Amex Launches Target's Prepaid Card as Retailer Retreats from Banking

American Express Co. and Target Corp. have officially launched a prepaid card at the retailer's U.S. stores, in the credit card company's latest effort to expand its prepaid operations.

The deal, announced Tuesday, also bulks up Target's financial offerings without requiring the Minneapolis retailer to recommit to its existing banking operations. Target has been considering a sale of its in-house credit card operations for years, and in January said it had hired a consulting firm to look for buyers.

The marriage of upscale American Express and discount-chic Target may seem unusual. But the credit card company has been ramping up its prepaid offerings in recent months, introducing a low-fee reloadable card in June and a college campus prepaid ID card in July. It began testing the Target prepaid card at 100 stores in February.

The deal comes as the card network looks to expand its consumer base and pick up additional revenue at a time of great turbulence in the industry, in the wake of new regulations on debit and credit cards, a sluggish economy and the rise of mobile banking.

"The key area for us is to develop payment forms outside of the traditional credit card space," Stefan Happ, senior vice president and general manager of American Express' global payment options division, told American Banker in an interview on Tuesday.

"This type of product we think is going to be an extremely useful tool" for consumers that typically rely on cash, debit or checks to manage their money, Happ says. "So that's a big pie of the U.S. population" that American Express has yet to reach, he adds.

American Express and its rivals are battling to keep their wealthiest customers happy with new rewards programs and other benefits. But at the same time, financial services companies are increasingly looking to pick up business from the so-called underbanked consumers that might not have credit cards or even checking accounts.

Now banks are increasingly turning to prepaid cards, which can be used like traditional debit cards but do not require people to have checking accounts, to bring more of these low-income consumers into the traditional banking industry.

"There is a huge opportunity to reach the underbanked and unbanked in the U.S. and globally," says Sanjay Sakhrani, an analyst with Keefe Bruyette & Woods.

For payments networks American Express, Visa Inc. and MasterCard Inc., prepaid cards provide "another opportunity to drive incremental volume flow over their network," Sakhrani says. "It's positive for Amex that they were chosen as a partner, given they are somewhat new in the space."

American Express is already looking past the Target deal to future prepaid possibilities.

"We're talking to a number of retailers. We have a very large footprint in gift cards," and the company is talking to those partners about prepaid as well, Happ says.

Terms of the deal between American Express and Target were not disclosed. But the new Target prepaid card offers relatively competitive fees in a market that has been criticized for high costs: it costs $3 the first time a consumer loads money and $3 for any in-store reloads. (Loading money onto the card online and by phone is free.)

Cardholders can also withdraw money from an ATM once a month for free, but then will have to pay $3 for every subsequent ATM withdrawal.

For Target, the partnership with Amex further calls into question the fate of the retailer's own credit card unit, which it has made various efforts to shrink or unload since the financial crisis.

Chief financial officer Doug Scovanner said during an August conference call with analysts that the retailer could close a deal late this year or early next year.

Target is scheduled to report its third-quarter earnings Wednesday morning. Spokeswoman Jenna Reck said the company "is excited to offer another payment option" for customers, and said Wednesday's earnings call would provide more information about the sale status of the cards unit.