AmEx’s Prepaid Card for Target Could Hit the Bull’s-Eye

by Kyle Woodley | November 16, 2011 9:00 am

American Express AXPThe “Upscale Walmart” and the upscale credit card company are officially an item.

American Express (NYSE:AXP[1]) on Tuesday announced the launch of new prepaid cards that will be sold exclusively at discount retailer Target (NYSE:TGT[2]). The American Express for Target — available at the Minneapolis-based retailer’s nearly 1,000 locations after months of pilot testing in about 100 stores — tout a simple, inexpensive fee system with a bevy of conveniences, including a few perks commonly granted to AmEx cardholders.

American Express’s prepaid cards — and well as others — work much like traditional debit cards. Users transfer money into the card, which then can be used wherever the issuer’s cards are accepted. Users also can check their account balances online and receive text alerts for low balances.

However, one of the AmEx card’s selling points is a simple, two-fee format[3]: $3 for the initial money load, as well as subsequent in-store loads (online and by phone are free), and $3 for an ATM withdrawal (however, users also get one free withdrawal per month). This differs from numerous other prepaid cards, which can charge monthly fees of up to $10, per-use purchase fees of $1 and fees for the account balance and alerts.

But while these prepaid cards are meant to put the power of plastic into the hands of the little guy — the cards are marketed to lower-income consumers without traditional bank accounts or credit cards — the actual corporate pairing is itself a weapon of big business. That is, American Express and Target are teaming against their bigger rivals Visa (NYSE:V[4]), MasterCard (NYSE:MA[5]) and Wal-Mart (NYSE:WMT[6]), which are partnered through the issuing company Green Dot.

American Express has long enjoyed a reputation for exclusivity and relative prestige in the credit card world, but Visa and MasterCard wield sheer numbers. As of 2010, Visa boasted 269 million credit cards and MasterCard 171 million, compared to AmEx’s 48.9 million. Visa and MasterCard also issue their brands to banks and rake in revenues from debit cards, and the pair had a respective 397 million and 123 million debit cards in circulation in 2010. American Express, which has a different model than its larger competitors, is absent from the debit card business.

AmEx is similarly lagging in the tale of the ticker tape. AXP shares, while up an impressive 16% on the year vs. a flat S&P 500, have trailed the rest of the high-octane industry[7]. MA stock is up almost 66% year-to-date, while V shares are up 36% — and even also-ran Discover Financial Services (NYSE:DFS[8]) has churned out 34% gains.

However, American Express has found a way to muscle in on a market dominated by Visa and MasterCard — prepaid cards — without jeopardizing the air of affluence surrounding its core Gold Cards and others. If successful, AmEx stands to take a chunk out of a U.S. prepaid card market that had an estimated value of $120 billion in 2009 and was projected to eclipse $440 billion by 2017, according to a MasterCard-commissioned independent study[9] by Boston Consulting Group.

Meanwhile, Target’s long-running war with discount retail titan Wal-Mart has brought the company back into the card business — indirectly, at least.

In 2001, Target began offering a store-branded Visa credit card that eventually yielded a significant payout — pulling in $797 million in 2007. However, Target was far from immune from the 2008-09 financial crisis, and as customers began ignoring the bills, the company was forced to write off considerable amounts of debt, including more than $1 billion in 2009. The fiasco helped drag TGT shares through the mud, hitting an all-time low around $26 in March 2009. By April 2010, Target ended the relationship[10], choosing instead to continue offering only its traditional store card.

Target has since recovered, its stock more than doubling since then. In Target’s latest quarterly report, the company announced earnings of $555 million, or 82 cents per share, beating FactSet analysts’ expectations of 74 cents per share. Revenue rose to $16.4 billion — the fourth-straight quarterly increase for the company.

Still, TGT shares are down 12% year-to-date while Wal-Mart keeps plodding ahead[11] (up 6.5% YTD). In its latest quarter, WMT finally broke a nine-quarter streak of declining revenues in U.S. same-store sales.

To stem the tide, Target now is revisiting cards — in a much less risky way — to pull more customers into its stores. Through such AmEx benefits such as roadside assistance, cardmember discounts and purchase protection, the retailer hopes its branded prepaid card will prove more attractive than the Wal-Mart equivalent.

The timing couldn’t be better for both Target and American Express — the official release came in with well more than a month to go in what’s expected to be a fruitful holiday shopping season[12]. November and December should provide a telling picture as to how lucrative the pairing of an “upper-crust” prepaid card and discount retail’s trendy No. 2 player might be.

As of this writing, Kyle Woodley did not own any a position in any of the aforementioned stocks.

  1. AXP:
  2. TGT:
  3. simple, two-fee format:
  4. V:
  5. MA:
  6. WMT:
  7. high-octane industry:
  8. DFS:
  9. independent study:
  10. ended the relationship:
  11. Wal-Mart keeps plodding ahead:
  12. fruitful holiday shopping season:

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