This week, American Express unveiled a new payments offering that will surely compete with not just other prepaidoptions, but will impact debit and credit sales volume as well.
The prepaid card offered by American Express carries no fee for activation, reloading or lost card replacement. The card also offers consumers the option of drawing cash at an ATM. Since the consumer funds all transactions, default risk goes away, exponentially opening up the market potential. The question becomes, how will this impact other plastic and mobile payment sales today and down the road?
Backin the year2000, credit cards dominated purchase volumegenerating 77% of all merchant sales on general purpose cards, versus23% on debit. Last year, debit and prepaidpurchases captured close to half of all general purpose card spend with credit sales capturing~53%, debit 44%and theremaining volume coming fromprepaid cards. With all of the regulatory changes impacting bank revenue and cost positions, financial institutions are having to rethink existing practices eliminating rewards programs tied to debit charge volume and resurrecting monthlychecking account fees in large scale. It’s not a question of bank gouging, rather how do financial service providers offset lost interchange income of $0.40+ per transaction down to $0.12 to $0.20 as is being mandated with the quickly approaching implementationof the Durbin Amendment on July 21st. Add to that reducedfee income from Dodd-Frank and institutions have to figure out how to still be able to afford to offerthese services to their customers.
Who will the winners and losers be?
Let’s start with the Merchant perspective. With companies now actively promoting services to help merchants calculate which payment vehicles generate the lowest costs without impacting sales volumes,we very wellmay start to see more of the "Costco" business model where only certain pay-types are accepted at different merchants. My predictions are that first, merchants will continue to send a message loud and clear that they perceive the cost of interchange to be too high. Smaller institutions, presumably protected from interchange caps, will be forced to reduce rates anywayto sustain merchant acceptance unless existing federal law requirements remain unchanged, precluding retailers from followingthe laws of capitalism. One certainty is that we will see continued development of alternatives similar to Wal-Mart and Starbucks payment options.
Credit and Debit sales will be impacted although they will continue to be valued highly by specific segments. The affluent will continue to expect rewards and other benefits deeming credit cards highly relevant and meaningful. Additionally, small business owners will need the payment float utility to fund services they typically don’t get paid for up front. At the same time, many consumers will continue to deleverage andsustain favoritism todebit over credit.
Prepaid and emerging Mobile Payments technology will continue to attract younger consumers as well as the early adapters that want to leverage the newest and coolest products and services. The negatives will take some time to surface. First, how will the CFPB react to prepaid growth and the fact that the product is not subject to interchange caps stipulated under Durbin? Next, how will merchants react and again, will we continue to see retailer specific options dominate merchant acceptance? Lastly, when fraudsters figure out how to penetrate the prepaid and mobile space, will consumers swarm back to credit before advanced fraud prediction models can be deployedsinceconsumers bear the brunt of theliability in the world of prepaid?
