEx should be able to earn enough profit from card use to justify giving customers cash back or some other perk for using their prepaid cards.
I don't see that happening anytime soon. With many people impressed enough at the fact that AmEx isn't gumming up the works with extra fees, the company doesn't have any incentive to reward cardholders further.
Financial institutions clearly want new payment methods to replace old, reliable ones. If you want to get the most out of whichever method you use to pay, you need to stay vigilant to ensure you don't end up losing money in the name of progress.
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