When Kanye West raps about the need to “American Express myself,” it’s a fair bet that he’s not talking about shopping at a Walmart. And yet, defying decades of upscale marketing, American Express (AXP) has partnered with Wal-Mart Stores (WMT) on its newest product, a prepaid debit card, Bluebird, that’s now on sale in 4,000 outlets nationwide. Customers can add money to Bluebird at Walmart stores or online and use the card anywhere AmEx plastic is accepted. It’s targeted mainly at the 68 million Americans the Federal Deposit Insurance Corp. defines as “underbanked” or “unbanked”—a demographic very different from the customers AmEx has courted for decades with stylish ads showcasing luxury pursuits.
AmEx has calculated the gains are worth the risk to its gilded brand. If Bluebird proves popular, it won’t just capture more swipe fees for AmEx. It will also accelerate a remarkable, and largely overlooked, shift: American Express is no longer just a charge-card company. AmEx has become a bank—offering a growing list of services that now includes savings accounts, certificates of deposit, direct deposit, bill payments, free ATM withdrawals, and instant person-to-person payments. “The company has undergone a stealth kind of transformation to become more relevant in a digital economy,” says Guggenheim Securities analyst David Darst. It’s “better positioned now for the emergence of the online commerce environment.”
The barrage of offerings comes at a time when Americans are more open to switching banks or doing business with more than one. An Ernst & Young survey in March found that 58 percent of customers now bank with more than one company, up 9 percentage points from 2011. AmEx hopes that ferment gives it a chance to compete with banks in the mobile payments market, regarded as the industry’s next frontier, without any of the costs of maintaining bricks-and-mortar locations. “Bluebird is another iteration of the trend that technological advances are allowing you to reimagine what financial services might look like,” says Dan Schulman, the AmEx executive in charge of enterprise growth, which includes the Serve program. Serve allows for instant person-to-person payments via e-mail, text message, and Facebook. “The banking system of yesterday, with branches as the mainstay, is really in many ways not necessary,” he says.
AmEx technically became a bank at the height of the credit crisis, in November 2008. The government had just made $700 billion available to struggling financial companies, and AmEx, whose stock had fallen more than 50 percent that year, applied to become a bank holding company to get access to those funds. The Federal Reserve quickly approved the request, waiving its usual 30-day waiting period, and the company began offering FDIC-insured savings accounts and CDs the next year. From $15 billion at the end of 2008, AmEx’s deposit base more than doubled to $37 billion at the end of September. AmEx’s core charge-card business has rebounded since the crisis, with the amount its average cardholder spends each year climbing to $14,124 in 2011—although spending growth is slowing.
Multiple surveys have found that consumers are increasingly dissatisfied with their banks, which today charge high fees for essentially no interest. Overdraft fees, monthly fees, minimum balance fees, and other charges have driven 1 in 10 American households out of the banking system entirely, according to the FDIC, and 1 in 4 households use payday loans, check cashing windows, pawnshops, or other services outside the banking mainstream to manage their finances.
About 18 percent of unbanked households turned to prepaid debit cards in 2011, according to the FDIC. Consumer advocates have complained about the cards’ high fees, but that’s changing as new cards such as Bluebird—and similar offerings such as Chase’s (JPM) Liquid card—compete for market share and drive down costs. “This tool looks like a win for consumers,” Bankrate.com (RATE) wrote about Bluebird. Another site that critiques personal finance options, NerdWallet, called the card’s low-fee schedule “exactly as momentous” as AmEx and Wal-Mart claim it is.
Analysts say Bluebird offers enough features, such as the ability to give children an allowance via their own linked Bluebird sub-accounts, to appeal to affluent customers as well as the underbanked. “I wouldn’t call this a downmarket product,” says Guggenheim’s Darst. “Can it compete for someone who’s part of the traditional banking system, who has a checking and a savings account? I think it can.”
Peer-to-peer payments are also a way for AmEx to expand into developing countries where merchants do not take its cards—but where most people carry cell phones. Those economies will not “follow the same path the U.S. did, from cash to checks to plastic to mobile payments, but leapfrog right from cash to mobile payments,” says AmEx’s Schulman.
Fees on charge-card transactions still provide the bulk of AmEx’s revenue— about 80 percent, according to JPMorgan Chase (JPM) analyst Rick Shane. While generating more fees, prepaid cards may also help sell more credit cards, he says. He offers the example of a parent who gives a Bluebird card to a child. Now all of her payments go through the AmEx network, generating fees; and when it’s time to sell her on her own AmEx card at age 21, the company has a rich data file from which to create a customized solicitation.
AmEx’s rivals are also trying to capture traditional banking customers. In August, Discover Financial Services (DFS) announced a deal that will let its customers use their PayPal (EBAY) accounts to make purchases. A startup called Simple offers users a stark white Visa (V) debit card and a smartphone app for tracking purchases and sending payments to friends.
“I don’t think that anybody really knows what’s going to be the winning feature,” says Shane, of the mix of digital payment options on offer today. “American Express, at the end of the day, will be very indifferent to whether you pay with your phone or by presenting a piece of plastic. But if the market goes one way and they don’t offer that option, and they’re losing share to someone else because of it, that’s what they can’t afford to do.”