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 (NYSE: AXP) has had a big disadvantage to overcome in helping customers take advantage of new technology to streamline their finances. But with a new initiative, the company is looking to leapfrog its competition and do battle with rival card networks Visa (NYSE: V) and MasterCard (NYSE: MA).

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 (NYSE: JPM) and Bank of America (NYSE: BAC), American Express doesn't issue debit cards that are linked to checking accounts. As a result, as demand shifted away from traditional credit cards toward debit-oriented products, American Express found itself without a horse in the race. With global spending on Visa and MasterCard-based debit cards rising to almost $4 trillion last year, that was a situation AmEx couldn't allow to continue.

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 (Nasdaq: EBAY) PayPal.

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 (NYSE: PAY) and NXP Semiconductors to develop payment terminals specifically designed to interface with Android smartphones. With credit card companies scurrying to partner up with smartphone makers before the best partnerships are already taken, AmEx has an uphill battle to stay relevant to a new generation of shoppers.

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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