American Express Launches a New Prepaid Card

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Credit card transactions in the US grew by slightly less than 4% to reach $1.96 trillion in 2010, whereas debit card transactions grew by almost 14% to cross $1.8 trillion over the same period. American Express ( AXP ) does not issue debit cards linked to bank accounts and so has missed out on this growing market. Its leading competitors Visa Inc. (NYSE:V) and MasterCard Inc. (NYSE:MA) benefited handsomely from this rising consumer preference for non-credit card products. In an attempt to attract debit card users to its payment network, American Express recently announced a new prepaid card that offers users the convenience of an American Express card without assuming additional credit by tapping into their already existing funds.

We value American Express with a $49.60 Trefis price estimate of its stock - roughly in line with its current market price.

What could drive American Express prepaid card numbers?

Limits imposed on transaction-fee on debit cards

The bank which issues cards charges merchants a transaction fee each time the card is used. The Fed capped debit-card transaction fees at 12 cents per transaction from the percentage-based fee charged earlier. However, this regulation excludes prepaid cards which can still charge a higher transaction fee.

The exemption of prepaid cards is encouraging many banks to push the sale of prepaid cards, resulting in a 35% increase in dollar volume of prepaid card transactions to $65 billion in 2010 from $48 billion in 2009. Government benefit programs such as unemployment compensation, disability benefit and employers' payrolls offer significant growth opportunities for prepaid cards. See Prepaid Cards Can Help Push Transaction Volumes Higher for Visa

Scope for expanding American Express cardmember base

American Express boasts of a relatively affluent cardmember base, which is reflected in a significantly higher average cardmember spending compared to its peers. The higher-income cardmember base also leads to lower defaults and enables American Express to charge merchants a higher transaction fee as American Express presents them consumers with a higher spending power. However, this limits growth in the number of card members. Prepaid cards enable American Express to expand its cardmember base beyond its current affluent customers without exposing itself to a higher default risk while increasing transaction volumes in the process.

How much could the impact on American Express' stock be?

We currently estimate American Express-issued cards in the US to grow from less than 30 million in 2010 to almost 40 million by the end of our forecast period. To gauge sensitivity, a 1% point incremental growth rate in the number of American Express cards in the US alone on account of prepaid cards, can result in a 2% potential upside to our current $49.60 Trefis price estimate of its stock.

You can make changes to the graph above to see the impact on American Express' stock price estimate.

View our detailed analysis for American Express



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

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