American Express Co. is offering a low-cost prepaid card that’s exempt from new U.S. caps on debit-swipe fees and may draw customers from some banks that are trimming rewards programs because of the rules.
AmEx, unlike other prepaid-card issuers, won’t charge for online purchases, monthly maintenance, balance inquiries, activation, replacement cards or when customers reload their accounts through checking and savings accounts, the New York-based lender said yesterday in an e-mailed statement. There will be retail fees for customers who reload with cash, it said.
The cards may be an alternative for customers of the biggest U.S. banks, including JPMorgan Chase & Co. and Wells Fargo & Co. Those lenders announced plans to scale back their debit-rewards programs after caps on the swipe fees they collect were enacted last year. Reloadable prepaid cards, and banks and credit unions with assets of less than $10 billion, are exempt.
“More and more people will probably move toward prepaid cards as a substitute,” Dan Schulman, group president for enterprise growth at AmEx, said in an interview. Prepaid-card use expanded 35 percent last year with more than 1 billion transactions “and we think it will grow even more quickly as a result of the recent legislation,” he said.
The Federal Reserve has proposed capping swipe fees, or interchange, at 12 cents a transaction, replacing a formula that averages 1.14 percent of the purchase price. Visa Inc. and MasterCard Inc., the biggest payment networks, set the fees and pass the money to card-issuing banks, whose revenues may decline by $12 billion a year when the caps take effect July 21.
Green Dot, NetSpend
“The whole industry is looking at prepaid offerings as a way to generate growth” outside of the fee restrictions, said Brian Foran, an analyst at Nomura Securities International Inc.
AmEx’s new card may force Green Dot Corp. and NetSpend Holdings Inc., the biggest U.S. prepaid processors, to cut fees, said Mike Taiano, an analyst with Sandler O’Neill & Partners.
“It could add pressure to companies that charge maintenance and activation fees with a product out there with virtually no fees,” Taiano said.
Dan Henry, chief executive officer of Austin, Texas-based NetSpend, welcomed the competition.
“The announcement from AmEx brings additional validation to the prepaid space and builds product awareness to the more than 60 million underbanked consumers,” Henry said in an e-mailed statement.
American Express fell 9 cents to $48.15 at 4:15 p.m. in New York Stock Exchange composite trading. Green Dot, based in Monrovia, California, climbed 1 percent to $35.45 and NetSpend advanced 1.8 percent to $7.91.
AmEx, which dominates the market for the highest-spending customers, is targeting a less-affluent population with its prepaid card, Schulman said.
These new customers will get access to the company’s round-the-clock customer service, roadside assistance and other perks like purchase protection. Funds can be loaded online through a savings or checking account and don’t expire, AmEx said.
“They are traditionally a high-end premium customer server with charge cards, where the model allows them to provide service to premium customers and charge a premium price,” said Bradley Ball, an analyst with Evercore Partners Inc. “They are transforming into something that is a broader payment services provider.”
‘Lean Cost Structure’
Schulman said AmEx is charging retailers a discounted rate from the fees it usually levies for credit-card transactions, which average more than 2.5 percent. The company declined to disclose the prepaid rate.
“You do need to make sure you have a pretty lean cost structure to be able to offer this product with an attractive margin,” Schulman said. “It’s a lower margin than we might usually have.”
Prepaid cards, which often are sold from racks in supermarkets or convenience stores, have emerged as an alternative for people who don’t have bank accounts and largely escaped federal regulatory scrutiny.
During the debate last year of the Dodd-Frank regulatory overhaul, Congress considered making prepaid cards subject to the swipe-fee caps. Hip-hop impresario Russell Simmons, who issues the prepaid RushCard, lobbied to exempt the products.
Kim, Khloe and Kourtney Kardashian, the sisters famous for their TV reality show, withdrew their own prepaid card from the market in November after Consumers Union, publisher of Consumer Reports, publicized its various fees for checking a balance or speaking to customer service.