Given how Green Dot (NYSE:GDOT) shares plunged 20% in one day following the news, it’s pretty clear that investors felt strongly about American Express (NYSE:AXP) being named as the newest prepaid debit card service provider within Wal-Mart (NYSE:WMT).
Now that the dust is settling, though, is anything changing with those knee-jerk assumptions?
The Same But Different
On the off chance you didn’t hear, the world’s biggest retailer — Wal-Mart — is beefing up its prepaid debt card offerings by adding an American Express-managed service to the mix. The so-called Bluebird cards will spend just like any other American Express charge card would, though (as is the case with all prepaid cards) it will be limited to the amount of money that’s loaded onto the card at the time.
If it seems familiar, it should. Green Dot offers a similar prepaid debit card and service through Wal-Mart.
These cards can be “loaded” a few different ways, including with a payroll deposit, or through a bank ACH transfer. Both types of cards can be reloaded with cash, too, though not quite in the same manner.
Green Dot requires the purchase of a MoneyPak or Cash Reload product, while Bluebird cards can be reloaded with cash at any Wal-Mart cash register. On the other hand, Bluebird cards can only be reloaded with cash at a Wal-Mart store, while MoneyPaks and Cash Reloads are available at several retailers. ATM transactions at MoneyPass machines also are free for both cards.
Don’t think for a minute one’s going to be viewed the same as the other, however.
While superficially, Green Dot and Bluebird do the same thing, the American Express-sponsored service has a significant edge. Namely, it doesn’t nickel-and-dime users with a monthly fee for deposits (or “loads”) of less than $1,000 per month, and it offers a smartphone app that allows deposits just by taking a picture of a check, mobile bill pay and online money transfers.
The question is, will those bells and whistles be enough?
The market spoke with decisiveness about the impact the new union between AmEx and Wal-Mart could have on Green Dot. There are lingering questions, however, about what all this might ultimately mean for Wal-Mart and American Express … and why Wal-Mart (or AmEx) would even bother.
First and foremost, this isn’t going to be a significant direct money-maker for Wal-Mart; it’s barely even going to save the company money.
While the terms of the deal weren’t disclosed, since Bluebird is ultimately an internal network, it’s widely presumed that American Express won’t be charging a swipe fee to Wal-Mart when a Bluebird card is used in a Wal-Mart store. Compared to the 21-cent-per-swipe that MasterCard (NYSE:MA) and Visa (NYSE:V) charge retailers each time one of their cards are used to make a purchase, “free” looks significantly more attractive. Yet, with 85% of the retailer’s transactions being made with cash, how many times is that 21-cent toll really taken? Not many. (The swipe fee still will be collected by AmEx when the cards are used anywhere but Wal-Mart, however.)
No, the real benefit to Wal-Mart in this deal is pulling more of the nation’s unbanked people — which is generally a good target market for the discounter — through its doors. Hopefully they’ll make a purchase while they’re in the building taking care of financial matters. In that light, it’s not a bad bet.
As for American Express, these are strange and dangerous waters.
AmEx was built on (and built its reputation on) a higher-end consumer … a consumer that most likely owned several bank accounts. Now it’s targeting the folks at the other end of the spectrum, suggesting that the Bluebird card can be a de facto bank account; no bank needed. There’s money to be made by serving this segment, yet it remains to be seen if American Express has actually provided a profit-bearing solution.
Just for the record, however: Green Dot grew into a $484 million business last year providing a lesser prepaid debit card service, with about 60% of its revenue coming from Wal-Mart stores.
What to Watch Out For
Neither Wal-Mart nor American Express has made any bones about it. The aim of Bluebird is to provide bank-like services to the unbanked or underbanked — a growing segment of the U.S. populace, with a total of 10 million U.S. households fitting that description as of about a month ago. Bluebird will take Wal-Mart further down the road of becoming a full-service financial solution, while AmEx expands its user base of swipe-fee-generating cardholders. Both companies can leverage the relationship with cardholders in several ways.
It’s not without risks, though.
For starters, it’s a leap of faith that card owners will be interested in coming to Wal-Mart or tracking down a MoneyPass ATM just to make a deposit or a withdrawal. The payroll deposit is a convenient feature, saving a trip to the bank, but doesn’t circumvent the need to get in a car to receive cash. Likewise, the ability to make a free cash deposit onto the card’s balance at any Wal-Mart cash register is handy, but if that cardholder has cash to deposit, wouldn’t that clearly indicate that they (some of them anyway) have at least some sort of access to a bank?
Mobile bill pay is a nice feature too, but it only matters if the Bluebird cardholder’s payees accept electronic payments. If not, a check still needs to be written somehow. And for that matter, how many unbanked consumers have smarpthones with the data plans needed to power the mobile app?
Point being, there are more than a few “ifs” that have to be fulfilled to really make this product compelling to the un- and underbanked.
Of course, Green Dot did it, and did so charging a few more fees.
American Express takes on an even bigger risk that Wal-Mart won’t be assuming — image damage. Will the company’s big-spending cardholders keep feeling as privileged as they have been once anyone and everyone has easy access to the charge cards’ services? We’ll see.
Still, it’s a promising new revenue avenue for both companies. Even if not a game-changer, it’s certainly not apt to be a drag.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.