The American Express Co. and Wal-Mart Stores Inc. Bluebird program was made official on Oct. 8. This program is heralded as an alternative financial services product to existing debit and checking accounts.
Neither company indicates when the program was conceived, but both note in a mirror image announcement that the new program is based on a pilot program introduced in late 2011. The announcement was not very transparent, leaving a lot of questions in people’s minds.
“A couple of subtle catches hit home in the press release that need further exploring. … It never highlights the fees paid by retailers. … The card can be used immediately anywhere in the U.S. where American Express Cards are accepted,” reducing the earning potential of American Express, an Oct. 10 article on the Seeking Alpha website speculates.
The Bluebird venture is supposed to eliminate the various lender fees Wal-Mart has to pay, as banks are now charging fees for costs once absorbed in the past. Over the years, banks provided free services, such as checking accounts.
“It costs a bank around $300 to provide a checking account. For the past 15 years, banks have subsidized these costs. … Banks are now charging monthly fees,” a February report by Bretton Woods Inc. states.
According to the Bretton Woods analysis, Bank of America Corp. charged the most expensive annual fee at $464, followed by BBVA Compass Bancshares Inc., costing $428.80. Citibank N.A. was found to be the lowest on the list at $179.
The American Express/Wal-Mart venture offers an online prepaid debit card called Bluebird in over 4,000 Walmart Stores. There is no cost to the Bluebird customer, but there is a $2 fee if the customer is not a member of the direct deposit program.
“The only fees consumers will ever pay are clear, transparent and within their control, such as out of network ATM withdrawals for a consumer that does not have direct deposit,” according to the announcements on the American Express and Wal-Mart Stores websites.
Jumping on the Bandwagon
“I think this is a brilliant alliance of two very different partners. Wal-Mart is obviously critical to mainstream America, so moving up the ladder to American Express gives them increased ‘oomph’ and brand projection,” an Oct. 12 article on the Money Morning website suggests.
Given that American Express has survived the financial crisis, it provides Wal-Mart with a “stable financial provider,” the Money Morning article states.
Furthermore, it brings about a new banking model and “potentially end runs the iron-fisted grip traditional financial institutions have had on consumers,” according to the Money Morning article.
American Express is not walking away empty-handed. This company wants to diversify and draw a new and different kind of clientele into its fold.
“The Bluebird accounts give American Express unprecedented marketing reach into an entirely new customer profile while bypassing the traditional competitive credit card channels. At the same time, it also offers an entirely new source of capital,” the Money Morning article states.
Unique Way of Outsmarting Banks
“The Bluebird completely bypasses the Durbin Amendment to the Dodd-Frank Act. Specifically, the consumer protection provisions in it related to restrictions on fees that banks and card networks can charge for the privilege of using traditional credit and debit cards,” according to the Money Morning article.
Under the American Express/Wal-Mart venture, lenders and credit card companies will lose the interchange fee, also called a swipe fee. This fee is a hidden cost to any company that accepts a credit or debit card.
“U.S. credit card issuers have held the upper hand for years and it’s estimated that they bank more than $30 billion a year from interchange fees alone,” the Money Morning article suggests.
However, due to the Durbin Amendment, a last-minute addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, this interchange fee was significantly lowered.
When customers buy into the Bluebird program, Wal-Mart no longer pays the interchange fee. The banks are no longer the middleman and have lost a means of making a higher profit.
The big question is whether Wal-Mart is reducing the cost of its merchandise or just pocketing that former fee, which it had priced into its products.
How losing the interchange fee affects American Express, a credit card company, is in question, as American Express charges the merchant a discount rate “which is really an interchange fee under the guise of a ‘prepaid discount’ by any other name,” the Money Morning article states.
Prepaid Card Issuer Green Dot Corp. at Risk
The Bluebird prepaid debit card could eat into the profits of American Express. “What is the catch? How could a company with the highest credit card fees offer lower fees than a company such as Green Dot that has been in the prepaid card business for a decade?” an Oct. 10 article on the Seeking Alpha website asks.
Green Dot Corp., a firm based in California that offers prepaid Visa or MasterCard credit cards, generally used by people with limited income, might be affected by the American Express/Wall-Mart prepaid credit card venture.
According to the Green Dot quarterly report dated June 30, the firm earned 59 percent of its sales revenue from Wal-Mart in 2011 and 64 percent for the six months ending June 30, 2012.
“It would be difficult to replace any of our large retail distributors, particularly Walmart, and the operating revenues derived from sales of our products and services at their stores. … The loss of Walmart or any of our other three largest retail distributors would have a material adverse effect on our business,” according to Green Dot’s second quarter financial statements.
On mentioning a possible competitive issue affecting its earnings during the second quarter earnings call, Green Dot’s stock decreased significantly from a closing price of $23.32 on July 26 to a closing price of $9.06 on July 27.
When American Express and Wal-Mart rolled out their new venture on Oct. 8, the Green Dot closing stock price decreased to $10.25, down from $12.85 on Oct. 5.
In a July 26 earning release, Steve Streit, chairman and CEO at Green Dot advised, “Although our growth was strong over the first half of 2012 and some notable new business wins could potentially provide meaningful tailwinds over the longer-term, we are lowering our guidance for the remainder of the year given that we now see a greater level of uncertainty going forward in our business.”
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