The Gimlet Eye: The Fed’s Prepaid Beneficiaries

Last month came word of what appears to be a potent new prepaid card offering from American Express Co. Dubbed Bluebird and offered through Wal-Mart Stores Inc., the card runs on AmEx’s new Serve transaction platform and eschews many of the pesky fees other prepaid cards levy on consumers. No monthly fees, for example, and no activation, deposit, or customer-service charges.

On the surface, at least, is sounds like a good deal. Wal-Mart already offers its shoppers the prepaid MoneyCard. Bluebird, it seems, is aimed at a younger demographic that aspires to the kind of lifestyle often associated with the AmEx brand.

We took note of the new product, however, for another reason. Among its features is the ability to pay bills and make person-to-person payments. Indeed, starting next year cardholders will be able to write checks against the balance in the card. These are powerful capabilities and are likely to add substantially to the product’s consumer appeal. Whether Bluebird will indeed sell like hotcakes and meet all of its sponsors’ expectations, we’ll leave to the marketplace to decide. Unfortunately, however, the marketplace’s range of potential choices is likely to be somewhat constrained.

That’s because the big banks that could compete with AmEx in this arena aren’t likely to make a competitive offering. You see, under a last-minute rule inserted by the Federal Reserve when it released its Durbin Amendment restrictions last year, transactions on general-purpose prepaid cards issued by financial institutions with $10 billion-plus in assets are subject to Durbin’s interchange controls if the cards allow access to the underlying funds through any means other than the card itself. As everyone probably knows by now, under the Fed’s price caps, debit interchange was roughly halved for the big issuers. AmEx, and for that matter Discover Financial Services, were specifically exempted by the Fed as so-called three-party networks (issuer and acquirer are the same entity).

That means the big banks can’t offer a Bluebird-like product, with bill payments and P2P payments, for example, if they want to avoid the ceiling on interchange fees. Most likely, they will want to collect market interchange on their prepaid products.

Now, we shed no tears here for big banks. And we think terms like “level playing field” are too often thrown around by entities that secretly wish the field were tilted just a bit in their favor. But surely it could not have been the Fed’s intent to hand an advantage such as this to big boys like AmEx who are fully capable of taking care of themselves. As the Fed periodically re-examines its Durbin rule, it should reconsider its prepaid card provisions.

John Stewart, Editor

john@digitaltransactions.net