What Does Partnering With Wal-Mart Mean For American Express?

American Express (NYSE:AXP) is looking to expand its prepaid card offerings in its recently announced partnership with Wal-Mart (NYSE:WMT) to offer a reloadable, prepaid debit card called Bluebird through more than 4,000 retail stores across the U.S. ^[1] The product will help American Express expand its target demographic beyond the affluent segment that it currently caters to. Currently, the average American Express household earns about $97,000 per year ^[2] whereas more than 5o% of Wal-Mart’s customers make less than $50,000 a year. ^[3]

Customers will be able to purchase the card at Wal-Mart stores for just $5, deposit funds as they would in a bank account, and use it as a debit card anywhere American Express cards are accepted. This is a step out of the spend-centric model that American Express has hitherto adopted quite successfully. American Express generally relies on higher spend per transaction, charging higher transaction fees from merchants and, in return, bringing them affluent customers who are willing to spend more. The implementation and scale of the Bluebird card might set up an alternative revenue stream for the company but could be deleterious to its core business model.

Our $62 price estimate for the company’s stock is in-line with the current market price.

See our complete analysis of AmEx’s stock here

What’s In It For Wal-Mart?

Bluebird is being promoted as an alternative to debit and checking accounts, with no monthly or annual fees and features such as mobile bill pay, fee transparency and the ability to make deposits via smartphones. Bluebird customers can deposit money into their accounts via cash at Wal-Mart stores. This will allow Wal-Mart to essentially offer banking services without being classified as a bank. The company had tried to open its own bank back in 2007, but was forced to reconsider due to pressure from regulators and other financial companies. ^[4]

Wal-Mart’s U.S. stores sales have somewhat stagnated with sales increasing by a meager 5% in the second quarter of 2012. The new offering might provide a much needed boost to its sales in the coming years.

Revenue Opportunity

Wal-Mart currently offers Green Dot (NYSE:GDOT) prepaid debit cards, transactions through which are processed by MasterCard (NYSE:MA) and Visa (NYSE:V). Green Dot earned around $285 million in revenues through Wal-Mart stores in 2011. Bluebird will be a direct competitor to Green Dot and if it can capture even 25% of the revenues in 2013, American Express will be able to double its current revenues earned through prepaid cards.

Potential Setback

American Express’ business model is based on its customers spending more money per transaction than its competitors. The company maintains a closed-loop network, whereby it issues its own cards and acts as the network provider as well as acquiring bank and charges higher fees than its competitors. The average discount rate charged from merchants accepting American Express cards in 2011 was around 2.54% of the dollar value per transaction. Visa and MasterCard do not issue their own cards but rely on a network of banks, and the average discount fee charged by the banks using Visa and MasterCard is anywhere between 1.62% and 1.90%.

American Express is able to charge a higher fee from the merchants as it promises to deliver high spending and loyal customers who form the company’s target demographic. As Bluebird will be accepted at all stores that accept American Express cards, there could lead to some merchant dissatisfaction in the long term. The average U.S. cardmember spend on Amex-issued cards stood at $15,000 in 2011 and we currently forecast steady growth in this metric, reaching $19,000 by 2019. This is primarily because American Express targets the affluent segment.

The 2010 census in the U.S. revealed that about 50% of the U.S. households have an annual income less than $50,000. ^[5] These people form the bulk of Wal-Mart’s customers and will also be the ones using Bluebird. This might lead to a decline in the growth rate for average U.S. cardmember spend. There is a potential downside of 10% to our price estimate should the average spend fall below $10,000 by the end of our forecast period. You can modify the interactive chart below to gauge the effect that a change in the forecast might have on our price estimate.

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1. American Express and Walmart Launch Bluebird®: a New Alternative to Debit and Checking Accounts, Press Release, 8^th October, 2012 [↩]
2. Spending by affluent helps Amex to strong quarter, Yahoo News, April 18^th, 2012 [↩]
3. The Demographics of Retail, AdAge, 19^th March, 2012 [↩]
4. Wal-Mart to Offer Banking Services With American Express, Bloomberg, 9^th October, 2012 [↩]
5. Annual Social and Economic (ASEC) Supplement, United States Census Bureau [↩]