Paying for things used to be so simple: You'd just pull out your wallet, take out some cash, and hand it over to the cashier. Nowadays, you have lots of choices when it comes to figuring out how to pay for something -- and the one you choose can make some companies rich and put others at risk of falling into obscurity.
The newest innovation in payment systems involves using your smartphone to link directly to your bank account. Until recently, American Express
Bridging the gap
For years, American Express has gone without something that customers have increasingly taken for granted: debit cards. Unlike card-issuing banks like JPMorgan Chase
In response, AmEx plans to roll out a prepaid electronic wallet called Serve. Using the service, customers can send money to each other using their smartphones, as well as shop online or obtain physical cash cards that act like other American Express charge cards. The company hopes that Serve will offer an alternative not just for debit card payments but also for eBay's
Customers will be able to add funds to their Serve accounts using credit cards, debit cards, or a direct transfer from a checking account. After an initial period, fees similar to what PayPal charges will apply for credit card funding, but the company doesn't plan to charge for funds from checking accounts or debit cards. On the flip side, customers can use the physical cards they get from AmEx to make one free ATM withdrawal per month, with a $2 fee applying for additional withdrawals.
Dealing with debit
Perhaps most importantly, the cards that Serve customers receive will be treated as prepaid cards for purposes of debit card reform laws when customers use them to make live payments at bricks-and-mortar stores. That means that the proposed $0.12 cap on debit card interchange fees won't apply, leaving AmEx free to charge fees closer to the 2.5% that merchants pay on credit card purchases.
Unfortunately for AmEx, some of the moves that competitors are making in the payment space make a card-based solution seem out-of-date even before it's available. Google has been working with companies like VeriFone
Investing for the future
After having missed the debit card revolution, it's good that American Express is at least trying to defend its turf by getting into the smartphone-based payment arena. But the company is late to the game and has ceded a huge advantage to PayPal on the person-to-person transfer front and to its other competitors on mobile payments.
Even if the Serve initiative isn't as successful as the company hopes, AmEx isn't going to disappear overnight. But with the company's future growth prospects resting on its ability to stay innovative, AmEx desperately needs a win to maintain the reputation it built decades ago.
To make sure you see what happens next with American Express, put it on your watchlist today.
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Fool contributor Dan Caplinger wants rewards for opening up his wallet. He doesn't own shares of the companies mentioned in this article. American Express, Google, and Visa are Motley Fool Inside Value recommendations. Google and NXP Semiconductors are Motley Fool Rule Breakers picks. eBay is a Motley Fool Stock Advisor selection. The Fool owns shares of Bank of America, Google, and JPMorgan Chase; and through a separate account in its Rising Star Portfolios also has a short position on Bank of America. 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 Fool's disclosure policy doesn't care what's in your wallet.