AmEx Launches a Reloadable Prepaid Card with Practically No Fees

With issuers and program managers having come under fire in recent months for allegedly high and numerous consumer fees for prepaid products, American Express Co. on Tuesday launched a reloadable prepaid card that levies no activation or maintenance fees. It also charges no reload fee when value is loaded from a checking account. A cash reload at a store carries a $4.95 charge, though this is levied by the reload network, AmEx says.

Experts expect the new product, called the American Express Prepaid Card, to put pressure on competing cards to drastically reduce or eliminate fees. Wal-Mart Stores Inc. had a similar effect in February 2009 when it slashed pricing for its popular, Visa-branded MoneyCard, but, while the cuts were deep, the chain did not reduce reload, activation, or maintenance fees to zero. “This [AmEx card] could really be a game-changer in prepaid,” says Ben Jackson, a senior analyst at Mercator Advisory Group who follows the prepaid card segment.

AmEx officials have high expectations for the product, though the company will not release projections. “We expect it to be big,” Laura Kelly, senior vice president of global products and marketing at AmEx, tells Digital Transactions News. The new product meets a strong consumer demand for a card with clear terms and without a welter of fees, she says. She points to the company’s experience with its Pass card, a prepaid product it introduced last year for teens. It found, though, that the card was being adopted by a wide range of consumers. “We uncovered a need for a product like [the American Express Prepaid Card],” she says.

Though AmEx has been piloting a digital wallet product called Serve, the company says its new prepaid card is not related to that service, at least for the time being.

One of the few fees the new card charges is for ATM transactions, though the first transaction each month is free. It also has no overdraft fees and features enhancements normally found on credit cards, including purchase protection, roadside assistance, and access to a network of discount offers. And, while the card carries an expiration date, the funds backing it do not expire. “It hits the bulls-eye of what consumers are looking for,” says Kelly.

AmEx can afford to eliminate the wide array of fees typical of prepaid cards because of the efficiencies it enjoys as issuer, program manager, and processor rolled into one entity, Kelly says. “We control the end-to-end value chain,” she says. “We have efficiencies not available to the rest of the industry.” With most network-branded prepaid card programs, these functions are carried out by separate companies, each of which must be compensated. But AmEx’s discount fee to merchants, on average significantly higher than that of Visa or MasterCard products, will also help fund the new card. “Certainly the merchant discount fee is part of the economics of the product,” says Kelly.

The card comes at a time when reloadable prepaid products are taking off as consumers seek out payment instruments that help them budget and control costs. Riding the trend, major service providers Green Dot Corp. and NetSpend Corp. have gone public in recent months. But prepaid has also drawn criticism from consumer groups and some in Congress. The CARD Act already controls gift card fees, and Sen. Robert Menendez, D-N.J., introduced a measure late last year to regulate the business.

The new product gives AmEx a debit product that helps it reach a wider range of consumers than it could access with its charge and credit card offerings, including the unbanked and underbanked. “They’re trying to tap into the entire market for prepaid,” notes Jackson.

Prepaid cards are likely to get a further boost from the Durbin Amendment, which recently survived an effort in Congress to delay its stringent caps on debit card interchange pricing. Durbin exempts reloadable prepaid cards as long as they carry no overdraft fees and refrain from charging for the first ATM transaction each month. As a result, issuers subject to the new law are expected to push prepaid and credit products.

Jackson says AmEx’s success with the new card will depend on market awareness and distribution. Currently, the company is marketing the card primarily online. Marketing, he says, will have to respond to the attitude of consumers, a significant portion of whom are watching their pennies closely. Indeed, some 16% of consumers who buy a prepaid card use the product as a budgeting tool, he says, citing Mercator research.