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After years of providing financial services, Walmart is becoming a more formidable bank competitor with the addition of American Express's checking account alternative, Bluebird.
October 8 -
Retailing giant Wal-Mart may be pulling American Express prepaid cards from its shelves due to poor sales, according to an analyst report from Jefferies & Co.
July 3 -
In attempting to prevent abuses of the interchange cap exemption for reloadable prepaid cards, the Fed may have inadvertently scuttled an opportunity for banks to serve low-balance account holders.
July 26
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customers, rather than on emulating Green Dot and Chase by issuing fee-based "prepaid cards" as a new (but already outdated) product.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
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
Amex didn't mention this in its recent
Dragged along Amex's circuitous, slippery path, the "prepaid card" emerges finally from its chrysalis as a full-fledged competitor to retail checking accounts — no need to apply and face possible rejection, no monthly or overdraft fees, immediate and convenient availability, remote deposit capture, convenient face-to-face service and big marketing budgets. Plus paper checks.
But no mention of FDIC insurance. Can Amex operate as an uninsured bank under the laws of 50 states, selling checking accounts untouched by bank regulation? I doubt it.
Most likely these customers don't care about FDIC insurance. Many dislike banks. Reciprocally, banks may dislike this lower-income customer group.
So, is Bluebird actually good for your bank because "Bluebirds are voracious insect consumers"—and Amex will gulp down unprofitable depositors you don't want?
If not, open your eyes and see how to keep these customers. Hint: important bank products such as cobranded cards, auto loans and mortgages are successfully distributed by independent retailers. Branches and direct response aren't the only channels through which banks can acquire profitable customers.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian.
