) has announced a new Bluebird program with Wal-Mart (
) 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
$62 price estimate for the company's stock
, which is at a premium of nearly 10% to the current market
See our complete analysis of AmEx's stock here
Wal-Mart Partnership Brings New Opportunities
The company announced a business agreement with Wal-Mart (
) 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
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 (
) was fined $214 for using deceptive marketing techniques to sell
protection against identity theft, stolen cards and catastrophic
events whereas Capital One (
) 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 (
) 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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