Why Durbin May Prove To Be a Prepaid Blessing for AmEx And Discover

With banks struggling to find their way in the new Durbin era that puts controls on their debit and prepaid card operations, the door is opening wider for American Express Co. and Discover Financial Services to win new prepaid card business, according to two attorneys familiar with payment card interchange issues.

Chris Daniel and Tom Brown, both partners at Paul Hastings LLP, spoke on Tuesday about new regulatory developments affecting the prepaid card industry at a packed session at the 2012 Prepaid Expo conference in Las Vegas. Regulation is a hot topic lately not only because of Durbin, but also because of the CARD Act of 2009 and actions by federal regulators and states.

The Durbin Amendment in 2010’s Dodd-Frank financial-reform act is the hottest topic because its price controls on debit card interchange kicked in only last October, and its new transaction-routing freedoms for merchants and bans on exclusive network affiliations between card networks and debit card issuers will begin taking effect next month.

While the Federal Reserve’s rule implementing the Durbin Amendment has its greatest effect on traditional debit cards, it affects prepaid cards too, especially its provision that banks’ prepaid cards can avoid Durbin price controls only if cardholders can access the funds exclusively through the card itself. That provision thwarted banks’ efforts to make prepaid cards more like demand-deposit accounts and led them to scale back or end bill payments through prepaid card accounts.

But American Express and Discover are not subject to Durbin’s controversial provisions, Daniel and Brown noted. Both companies are so-called “three-party” payment systems that function both as merchant acquirer and card issuer. In contrast, Visa and MasterCard debit and prepaid cards are part of “four-party” systems in which the issuer and acquirer are usually different companies and rely on the Visa and MasterCard networks to route transactions among them. The Durbin Amendment exempts, or “carves out” in industry parlance, three-party networks from its provisions, including interchange regulation.

“There’s no restriction on what AmEx can pay itself” for prepaid card transactions, said Brown. Thus, AmEx and Discover have a new opportunity to grow their prepaid businesses, the attorneys said.

AmEx is indeed growing its prepaid business, but not just because of Durbin, according to Laura Kelly, senior vice president and general manager of the Americas for Global Payment Operations. “I don’t think it’s due to any specific carve out,” the former MasterCard Inc. executive tells Digital Transactions News.

Last week, The Wall Street Journal reported that AmEx was testing a reloadable prepaid card under the “bluebird” brand at 180 Wal-Mart Stores Inc. locations. Testing began in November, according to Kelly. “It’s a great product, it’s got great demographics, it’s going to skew younger,” she says. But apart from adding that the card is not a decoupled debit card, despite erroneous reports to the contrary, Kelly says she’s under orders not to give details about the program.

A source outside of AmEx but familiar with the prepaid industry tells Digital Transactions News that AmEx is aiming the card at young, debit-oriented adults aspiring to a share of the upscale lifestyle symbolized by the AmEx brand. As such, these cardholders are different from the typical working- class Wal-Mart customer that uses the leading retailer’s Walmart MoneyCard, a prepaid card managed by Green Dot Corp.

AmEx also sells a cobranded prepaid card for Target Corp. and about six months ago introduced a card for AAA, the motor club federation. AmEx is a good partner for merchants interested in offering prepaid cards because as acquirer and issuer, it has full access to all transaction and cardholder data, Kelly argues.  “We can deliver more value,” she says. “Our brand is huge.”