The decision by American Express (NYSE:AXP) and Wal-Mart (NYSE:WMT) to revamp and re-launch their Bluebird prepaid card project (a more limited card was trialed and scuttled in July) seems aimed less at unbanked leader Green Dot (NYSE:GDOT), which was hammered by the news, and more at the low end of the banking market.
As I have written here before, people who are "unbanked" prefer a location in their neighborhood to any electronic device to handle what banking services they require. It's transaction-oriented, not relationship-oriented. This is a $36 billion market, led by check-cashers such as First Cash (NASDAQ:FCFS) and pawn shops like EZPawn (NASDAQ:EZPW), both of which are fixtures in the poor neighborhoods near my Atlanta home. The bearish case for GreenDot lies in its failure to penetrate these markets.
On the other hand, there are a huge number of people who are being nickel-and-dimed by big banks like JPMorgan Chase (NYSE:JPM), Citibank (NYSE:C) and Wells Fargo (NYSE:WFC), who aren't big users of loan servers, and who are also accustomed to electronic banking. These include young consumers, who might be upwardly mobile, and older consumers who first saw electronic banking in their 30s but are now retiring.
The keys to the WMT-AXP offer are the chance to use Wal-Mart cashiers to reload cards with cash, and the use of AXP's ATM network for cash withdrawals. This can make it an adjunct to an existing account at a local bank or credit union, extending the reach of that account rather than acting as a form of low-cost banking for the unbanked.
All the biggest banks have invested heavily the last few years in branches and ATM networks, which consumers use to rationalize high fees. This is what the AXP-WMT deal bypasses. If it can help build volumes through which AXP can expand its nationwide ATM network, it will prove wildly profitable.
For investors, I think AXP is the play here. The stock is up 34% year to date, it still carries a PE under 14, and it's going to earn most of the money in this deal. Revenues are back to pre-recession levels and operating margins are now over 25%. This deal is bound to have a positive impact on earnings and solidify them going forward.
For WMT, it's interesting that the company has now done a deal with the same outfit that runs Costco's (NASDAQ:COST) credit card operations. This gives is a chance to enhance its share of its target market's wallets, but I think the kick to earnings will be less than for AXP.