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.
) does not issue debit cards linked to bank accounts and so has
missed out on this growing market. Its leading competitors
(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
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
How much could the impact on American Express' stock
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
You can make changes to the graph above to see the impact on
American Express' stock price estimate.
View our detailed analysis for American