Serving up "Bluebird" for a Song!

This post is syndicated at The Motley Fool Network: http://beta.fool.com/malayappan/2012/11/12/serving-bluebird-song/16143/

There is a quiet prepaid card revolution happening out there and American Express (NYSE:AXP) is at its forefront.  Long a purveyor of charge cards to the wealthy and well off, this card issuer and bank has slowly but steadily expanded to credit cards and now prepaid cards.  American Express operates several businesses which include a travel business, an insurance business and a traditional bank among others.  In contrast to rivals such as Bank of America or JPMorgan Chase (NYSE: JPM), American Express had and still has a cachet among upper income families and Americans in particular.  Even today, carry an American Express card across the border to Canada or across the "pond" to Europe and you will instantly get identified as an American.

Bluebird for a Song

In October, American Express and Wal-Mart (NYSE: WMT) announced in a news release that they had teamed up together to offer Bluebird, which according to them is a new alternative to checking accounts and debit cards.  This credit card like product is available at Wal-Mart stores countrywide as well as online at www.bluebird.com. The news release goes on to position Bluebird as the best alternative to traditional banking products for “poorly served consumers.”  In fact, I read it differently.  The product is likely tailored for poor consumers who are unlikely to have a traditional checking account and rely on check cashing storefronts such as Western Union or Moneygram International. Now, these customers will have access to a Bluebird kiosk at every Wal-Mart and pay little or no fees for almost every convenience.  American Express and Wal-Mart would love to tell you that they are offering the Bluebird card for a song!    

A quick glance at this product actually produces a very satisfying first take.  The FAQ’s describe various scenarios where a fee will not be applied and it turns out that the only fee that is assessed is the $2 ATM withdrawal fee.  I called the American Express toll free number for Bluebird and questioned them extensively on the terms and conditions.  To sign up, you could buy a $5 “starter kit” from Wal-Mart and then sign up online to get a personalized credit card that comes to you in 7 to 10 days.  However, the kit is designed to get you up and running immediately after you load it up with funds.  Alternatively, you can go online and directly sign up for free in order to avoid the $5 starter kit fee.  The only catch is that you have to wait for 7 to 10 days to get your personalized card.  Either way, you get access to an amazingly well thought out brand name pre-loaded debit card that offers most of the benefits available to a full service American Express charge card customer including the very valuable 90 day buyer protection.

Serving up Prepaid

I was actually surprised that the Bluebird card came so close on the heels of the other similarly designed card from American Express called Serve.  A few months ago, I signed up for the card after I got an email solicitation offering me a $25 deposit bonus for signing up.  All I had to do was to initially load up with $25 from my checking account.  Serve offers up many of the same benefits available to a Bluebird card holder including making "person to person" payments, meaning to those who have a Serve or Bluebird account as well or agree to sign up for one.  According to American Express, with Serve, “consumers can make purchases and person-to-person (P2P) payments online (serve.com), via mobile phones, and at millions of merchants who accept American Express cards.”  The cornerstone of the Serve or the Bluebird card is the ability to use a smartphone app to make payments, send and receive money and manage their entire account including the reloading part. 

When you look closely at both Serve and Bluebird and a third product called American Express Prepaid, they all appear to share the same platform and offer for the most part seemingly identical features. However there appear to be slight differences.  Serve allows the creation of “personal widgets” that one could use in “shopping carts” on personal webpages or for funding charity fundraisers.  Plus American Express has partnered up Serve with Zinga to offer a rewards program that allows point accumulation for use in Zynga’s online games.  Other than that, American Express has done a nifty job of deftly branding its products so that they appeal to their respective target audiences.  As mentioned before, you can send and receive money from anyone with a like account such as Bluebird or Serve.  However, the ability to negotiate such amounts (in case of buyer-seller transactions on the Internet is named differently.  Serve calls it “negotiation” and Bluebird calls it “suggest new amount.”  Notice the subtle difference?  Of course.  Serve is seemingly intended for a more sophisticated audience while Bluebird is well, aimed at the common man on the street.  Either way, American Express wins and makes more money!

Going Liquid with Chase

The closest direct competitor is Liquid from Chase.  However, Liquid comes with a $4.95 monthly fee although Chase tells you that there are ways to avoid the fee by exceeding some account thresholds.  There are arguably some conceivable advantages to use the more widely accepted VISA branded Liquid card.  Backed by a major, easily recognizable bank, Liquid is definitely a direct alternative to the prepaid products from American Express.  The other significant competitor is GreenDot (NYSE: GDOT), that until recently was the undisputed leader of the prepaid world.  There is a $5.95 monthly fee for using Greendot’s products and fees for other items as well.  Similar to Liquid, Greendot says that the monthly fees can be avoided through certain actions such as loading high amounts onto the card or performing a set number of transactions.  Either way, neither Liquid nor Greendot can match the newly energized prepaid cards from American Express and therein lies the Investment opportunity!

Going Long with American Express

AXP has a forward P/E of 11.75 and a 5 year PEG ratio of 1.16.  Its prepaid competitors - JPMorgan Chase in contrast has a P/E of 7.59 and a PEG ratio of 1.24 while Greendot has a P/E of 8.16 and a PEG ratio of 0.44.  At first glance, GDOT might appear cheap compared to JPM and AXP.  There is a reason for it and it is because American Express is poised to eat Greendot's lunch.  While prepaid cards are one line of business for both Chase and American Express, Greendot depends on it!  Now, with American Express going aggressively after GDOT’s core business, guess who is going to win? So, compared to GDOT, is AXP’s higher P/E justified?  Judging by the substantial inroads that American Express has made into the prepaid market, you bet!

I rate AXP a buy.​