The American Express Company (NYSE: AXP), is a global financial services institution whose main offerings are charge and credit cards. American Express earns about half of its revenue from merchants, charging them a discount rate for each transaction processed. The other major source of revenue is cardholders themselves, who pay annual fees and interest charges on balances. During 2010, American Express posted a net income of $4.1 billion from its total revenues of $27.8 billion.
American Express announced that it would revive its share repurchase plan. The announcement came after obtaining approval from the Federal Reserve after American Express passed stress tests. American Express did not announce how many shares or how quickly it would repurchase shares. However, despite the positive news for investors, American Express also announced that its legal liabilities would exceed the amount it had set aside already, with up to $500 million in additional legal costs.
Headquartered in New York City, American Express is a global payment and travel service company. Because American Express is one of the leading issuers of corporate credit cards, its customers on average spend up to 2-4 times as much as customers using competing cards; the average American Express cardholder spent $11,213 per year, excluding cards issued by affiliates. This allows American Express to charge a discount rate over twice as high as either of its main competitors (an average of 2.54%). This combination of higher discount rates and big-spending cardholders means that American Express earns much more per swipe than either Visa (V) or Mastercard (MA).
As a credit card issuer, American Express's performance is highly dependent on the overall state of the economy. During economic downturns, consumer spending drops, while booms can stimulate spending and borrowing. With the falling U.S. home prices, tightening credit markets, and the general economic uncertainty caused by the subprime lending fiasco, credit card issuers like American Express are facing declining consumer spending as well as the increased likelihood that some customers will be unable to repay their balances. Additionally, interest rate cuts could pressure lenders like American Express to lower the rates they charge on balances, further hurting earnings.
During 2010, American Express posted a net income of $4.1 billion from its total revenues of $27.8 billion. This was an increase from its 2009 net income of $2.1 billion and revenues of $24.5 billion/
American Express offers a number of products and services to its customers. They include U.S. Card Services, Prepaid Product, International Card & Global Commercial Services, and Global Network & Merchant Services.
This division's products include their branded cards as well as several niche charge and credit cards (e.g., student, travel rewards).
The GCS branch of American Express provides expense management services to firms worldwide. Products offerings include corporate cards provided to a company's employees and corporate purchasing solutions for items such as office supplies. American Express also focuses on business travel planning and expense management.
The GNS business operates a business that signs merchants to accept American Express cards and processes card transactions for those merchants. American Express successfully sued Visa and MasterCard on anti-trust grounds to allow U.S. banks to issue American Express cards. This business segments oversees the charge and credit card network that includes both proprietary cards and those licensed under partnership agreements.
In order to secure partnerships with merchants, GNS also provides partner financial institutions and merchants with services such as back-office products and marketing programs.
American Express generates revenue from six sources: i) Discount Revenue, ii) Travel, Commission, and other Fees, iii) Net Card Fees, and iv) Net Securitization Income, and v) Net Interest Income, and vi) Other Income.
The company receives a portion of every transaction charged to its credit and charge cards, and this fee is assessed to merchants' respective businesses. Historically over half of all American Express revenues come from discount revenues.
With the recessionary period, fewer people traveled, which led to the decline in lower fees.
Card Fees come from annual memberships, foreign exchange conversion fees, and service fees.
Net interest income is defined as total interest earned minus total interest expense.
Revenue from this segment includes various fees such as commissions from partners.
On March 30 of 2011, American Express received news that the Federal Reserve missed a deadline for issuing final rules that would put restrictions on debit interchange fees that banks and debit card companies are able charge to merchants. Industry analysts generally see this as a positive for companies such as Visa (V) and Mastercard (MA), but may have less of an impact on American Express since it does not make extensive use of debit cards.
American Express also came to an agreement with Facebook in July 2011. AMEX will offer discount offers to Facebook members who link their card to their account based on their activity on Facebook. This represents a movement of American Express to the social and web technology industry.
The Federal Reserve, under orders from Congress released a set of proposed rules that would limit debit card interchange fees at just 12 cents per transaction, significantly lower than the average 44 cents the card companies are currently charging. At 12 cents per transactions, it is expected that the banks and issues will not be able to cover their costs of operations, which could significantly hurt their profitability. American Express, Visa (V), and Mastercard (MA) are all expected to be significantly hurt by this regulation if passed, as they would not only lose control over their ability to set their price for interchange fees, but would also have their fee revenue capped at 12 cents per dollar of transaction. Whether these proposed rules ultimately get passed into law or are amended remains to be seen.
Visa announced that it has teamed up with Wells Fargo to pilot test a mobile payments system using smartphones such as the iPhone and Blackberry. This announcement came shortly after three of the largest telecom carriers (AT&T (T), Verizon Communications (VZ), and T-Mobile announced a joint venture for mobile payments technology as they try to shift the future of mobile payments away from credit card companies and towards mobile phone companies. The upcoming struggle for mobile payments dominance between credit card companies and telecom companies may have huge implications for future earnings for the dominant players as this market begins to develop. However, American Express seems to be left out as currently only Visa and Wells Fargo have teamed up to explore this potential market.
President Obama signed into law the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, a wide ranging credit card reform bill set to fully take effect. Included in this bill are restrictions on interest rate increases, a 45 day notice before changing interest rates, restrictions on fees that can be charged, requirements for more disclosure, and limits on ability of those under the age of 21 to obtain cards, among others. Banks have warned that the new legislation will increase rates, decrease credit extended, and increase the use of annual fees for cards. Less credit likely means less transactions, transaction amounts, and thus a negative impact on earnings.
U.S. consumers have increasingly used credit cards to pay for more purchases than cash or checks, a trend that continued since then. In addition to credit cards, debit cards and electronic payments (like PayPal) have taken market share away from more traditional means of payment. It should be noted that debit cards have doubled in usage over the past six years, but American Express does not provide debit card products.
One particular technology driving increased usage of credit cards is contact-less payments which do not require a swiping through a machine. American Express entered the contact-less market through its ExpressPay service. The company estimates that ExpressPay not only shortens the length of time for a transaction but also increases average transaction size by 20-30% compared to cash spending--both attractive for merchants using this system. One of the primary participants within the contact-less payment sector is MasterCard's PayPass, which is currently accepted in major businesses such as McDonald's (MCD) and CVS (CVS).
A charge and credit card company is only as good as the merchant network that accepts its cards--after all, a customer cannot make a charge unless the card is accepted. One of American Express' primary competitive advantages is its closed loop network, meaning that it acquires both cardholders as well as merchants into its network. This allows the company to have a deep understanding of how its cardholders charge purchases. Merchants are attracted to the American Express network because of the company's wealthier demographic.
The net effect of this closed loop network is an average cardmember spending 2-4 times higher than competitors, as well as a merchant discount rate twice as high as its competitors. All in, American Express makes 4-8 times as much discount revenue from a typical cardholder compared to either Visa or MasterCard. Its limitation is its ability to grow and scale this network and the American Express' dependency on the merchant discount rate as primary revenue stream.
The company estimates that its network accommodates approximately 80-90% of the general transactions its customers make in a given year. As such, American Express has shifted away from its legacy of travel and entertainment--which used to drive two-thirds of all transactions--to general retail and other sections, which currently generates the majority of all charges from its cardholders.
American Express competes against companies in the general purpose payment card industry, as well as against all other forms of payment. Its top competitors within the general purpose payment card industry include Visa (V), Mastercard (MA), and Discover Financial Services (DFS). American Express's advantages include its low exposure to subprime cardholders (based on credit score), thus reducing risks of write-offs when cardholders do not pay their bills. American Express also owns nearly half of all transaction volume in the U.S. Small Business niche, which is estimated to charge nearly $200 billion on cards a year.