Amex's Bluebird Is a No-Fee Checking Account, Not a 'Prepaid Card'

American Express recently announced its new Bluebird "card" account. Feature-wise, it's a checking account with debit card—distributed in part through Walmart. Immediate result: The stock of Green Dot, No. 1 in prepaid cards, fell another 25%, 80% below its high. What's driving Green Dot's reduced valuation is retail channel exposure to much more attractive products backed by big bucks.

Green Dot's initial high valuation resulted from a preferential distribution arrangement with Walmart, which sold lots of cards. Green Dot acquired a bank charter, eliminating the need to issue the cards through an unaffiliated bank. Investors evidently believe (as do I) that this acquisition won't help.

The view from the opposite direction is similarly grim. Checking accounts are regarded by most bankers as the hub consumer relationship. Now Bluebird will compete directly against them, with no monthly fees or minimums. 

If your bank, like so many others, is gung-ho to issue prepaid cards, think again. Focus on how to retain your checking account customers, rather than on emulating Green Dot and Chase by issuing fee-based "prepaid cards" as a new (but already outdated) product.

Prepaid cards sold initially, primarily in retail stores, as impulse, disposable purchases. Where else can you get a MasterCard, Visa or Amex card, pay the cashier and use it without waiting for approval or for the mailman? Not in most bank branches. Prepaid customers, unlike checking account customers or even Facebook members, made scant investment of money or effort binding them to the product they bought.  They're volatile.

As prepaid competition increased, issuers added more transaction capabilities such as bill pay and person-to-person payments to the original prepaid card. "Prepaid" became more like a checking account, under a different name and with different pricing.

Into this came Senator Dick Durbin and the Fed, to bifurcate prepaid evolution. Under Regulation II, which implements Durbin's amendment to Dodd-Frank, if a prepaid card account offers means of payment besides card purchases and ATM withdrawals, then it's a debit card, with purchase interchange limited to around 0.44% — rather than a prepaid card, with unregulated interchange more than twice this.

Prepaid issuers faced a stark choice: promote the card accounts as latter-day checking accounts, accept tiny purchase interchange — and go on charging monthly fees. Or, squeeze the product back into the "prepaid card" coffin, with no-fee cards usable only for store purchases and at ATMs.

Amex was among the few choosing minimal payment capability and customer value while generating more interchange revenue, via a plain vanilla, no-fee product. Western Union was another. (Chase launched a similarly defeatured product, but with a $4.95 monthly fee.) These products, with their limited payment capabilities, were not competitive either with checking accounts or with full-featured prepaid cards.

Maybe Amex should have called the new card account Phoenix, as it rises from the ashes of the old Bluebird. The company says it will mail old Bluebird customers refund checks for their balances—though it told them, "Your bluebird funds do not expire, period…we will always mail you a new Card before the 'valid thru' date passes." Commitment not met. Worse, the disruption of having to stop direct deposit of one's pay is likely far more than a nuisance for underbanked customers who live paycheck to paycheck.

Amex didn't mention this in its recent press release. The truth pops up only at the company's website. The issuer evidently didn't learn from a $100 million settlement with four regulators for failing to meet obligations to customers.