As American Express (NYSE:AXP) looks for ways to grow after ending its deal with Costco, prepaid cards are becoming an avenue for putting its cards in the hands of more spenders. Recently, the company announced the first-ever prepaid card with a rewards program offering 1% cash back on each dollar spent.
Prepaid cards present an interesting opportunity for American Express to attract a demographic that traditionally has not been American Express customers. In a presentation with analysts earlier in 2015, American Express CEO, Ken Chenault, described prepaid cards as being very much like the company's travelers cheques business in that it allows American Express to connect with customers who aren't selected based on credit profiles.
For example, you certainly didn't need a credit score to purchase a travelers cheque when they were first introduced in 1896, just as you don't need one now. Similarly, you don't need a good credit profile to buy a prepaid card.
But introducing the American Express brand to the masses with travelers cheques made it easier for American Express to later grab its share of the credit-card market. Similarly, prepaid cards are making it easier for American Express to target customers for its credit-card segment as they become wealthier.
Chenault pointed to the fact that 44% of American Express' prepaid customers are under 35. And he also noted that, of customers who are aware of its prepaid businesses -- Bluebird and Serve -- its customers had a 30% higher view of the brand.
What prepaid cards mean for American Express
Prepaid card users generally spend less than credit card users in dollar terms, but believe it or not, they create almost as many transactions per card, per month.
Knowing this, it makes sense why American Express is keen on investing more into its prepaid business. By getting its cards into more hands, and by processing more payment volume, American Express builds on its moat. The more customers use its cards, the more difficult it will be for merchants to negotiate for lower discount rates, or simply not accept Amex cards altogether.
Furthermore, those who use prepaid cards tend to use them actively. In 2012, there were 23.5 million active general-purpose prepaid cards in the hands of customers. Of those, nearly 80% used their cards at an ATM, suggesting that it was effectively being used to store value -- something similar to a bank account for most users.
The prepaid business is still quite small. As of June 2014, American Express noted that it was processing payments at a clip of about $6 billion on an annual run rate, a mere fraction of its $1 trillion in billed business in 2014. But the growth possibilities are enormous.
With as many as 17 million Americans lacking a basic bank account, and 51 million considered "underbanked," according to the FDIC, there are potentially billions of transactions annually waiting to be captured by the winner of the prepaid market. American Express is certainly taking a stab at taking its fair share.
Jordan Wathen has no position in any stocks mentioned. The Motley Fool owns and recommends Costco Wholesale. The Motley Fool recommends American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.