Paying for things used to be so simple: You'd just pull out your
wallet, take out some cash, and hand it over to the cashier.
Nowadays, you have
lots of choices
when it comes to figuring out how to pay for something -- and the
one you choose can make some companies rich and put others at risk
of falling into obscurity.
The newest innovation in payment systems involves using your
to link directly to your bank account. Until recently,
) has had a big disadvantage to overcome in helping customers take
advantage of new technology to streamline their finances. But with
a new initiative, the company is looking to leapfrog its
competition and do battle with rival card networks
(NYSE: V) and
(NYSE: MA) .
Bridging the gap
For years, American Express has gone without something that
customers have increasingly taken for granted:
. Unlike card-issuing banks like
(NYSE: JPM) and
Bank of America
) , American Express doesn't issue debit cards that are linked to
checking accounts. As a result, as demand shifted away from
traditional credit cards toward debit-oriented products, American
Express found itself without a horse in the race. With global
spending on Visa and MasterCard-based debit cards rising to almost
$4 trillion last year, that was a situation AmEx couldn't allow to
In response, AmEx plans to roll out a prepaid electronic wallet
called Serve. Using the service, customers can send money to each
other using their smartphones, as well as shop online or obtain
physical cash cards that act like other American Express charge
cards. The company hopes that Serve will offer an alternative not
just for debit card payments but also for
's(Nasdaq: EBAY) PayPal.
Customers will be able to add funds to their Serve accounts
using credit cards, debit cards, or a direct transfer from a
checking account. After an initial period, fees similar to what
PayPal charges will apply for credit card funding, but the company
doesn't plan to charge for funds from checking accounts or debit
cards. On the flip side, customers can use the physical cards they
get from AmEx to make one free ATM withdrawal per month, with a $2
fee applying for additional withdrawals.
Dealing with debit
Perhaps most importantly, the cards that Serve customers receive
will be treated as prepaid cards for purposes of
debit card reform laws
when customers use them to make live payments at bricks-and-mortar
stores. That means that the proposed $0.12 cap on debit card
interchange fees won't apply, leaving AmEx free to charge fees
closer to the 2.5% that merchants pay on credit card purchases.
Unfortunately for AmEx, some of the moves that competitors are
making in the payment space make a card-based solution seem
out-of-date even before it's available.
has been working with companies like
to develop payment terminals specifically designed to interface
with Android smartphones. With credit card companies scurrying to
partner up with smartphone makers before the best partnerships are
already taken, AmEx has an uphill battle to stay relevant to a new
generation of shoppers.
Investing for the future
After having missed the debit card revolution, it's good that
American Express is at least trying to defend its turf by getting
into the smartphone-based payment arena. But the company is late to
the game and has ceded a huge advantage to PayPal on the
person-to-person transfer front and to its other competitors on
Even if the Serve initiative isn't as successful as the company
hopes, AmEx isn't going to disappear overnight. But with the
company's future growth prospects resting on its ability to stay
innovative, AmEx desperately needs a win to maintain the reputation
it built decades ago.
To make sure you see what happens next with American Express,
put it on your watchlist today.
For more smart solutions on all your saving and spending
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wants rewards for opening up his wallet. He doesn't own shares
of the companies mentioned in this article. American Express,
Google, and Visa are
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