have been on the defensive since their balance sheets melted down
during the housing bust.
have turned public opinion completely against them. Yet while many
banks have responded by grabbing for more profits, one company is
taking a longer-term view with a product that actually makes sense
for some customers.
The prepaid card you shouldn't leave home without
) announced that it would offer a prepaid card to consumers. The
move represents a significant strategic initiative for the company,
as AmEx has
long lacked exposure
to the debit-card market that
) have used as a growth vehicle. With the debit-card market
representing $1.85 trillion in sales for Visa and MasterCard last
year, AmEx couldn't afford to leave it untouched.
The AmEx offering is far from the first available to customers.
(Nasdaq: GDOT) and
(Nasdaq: NTSP) are the biggest prepaid processors and have been
hugely profitable, thanks in large part to activation and
maintenance fees. One of the most egregious examples of prepaid
cards was the short-lived Kardashian Kard, with its $100 annual
membership fee and numerous additional charges for everything from
paying bills to using ATMs.
What makes the AmEx card stand out is that it charges very few
fees. Fund the card from a checking account, and you won't pay a
reload fee. You get one free ATM transaction every month. The card
never expires, and it lacks foreign currency conversion fees. Even
more impressively, AmEx will offer credit-card-style perks like
purchase protection and roadside assistance.
Hitting competitors where it hurts
Hearing these customer benefits, you might figure that the idea
behind the AmEx card is to hammer home fees on retailers who accept
their cards. After all, high debit-card fees have made plenty of
money for issuers like
) , and they've led to Congressional scrutiny and a proposed cap on
those fees. In fact, some banks are hoping to use prepaid cards as
a way to circumvent debit-card legislation.
But AmEx is cutting merchants some slack with its offering, too.
Although actual fees weren't disclosed, AmEx said that a lower rate
structure will apply to its prepaid cards than merchants pay for
AmEx credit cards.
Good news for customers?
I've long wondered what the big deal is about debit and prepaid
cards. Call me old-fashioned, but the benefits of using credit
cards -- including the best rewards programs and the ability to
float expenses for a month or longer -- are just too good for
responsible cardholders to pass up.
But with fees disappearing, there are definitely some legitimate
uses for prepaid cards. First and foremost, using the cards as
budgeting tools or methods to help children learn how to handle
money makes a lot of sense. Moreover, for those who don't have
access to banking services and would otherwise carry substantial
amounts of cash around, a prepaid card is a definite improvement
from the standpoint of personal security.
Where's the money?
The key question is whether prepaid cards will ever offer the same
levels of rewards that many credit cards do. Given that prepaid
cards aren't going to be subject to the same limits on transaction
fees as debit cards -- or at least not yet -- companies like AmEx
should be able to earn enough profit from card use to justify
giving customers cash back or some other perk for using their
I don't see that happening anytime soon. With many people
impressed enough at the fact that AmEx isn't gumming up the works
with extra fees, the company doesn't have any incentive to reward
Financial institutions clearly want new payment methods to
replace old, reliable ones. If you want to get the most out of
whichever method you use to pay, you need to stay vigilant to
ensure you don't end up losing money in the name of progress.
As banks start boosting their profits, they're going to pay
higher dividends to shareholders. But you don't have to wait to get
strong dividends now. Read the Fool's special free report and find
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thinks like an economist. He doesn't own shares of the
companies mentioned in this article. The Motley Fool owns shares
of JPMorgan Chase.
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