Over the past year, there has been significant growth in the credit card and debit card markets, but more in the latter. Credit card transactions grew by about 4% to $1.96 trillion while debit card transactions grew by almost 14% to over $1.8 trillion in the same time. American Express never really benefited from the growth like VISA and MasterCard did since they don’t issue debit cards, but in an attempt to gain some spoils of the growth, American Express has entered the prepaid card market.
The Card giants recently announced a new prepaid card that offers users the convenience of an American Express card without assuming additional credit by tapping into their already existing funds.
No limit on Transaction Fees.
One advantage American Express will play on is that unlike debit cards, there is no cap on transaction fees with Prepaid cards. Issuing banks often charge transaction fees on debit cards, but the Fed recently capped those fees at 12 cents per transactions from the percentage based fees charged in the past.
The fact that those caps don’t apply to prepaid cards have led to an increase in sale of prepaid cards by banks, up to about 35% rise in dollar volume of prepaid card transactions to $65 billion in 2010 from $48 billion in 2009.
It helps American Express grow its Cardmember base
Generally, American Express has a card member base considered to be the richest, which has shown over the years in how much money is spent by the average card holder. The higher income cardmember base also leads to lower defaults and allows American Express to charge merchants a higher transaction fee as American Express presents them consumers with a much higher spending power compared to others.
On the other hand, this limits growth in the number of card members. Prepaid cards enable American Express to expand its cardmember base beyond its current “well to do” customers while increasing the number of transactions.