American Express Updates: Launches Prepaid Card Service With Wal-Mart, Faces Gov't Scrutiny

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American Express ( AXP ) has announced a new Bluebird program with Wal-Mart ( WMT ) which provides an alternative to basic checking and debit bank accounts with a reloadable, prepaid card. This new platform also offers many of the benefits associated with a credit card, has lower fees than most checking accounts and is accepted anywhere that American Express is accepted. This could open up a new market segment for American Express which is traditionally known for targeting the affluent.

Separately, the credit card company recently agreed to refund $85 million to around 250,000 customers who were reportedly victims of deceptive marketing methods and will also have to pay civil penalties totaling $27.5 million to the CFPB, the Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corp.

We believe that the fines will have a minimal impact on the company, and the Bluebird program could be an interesting opportunity to expand its reach into the prepaid card arena. We maintain our $62 price estimate for the company's stock , which is at a premium of nearly 10% to the current market price.

See our complete analysis of AmEx's stock here

Wal-Mart Partnership Brings New Opportunities

The company announced a business agreement with Wal-Mart ( WMT ) called Bluebird which helps it expand its prepaid business and places greater focus on those with lower household incomes. American Express has traditionally been associated with the more affluent as the average American Express household earns about $97,000 per year.

This will change following the partnership with Wal-Mart as more than 56% of Wal-Mart's customers make less than $50,000 a year, and 85% of the retail stores transactions in the U.S. are carried out via cash. We will keep a close eye on developments and adjust our forecast accordingly.

Amex Faces Penalties

The amercement mitigated is for a series of violations by the company, starting from 2003. American Express offered a $300 reward with its "Blue Sky" travel credit card program that many customers never realized; in addition, it infringed on the Credit Card Accountability, Responsibility and Disclosure Act of 2009, by charging late fees based on a percentage of the debt a customer owed. The company is also alleged to have discriminated against applicants over the age of 35 and mislead customers by telling them that they could improve their credit scores by paying off old debts in lump sums.

Credit Card Companies Draw Heat

The litigation is part of Uncle Sam's crackdown on credit card companies. Earlier, in September, Discover Financial ( DFS ) was fined $214 for using deceptive marketing techniques to sell protection against identity theft, stolen cards and catastrophic events whereas Capital One ( COF ) was prescribed to refund $150 million to customers.

We believe American Express has enough cash flow from its operations to offset the expense. In the first half of 2012, the company reported an 11% growth in billed business in the U.S. while total cards in force grew to 51 million. We expect card use and outstanding loans to increase in the future, as the U.S. economy continues to go through a trough. The consumer price index ( CPI ) which measures price changes in consumer goods and services such as gasoline and food has been increasing steadily since onset of the recession whereas the growth in disposable personal income has been almost negligible..

An increase in spending on essential items coupled with a lack of money to spend will promote the use of credit cards in the U.S. in the coming years. Growth in the U.S. business is critical for American Express as the country accounts for nearly 70% of its billed business. We currently forecast a steady growth in average loan balance per cardmember in the U.S., reaching $2,200 by 2019. There is a potential upside of 10% to our price estimate, should the average loan balance breach $3,000 by the end of our forecast period. You can modify the interactive chart below to gauge the effect a change in our projected growth rate will have on the price estimate we have for American Express.

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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

Referenced Stocks: AXP , COF , CPI , DFS , WMT

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