AmEx Goes Bold With Its New Prepaid, Reloadable Card Product

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NEW YORK-American Express Co. is making its boldest move yet in the prepaid market by introducing a reloadable card that carries almost no fees.

Instead of charging cardholders for activating, reloading or replacing lost cards-standard practice in the prepaid market-the company will make its money on the product primarily from the fees retailers pay when consumers make purchases. AmEx's merchant rates traditionally have been higher than those of the other payment networks. "We thought to ourselves...how could we create a fee-free product and basically make money on the discount rate associated when a customer uses a card at a merchant, either online or offline," Dan Schulman, AmEx's group president for enterprise growth, told American Banker, an affiliate of Credit Union Journal.

The company unveiled the American Express Prepaid Card recently. By appealing to a wider swath of customers than the well-heeled credit and charge card customers with whom its brand has long been associated, Amex plans to garner additional transaction volume. Industry wide, cardholder spending has shifted from credit toward debit cards in recent years.

An Amex spokesperson said its prepaid merchant discount rates will be lower than those for credit and charge cards. AmEx also plans to charge for ATM withdrawals, and to potentially make money through partnerships with retailers that would sell the cards in their stores. It will not charge for currency conversion, as many prepaid providers do.

Prepaid cards are "an extremely fast-growing piece of the overall payments industry, and we think it will actually accelerate in growth," Schulman said.

Customers will be able to reload funds onto the card from a bank account. The company is offering a free ATM withdrawal each month but will charge $2 for subsequent withdrawals, American Banker reported.

"It sounds like a dramatically simple fee structure," said Lauren Saunders, a managing attorney with the National Consumer Law Center. "I would imagine that people will take notice."

Prepaid card fees have caught the attention of consumer advocates and regulators.

Florida Attorney General Pam Bondi announced the state is investigating five prepaid card companies, including Russell Simmons' UniRush LLC, NetSpend Holdings Inc. and AccountNow Inc., for hidden fees and other practices.

The new Consumer Financial Protection Bureau, which has jurisdiction over rules governing card products, is expected to hone in on prepaid card fee disclosures in the future.

AmEx considered advocate and consumer feedback when developing its prepaid card but did not design it to appease regulators, Schulman said.

"We designed it with the marketplace in mind," he said.

The company has dabbled in this market with various gift card programs and recent marketing partnerships, including ones with Target Corp. and AAA.

It recently announced a deal with AOL Inc.'s Patch news network to market Serve, a digital payments service Amex announced in March that includes a prepaid card.

The new prepaid card "helps extend [AmEx's customer base] out in a secure fashion so they don't take on a ton of credit risk," said Sanjay Sakhrani, an analyst with Keefe, Bruyette & Woods.

Another reason banks like prepaid cards is because they are exempt from the Federal Reserve Board's caps on debit card interchange fees scheduled to take effect July 21. The caps could wipe out as much as $14 billion of revenue for large banks, according to some estimates.

The amount of money put on reloadable, "open-loop" prepaid cards, which carry the brand of a major network like Visa Inc. or MasterCard Inc., will climb to $202 billion in the U.S. in 2013, from about $29 billion in 2009, according to Mercator Advisory Group.

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