American Express Takes Aim at PayPal With Serve

American Express (NYSE:AXP) is a world leading financial services firm offering consumers charge and credit card-based payment products along with travel services to consumers and businesses across the globe. American Express has just recently launched a digital payment and commerce platform called, Serve which brings it in direct competition with EBay’s e-wallet service, PayPal. Visa (NYSE:V) also released a personal payments service and MasterCard (NYSE:MA) should launch a personal payments.

How it Works

Serve offers consumers prepaid accounts that can be funded by debit, credit, charge card, bank account or transfers from other Serve accounts. Serve customers can shop online and can even send money to each other via smartphones. Serve (prepaid) accounts can be accessed via Serve Apple iOS and Android applications, via serve.com and through Facebook. Serve accounts come with a plastic card, which, like any American Express charge or credit card, can be used at any brink-and-mortar retailer that accepts American Express.

Fills Debit Card Void

American Express payment products portfolio has historically been at a disadvantage due to the absence of a debit card product. American Express issues charge and credit cards but not debit cards, which are linked with the consumers’ checking accounts.

Due to the volatile and high interest rates often in excess of 18% (annualized) on credit card debt, consumers have been using less credit in the recent years. Simultaneously, debit cards, which facilitate the payment process but come with no corresponding interest expense, have grown sharply. In the U.S. alone, spending on debit cards grew by 15% in 2010, compared to 6.3% for credit cards. With Serve, American Express can now address consumers who would have otherwise used debit cards or checking accounts for their day-to-day expenses.

Mobile Device Revolution

While mobile payment is still in a nascent stage, given over 4.8 billion mobile phone users worldwide, the opportunity is tremendous. Mobile payment users grew 70% to 73.4 million in 2009 and are expected to breach 190 million by 2012.

With such growth in the number of mobile phone users, it doesn’t come as a surprise that the transactions via mobile phones are expected to breach $110 billion by 2013 ^[1] ATM cash withdrawals will cost $2 per withdrawal with the first withdrawal every calendar month as free.

See our full Trefis analysis of American Express.

1. Visa Has Room To Run On Mobile Payment Trend, Trefis, December 22′ 2011). Clearly, providing payment solutions for m-commerce, i.e. business over mobile devices, presents too big an opportunity to be missed.

   How Does Serve Impact American Express?

   American Express earns a commission (around 2.25%) on every transaction. This card transaction fee contributes the most value to American Express stock and as per our estimates, makes up over 72% of our $49 Trefis price for American Express stock.

   Also Serve has been communicated as a new brand with no American Express branding on its homepage. This lets American Express expand its customer base without tampering with the exclusivity that comes with owning an American Express card, which is targeted at higher-income consumers.

   While Serve might advertise that there is no fee to open an account, no monthly fee, no fee for person-to-person transactions or to use the widgets, it will however levy 2.9% on the amount put in the Serve account along with 30c each time the account if loaded with a credit card. ((American Express Announces Serve The Next Generation Digital Payment Platform, American Express, March 28′ 2011 [↩]