American Express unveils prepaid debit card

June 13, 2011: 8:09 PM ET

NEW YORK (CNNMoney) -- American Express announced Monday that it is introducing a prepaid debit card, marking what could be the start of a shift away from conventional charge cards for many consumers.

Prepaid cards allow consumers to load a card with money and only spend that money. And the cards aren't attached to a bank account, so anyone can use them. In 2010, there were $65 billion worth of prepaid card transactions -- up 35% from $48 billion in 2009.

"Prepaid is an exploding part of the payments industry," said Dan Schulman, group president of American Express' Enterprise Growth Group. "It's safer than cash, you can use it for online purchases and it's a great budgetary tool, because it gives you limits since it's prepaid and you can only spend what you put on it."

American Express (AXP, Fortune 500) says its biggest competition comes from prepaid card issuers Green Dot (GDOT) and NetSpend (NTSP), which work with major credit card networks like MasterCard (MA, Fortune 500) and Visa (V, Fortune 500).

And more competition may be on its way.

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While other major banks haven't yet introduced prepaid cards, it might not be long before they do, according to Gerri Detweiler, personal finance expert at Credit.com.

"I can't imagine that every large issuer isn't looking hard at prepaid cards right now," Detweiler said.

Here's why you might start seeing more offers for prepaid cards: They were not covered by the CARD Act, which Congress passed last year to limit certain credit card fees. Prepaid cards will also not be regulated by the Durbin Amendment, a law that takes affect soon that will limit the fees banks can charge retailers when customers swipe their debit cards.

Since prepaid cards remain untouched by the new rules, they could make a good alternative revenue stream for the banks, which will still get revenue from "swipe fees" when consumers use their prepaid cards.

And consumers may end up with fewer fees.

To be sure, the prepaid card industry has gotten a bad rap because of fee-laden cards like the RushCard and the now-extinct Kardashian Kard.

But some banking experts believe that if prepaid cards replace traditional debit cards, banks will be able to afford fewer fees.

"Right now prepaid cards tend to be more expensive than debit cards tied to checking accounts, but if that changes, prepaid cards could start looking a lot more financially attractive than debit cards," said Detweiler.

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Issuers of some prepaid cards charge fees when consumers activate their cards, load them with money or even call customer service.

American Express will not charge any of those fees or charge customers to use the card online or in a store. Customers will, however, pay $2 for using the card at an ATM after an initial free transaction each month.

If more issuers jump on the bandwagon, Detweiler said more consumers will likely adopt prepaid cards and drop their debit cards.

"Prepaid cards are already popular with consumers, and now that banks can possibly make more money from them than traditional debit cards, they could start becoming enormously popular with issuers too," Detweiler said. To top of page

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