American Express (NYSE:AXP) has been the best in the business at creating exclusive "clubs" of cardholders for some time now. On top of that, the company has had success in other areas of the business, such as co-branded cards and prepaid gift cards.
Now American Express is following the lead of some of its peers and targeting the "underbanked", or the portion of the population that doesn't have traditional checking or savings accounts, and generally doesn't have credit cards. However, there is one thing about Amex's Serve product that gives it a big competitive advantage over similar products from Wal-Mart and Bank of America.
American Express Serve: the details
Serve is American Express' reloadable prepaid card account. It has been available in its current form and fee structure for about a year now.
The card works just like an American Express credit card combined with a checking account. Customers can enroll in free online bill pay and can withdraw money for free at over 24,000 ATMs. They can also send money to family and friends online or through Amex's mobile app.
So what makes this better than other prepaid card accounts?
The best deal for consumers
By far, the biggest selling point for Serve is that it's cheap. Other companies have similar product offerings, but none are as cheap as this.
The only fee customers have to pay is a monthly account fee of $1, and even this can be waived with at least $500 in deposits during each monthly statement period. And they don't even have to be direct deposits. Customers can use cash to put money on their account at more than 27,500 locations, including CVS, Family Dollar, Wal-Mart, and some 7-ELEVEN locations, and this can also result in a fee waiver.
There are also no card replacement fees, no cash reload fees, and no ATM fees in-network.
In contrast, Green Dot, which is partnering with Wal-Mart to offer a similar product, charges a monthly fee of $8.95, along with other fees such as $4.95 to replace a lost card. Western Union charges a $2.95 monthly fee, in addition to $2.95 for cash reloads, $1.95 to use ATMs, and $5 for card replacement. Bank of America's SafeBalance account charges a $4.95 monthly maintenance fee that has no direct deposit waiver.
Only $1 per month? How will American Express make any real money from this?
It's definitely true that the $1 monthly fee won't make American Express a lot of money, especially since the fee can be waived rather easily. Even if the company manages to build up a customer base of 5 million Serve cardholders, this means a maximum of $60 million in revenue per year. In 2013 American Express produced about $35 billion in revenue, so this would be just a drop in the bucket. Not to mention that the $1 monthly fee likely doesn't even cover American Express' administrative costs issuing the cards and maintaining the accounts.
However, think of this like Sony or Microsoft taking a loss on the PlayStation and Xbox gaming consoles. Once these companies get their consoles into consumers' homes, they stand to make incredible profits on the sale of games and subscriptions. The same logic applies here.
If you ask any merchant who accepts American Express about processing costs, you will undoubtedly hear something to the effect of "American Express is so expensive to accept." Amex is notorious for charging merchants much higher fees than Visa, MasterCard, and Discover. The company simply has such a desirable group of customers (thanks to the "exclusive clubs" of cardholders I mentioned earlier) that retailers deal with it and pay the higher fees.
The actual fees vary, but a quick search reveals that American Express charges "swipe fees" of about 3.5%, while Visa and MasterCard charge 2-3%.
So with Serve, American Express is relying on an influx of swipe fee revenue to drive profits. And there is definitely money to be made. If the average Serve customer uses their card to pay for just $250 per month in purchases (a conservative estimate), this translates to $8.75 in swipe fees per month, per customer.
Is it working so far?
Well, it seems to be. Although we don't know the exact number of Serve accounts currently open, the company is taking steps to expand the program, which tells me they're happy with the results so far.
For example, during the most recent quarter, the company expanded the retail availability of Serve cards to 32,000 locations by adding OfficeMax and Hy-Vee retail locations.
And perhaps even more significantly for future revenue growth, American Express has partnered with Intuit to allow clients of professional tax preparers to receive tax refunds on their Serve cards. This could be a huge driver of revenue in the first half of next year.
So while the bulk of American Express' card revenue is likely to continue to come from its credit card business for the foreseeable future, this is definitely a new and growing revenue stream worth keeping an eye on.