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American Express (NYSE:AXP), the company that has the third-largest market share (8%) in the global payments industry, behind Visa (NYSE:V) and MasterCard (NYSE:MA), has joined hands with the world's largest retailer, Wal-Mart (NYSE:WMT), to launch a prepaid debit card called the Bluebird. Starting next week, the card will not only be accepted at over 4,000 Wal-Mart stores, but also any other place that accepts American Express cards. We believe AMEX's expansion into the debit card business, and its collaboration with Wal-Mart, represent a big opportunity for the company. Therefore, we reiterate our long rating for the stock.

Features and Benefits of the Card to Consumers:

This partnership between the world's largest retailer and a U.S. financial services company aims to target consumers who are poorly served by the currently available banking solutions. Since Wal-Mart operates as a discount retailer, the company, combined with American Express, seeks to serve lower-income shoppers with little or no access to a credit facility. The facility will enable Wal-Mart customers to pay their bills via their cell phones by using various applications.

The terms and conditions of the card mention only two fees, and both Wal-Mart and American Express claim that the card does not contain any hidden fees or annual/monthly overdraft charges. The two listed fees include a $2 fee when the card is charged from another debit card machine, and $2 for making a withdrawal from an ATM. Those customers who have been hit hard by soaring banking fees will be the primary beneficiaries of the new service.

Benefits to American Express:

As noted earlier, the global payments industry is experiencing a secular shift towards contactless payments or mobile payments. Each of the three major players in the global payments industry are busy collaborating with retailers and other financial companies to come up with innovative and convenient ways to transact. The collaboration with Wal-Mart is a step further by American Express to introduce a product that combines a debit card with mobile payments.

The launch of this card represents a big opportunity for American Express, as about 85% of the transactions in Wal-Mart are cash based. Besides, the launch of this service will allow American Express to expand its core credit and charge card business to debit cards. The company until now did not issue debit cards. Expansion into debit cards will create new avenues of income for American Express, particularly at a time when spending through debit cards in the U.S. is on the rise. Spending for the month of August this year through PIN debit increased 9.3% as compared to the previous year. Signature debit increase 7.9% over the same period. The launch of the card comes at a time when issuers of prepaid cards are being pushed for greater scrutiny. Prepaid cards operate under a different set of regulations from debit and credit cards.

Valuations:

American Express' stock, with a 25% price appreciation since the beginning of the year, trades at a forward P/E ratio of 13 times, against 19.4 times and 18.4 times for Visa and MasterCard, respectively.

Against the current price of $58.8, analysts have a consensus mean price target of $62.5. This is an upside of 6.3%.

Source: American Express All Set To Ride The Debit Card Expansion