netrashetty
Netra Shetty
American Express Company (NYSE: AXP), sometimes known as AmEx, is a diversified global financial services company headquartered in New York City. Founded in 1850, it is one of the 30 components of the Dow Jones Industrial Average. The company is best known for its credit card, charge card, and traveler's cheque businesses. Amex cards account for approximately 24% of the total dollar volume of credit card transactions in the US, the highest of any card issuer.[4][5]
BusinessWeek and Interbrand ranked American Express as the 22nd most valuable brand in the world, estimating the brand to be worth US$14.97 billion.[6] Fortune listed Amex as one of the top 30 Most Admired Companies in the World.[7]
The company's mascot, adopted in 1958, is a Roman gladiator[8] whose image appears on the company's travelers' cheques and charge cards.
U.S. consumers spent more using their credit cards than with either cash or checks for the first time in 2006. The American Express Company (NYSE: AXP), a global financial services institution whose main offerings are charge and credit cards, is a beneficiary of this shift. 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. The company earned $26.73 billion in revenues for 2009 from its $620 billion in total consumer transactions.[1]
American Express converted into a bank holding company in order to become a Federal Reserve member, enabling it to receive the benefits of being a member.[2] American Express has declared that this conversion to a bank holding company will not in any way impact their core business or business model.
Beginning February 22, 2010, the Credit Card Accountability, Responsibility and Disclosure Act will take full effect. The bill was signed into law on May 22, 2009 by Obama, and made sweeping reforms to the credit card industry. Included in the bill are requirements for more disclosure about interest rates, the inability of most people under the age of 21 to obtain cards, caps on service fees within the first year, and well defined grace periods.[3] How these changes affect the current credit card landscape and which companies are able to better adapt to the new rules remains to be seen.
Contents
1 Company Overview
1.1 Business and Financial Metrics
1.2 Products/Services
1.2.1 U.S. Card Services
1.2.2 International Card & Global Commercial Services [GCS]
1.2.3 Global Network Services [GNS]
1.3 Business Segments
1.3.1 Discount Revenue (54.6% of 2009 total revenue[10])
1.3.2 Travel Commission Fees and Other Fees (13.8%[10])
1.3.3 Card Fees (8.8%[10])
1.3.4 Net Interest Income (12.7%[10])
1.3.5 Net Securitization Income (1.6%[10])
1.3.6 Other revenues (8.6%[10])
2 Trends and Forces
2.1 Potential Regulation Limiting Debit Interchange Fees
2.2 American Express Competitor Visa has teamed up with Wells Fargo (WFC) to pilot test mobile payments system
2.3 Impact of credit card reform bill
2.4 Consumer Payment Means
2.5 Closed Loop Merchant Network
3 Competition
4 References
For the third quarter of 2010, American Express had total net income of $1.1 billion, a 71% increase from its 2009 third quarter net income of $640 million.[4] A significant driver of the increase in profits was due to American Express decreasing its provision for loan losses, as its provisions were only $373 million compared to $1.2 billion a year ago.
Company Overview
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; in 2009, the average American Express cardholder spent $11,213 per year, excluding cards issued by affiliates.[5] This allows American Express to charge a discount rate over twice as high as either of its main competitors (an average of 2.54% in 2009).[5] 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.
Business and Financial Metrics
During 2009, American Express posted a net income of $2.13 billion from its total revenues of $26.37 billion. While these were declines compared to its 2008 net income of $2.7 billion and 2008 total revenues of $31.9 billion, the results are still positive, which is an encouraging sign for recessionary times.
During the fourth quarter of 2009, American Express began having fewer credit losses, which accounted for improvement in its net income. However, because total revenues did not increase much, American Express's Chief Financial Officer Dan Henry has cautioned that growth in the future may be slow.[6]
American Express Financials (In Millions) 2006[7] 2007[7] 2008[7] 2009[7]
Total Revenues Net of Interest Expense 24,826 27,559 28,365 24,523
Expenses 17,008 17,762 18,986 16,369
Provision for loan losses 2,666 4,103 5,798 5,313
Operating Income 3,625 4,126 2,871 2,137
Net Income 3,707 4,012 2,699 2,130
For the first quarter of 2010, American Express posted a net income of $885 million, more than double its previous year's first quarter net income of $437 million.[8] American Express attributed this strong improvement to a 48% decrease in its provision for loan losses. With the economy improving, American Express reduced the amount of charge offs they had, meaning fewer customers were unable to pay back their balances on credit cards and loans.
For the second quarter of 2010, American Express posted a net income of over $1 billion, nearly triple that of the second quarter of 2009. American Express reported that consumers spending was up 16%, thereby helping American Express's revenue rise 13% to $6.86 billion.[9] Furthermore, delinquency rates, which are a key gauge of future losses, are at its lowest point for 2010.
Products/Services
American Express offers a number of products and services to its customers. They include U.S. Card Services, International Card & Global Commercial Services, and Global Network & Merchant Services.
U.S. Card Services
This division's products include their branded cards as well as several niche charge and credit cards (e.g., student, travel rewards).
Charge Cards include Green, Gold, Platinum, and Centurion cards. Charge cards operate like credit cards, with the exception that cardholders must pay outstanding balances in full every month.
Credit Cards are different from charge cards in that customers are allowed to carry a balance. American Express makes money from financing charges for accrued balances by charging interest on the balances.
Travelers Check and Card are used by travelers because of its loss protection. American Express offers pre-paid card version of this product as well.
Travel Services provide Card members and non-members with travel options including flight schedules, car rentals, and hotel bookings.
Small Business OPEN allows small businesses to manage expenses, budget for travel and gain rewards through targeted credit and charge cards as well as tools. American Express is the leader in this niche.
International Card & Global Commercial Services [GCS]
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.
Global Network Services [GNS]
The GNS business operates a business that signs merchants to accept American Express cards and processes card transactions for those merchants. In 2004, 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.
Business Segments
In 2009, American Express generated $26.37 billion in net 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.
Discount Revenue (54.6% of 2009 total revenue[10])
The company receives a portion of every transaction charged to its credit and charge cards, and this fee is assessed to merchants' respective businesses. American Express's average discount rate declined to 2.54% in 2009 from its 2008 level of 2.55%.[5] Discount Revenue accounted for $13.4 billion, or 54.6% of all revenue for American Express in 2009.[11] The discount revenue for American Express declined compared to 2008, when it had total discount revenue of $15 billion. American Express attributes this decline in large part to a 9% decrease in overall billed business.
Travel Commission Fees and Other Fees (13.8%[10])
Travel commission fees declined by $416 million to $1.6 billion in 2009 compared to 2008 due to a 28% decline in worldwide travel sales.[12] With the recessionary period of 2009, fewer people traveled, which led to the decline in lower fees. American Express' Other commission and fees decreased $529 million to $1.8 billion in 2009 compared to 2008, due to lower delinquency fees.[13] The lower delinquency fees reflects the reduction in total owned loan balances (number of balances outstanding; fewer overall balances would lead to fewer delinquency fees).
Card Fees (8.8%[10])
Card Fees come from annual memberships, foreign exchange conversion fees, and service fees. Although the total number of American Express Cards decreased in 2009, its net card fees remained at $2.8 billion (same as in 2008) due to the average fee per card increasing.[12]
Net Interest Income (12.7%[10])
Net interest income is defined as total interest earned minus total interest expense. During 2009 American Express earned $3.12 billion in total net interest income, a decrease from its 2008 total net interest income of $3.65 billion.[13] This was in large part due to the very low interest rate environment in 2009. While it decreased interest expense, it also significantly lowered interest revenues, resulting in an overall decline in net interest income.
Net Securitization Income (1.6%[10])
American Express' net securitization income decreased $670 million, or 63%, to $400 million in 2009 compared to 2008.[13] This decline was driven mostly by increased write-offs and a decrease in interest income on cardmember loans and fee revenues.
Other revenues (8.6%[10])
Revenue from this segment includes various fees such as commissions from partners. Other revenues in 2009 declined by $70 million to $2.1 billion in 2009, compared to 2008.[13]
Trends and Forces
Potential Regulation Limiting Debit Interchange Fees
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.[14] 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.
American Express Competitor Visa has teamed up with Wells Fargo (WFC) to pilot test mobile payments system
Visa announced on December of 2010 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.
Impact of credit card reform bill
On May 22, 2009, 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 beginning in February 2010.[15] However, the first stages of the reform take effect as early as August 20, 2009.[16] 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.[17] Banks have warned that the new legislation will increase rates, decrease credit extended, and increase the use of annual fees for cards.[18] Less credit likely means less transactions, transaction amounts, and thus a negative impact on earnings.
Consumer Payment Means
In 2006, for the first time, U.S. consumers 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).
Closed Loop Merchant Network
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.
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 in 1990--to general retail and other sections, which currently generates the majority of all charges from its cardholders.
Competition
Credit Card market share among the top four largest companies.[19]
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.
Mastercard (MA): Mastercard has a strong brand loyalty and name recognition through its "Priceless®” marketing campaign. It has also experienced rapid growth as it has pushed to switch from paper to a fully electronic system.[20] American Express has an advantage over Mastercard because it has direct relationships with both cardholders and card issuers, and is not affected by regulation of interchange fees.
Visa (V) is the world's largest retail payment processor by far. Within the United States, Visa accounts for 60% of the debit-card transactions in the U.S. market - a four-to-one advantage over second place Mastercard. Visa is also the largest in terms of total transactions and total volume. As with Mastercard, American Express holds an advantage because of its direct relationships as well as avoiding interchange fee regulation.
Discover Financial Services (DFS): Discover is smaller than American Express, and competes with it almost exclusively in the US. American Express also competes against Discover's PULSE, a network that increases the compatibility of debit cards and ATMs in the network.
BusinessWeek and Interbrand ranked American Express as the 22nd most valuable brand in the world, estimating the brand to be worth US$14.97 billion.[6] Fortune listed Amex as one of the top 30 Most Admired Companies in the World.[7]
The company's mascot, adopted in 1958, is a Roman gladiator[8] whose image appears on the company's travelers' cheques and charge cards.
U.S. consumers spent more using their credit cards than with either cash or checks for the first time in 2006. The American Express Company (NYSE: AXP), a global financial services institution whose main offerings are charge and credit cards, is a beneficiary of this shift. 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. The company earned $26.73 billion in revenues for 2009 from its $620 billion in total consumer transactions.[1]
American Express converted into a bank holding company in order to become a Federal Reserve member, enabling it to receive the benefits of being a member.[2] American Express has declared that this conversion to a bank holding company will not in any way impact their core business or business model.
Beginning February 22, 2010, the Credit Card Accountability, Responsibility and Disclosure Act will take full effect. The bill was signed into law on May 22, 2009 by Obama, and made sweeping reforms to the credit card industry. Included in the bill are requirements for more disclosure about interest rates, the inability of most people under the age of 21 to obtain cards, caps on service fees within the first year, and well defined grace periods.[3] How these changes affect the current credit card landscape and which companies are able to better adapt to the new rules remains to be seen.
Contents
1 Company Overview
1.1 Business and Financial Metrics
1.2 Products/Services
1.2.1 U.S. Card Services
1.2.2 International Card & Global Commercial Services [GCS]
1.2.3 Global Network Services [GNS]
1.3 Business Segments
1.3.1 Discount Revenue (54.6% of 2009 total revenue[10])
1.3.2 Travel Commission Fees and Other Fees (13.8%[10])
1.3.3 Card Fees (8.8%[10])
1.3.4 Net Interest Income (12.7%[10])
1.3.5 Net Securitization Income (1.6%[10])
1.3.6 Other revenues (8.6%[10])
2 Trends and Forces
2.1 Potential Regulation Limiting Debit Interchange Fees
2.2 American Express Competitor Visa has teamed up with Wells Fargo (WFC) to pilot test mobile payments system
2.3 Impact of credit card reform bill
2.4 Consumer Payment Means
2.5 Closed Loop Merchant Network
3 Competition
4 References
For the third quarter of 2010, American Express had total net income of $1.1 billion, a 71% increase from its 2009 third quarter net income of $640 million.[4] A significant driver of the increase in profits was due to American Express decreasing its provision for loan losses, as its provisions were only $373 million compared to $1.2 billion a year ago.
Company Overview
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; in 2009, the average American Express cardholder spent $11,213 per year, excluding cards issued by affiliates.[5] This allows American Express to charge a discount rate over twice as high as either of its main competitors (an average of 2.54% in 2009).[5] 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.
Business and Financial Metrics
During 2009, American Express posted a net income of $2.13 billion from its total revenues of $26.37 billion. While these were declines compared to its 2008 net income of $2.7 billion and 2008 total revenues of $31.9 billion, the results are still positive, which is an encouraging sign for recessionary times.
During the fourth quarter of 2009, American Express began having fewer credit losses, which accounted for improvement in its net income. However, because total revenues did not increase much, American Express's Chief Financial Officer Dan Henry has cautioned that growth in the future may be slow.[6]
American Express Financials (In Millions) 2006[7] 2007[7] 2008[7] 2009[7]
Total Revenues Net of Interest Expense 24,826 27,559 28,365 24,523
Expenses 17,008 17,762 18,986 16,369
Provision for loan losses 2,666 4,103 5,798 5,313
Operating Income 3,625 4,126 2,871 2,137
Net Income 3,707 4,012 2,699 2,130
For the first quarter of 2010, American Express posted a net income of $885 million, more than double its previous year's first quarter net income of $437 million.[8] American Express attributed this strong improvement to a 48% decrease in its provision for loan losses. With the economy improving, American Express reduced the amount of charge offs they had, meaning fewer customers were unable to pay back their balances on credit cards and loans.
For the second quarter of 2010, American Express posted a net income of over $1 billion, nearly triple that of the second quarter of 2009. American Express reported that consumers spending was up 16%, thereby helping American Express's revenue rise 13% to $6.86 billion.[9] Furthermore, delinquency rates, which are a key gauge of future losses, are at its lowest point for 2010.
Products/Services
American Express offers a number of products and services to its customers. They include U.S. Card Services, International Card & Global Commercial Services, and Global Network & Merchant Services.
U.S. Card Services
This division's products include their branded cards as well as several niche charge and credit cards (e.g., student, travel rewards).
Charge Cards include Green, Gold, Platinum, and Centurion cards. Charge cards operate like credit cards, with the exception that cardholders must pay outstanding balances in full every month.
Credit Cards are different from charge cards in that customers are allowed to carry a balance. American Express makes money from financing charges for accrued balances by charging interest on the balances.
Travelers Check and Card are used by travelers because of its loss protection. American Express offers pre-paid card version of this product as well.
Travel Services provide Card members and non-members with travel options including flight schedules, car rentals, and hotel bookings.
Small Business OPEN allows small businesses to manage expenses, budget for travel and gain rewards through targeted credit and charge cards as well as tools. American Express is the leader in this niche.
International Card & Global Commercial Services [GCS]
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.
Global Network Services [GNS]
The GNS business operates a business that signs merchants to accept American Express cards and processes card transactions for those merchants. In 2004, 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.
Business Segments
In 2009, American Express generated $26.37 billion in net 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.
Discount Revenue (54.6% of 2009 total revenue[10])
The company receives a portion of every transaction charged to its credit and charge cards, and this fee is assessed to merchants' respective businesses. American Express's average discount rate declined to 2.54% in 2009 from its 2008 level of 2.55%.[5] Discount Revenue accounted for $13.4 billion, or 54.6% of all revenue for American Express in 2009.[11] The discount revenue for American Express declined compared to 2008, when it had total discount revenue of $15 billion. American Express attributes this decline in large part to a 9% decrease in overall billed business.
Travel Commission Fees and Other Fees (13.8%[10])
Travel commission fees declined by $416 million to $1.6 billion in 2009 compared to 2008 due to a 28% decline in worldwide travel sales.[12] With the recessionary period of 2009, fewer people traveled, which led to the decline in lower fees. American Express' Other commission and fees decreased $529 million to $1.8 billion in 2009 compared to 2008, due to lower delinquency fees.[13] The lower delinquency fees reflects the reduction in total owned loan balances (number of balances outstanding; fewer overall balances would lead to fewer delinquency fees).
Card Fees (8.8%[10])
Card Fees come from annual memberships, foreign exchange conversion fees, and service fees. Although the total number of American Express Cards decreased in 2009, its net card fees remained at $2.8 billion (same as in 2008) due to the average fee per card increasing.[12]
Net Interest Income (12.7%[10])
Net interest income is defined as total interest earned minus total interest expense. During 2009 American Express earned $3.12 billion in total net interest income, a decrease from its 2008 total net interest income of $3.65 billion.[13] This was in large part due to the very low interest rate environment in 2009. While it decreased interest expense, it also significantly lowered interest revenues, resulting in an overall decline in net interest income.
Net Securitization Income (1.6%[10])
American Express' net securitization income decreased $670 million, or 63%, to $400 million in 2009 compared to 2008.[13] This decline was driven mostly by increased write-offs and a decrease in interest income on cardmember loans and fee revenues.
Other revenues (8.6%[10])
Revenue from this segment includes various fees such as commissions from partners. Other revenues in 2009 declined by $70 million to $2.1 billion in 2009, compared to 2008.[13]
Trends and Forces
Potential Regulation Limiting Debit Interchange Fees
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.[14] 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.
American Express Competitor Visa has teamed up with Wells Fargo (WFC) to pilot test mobile payments system
Visa announced on December of 2010 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.
Impact of credit card reform bill
On May 22, 2009, 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 beginning in February 2010.[15] However, the first stages of the reform take effect as early as August 20, 2009.[16] 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.[17] Banks have warned that the new legislation will increase rates, decrease credit extended, and increase the use of annual fees for cards.[18] Less credit likely means less transactions, transaction amounts, and thus a negative impact on earnings.
Consumer Payment Means
In 2006, for the first time, U.S. consumers 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).
Closed Loop Merchant Network
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.
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 in 1990--to general retail and other sections, which currently generates the majority of all charges from its cardholders.
Competition
Credit Card market share among the top four largest companies.[19]
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.
Mastercard (MA): Mastercard has a strong brand loyalty and name recognition through its "Priceless®” marketing campaign. It has also experienced rapid growth as it has pushed to switch from paper to a fully electronic system.[20] American Express has an advantage over Mastercard because it has direct relationships with both cardholders and card issuers, and is not affected by regulation of interchange fees.
Visa (V) is the world's largest retail payment processor by far. Within the United States, Visa accounts for 60% of the debit-card transactions in the U.S. market - a four-to-one advantage over second place Mastercard. Visa is also the largest in terms of total transactions and total volume. As with Mastercard, American Express holds an advantage because of its direct relationships as well as avoiding interchange fee regulation.
Discover Financial Services (DFS): Discover is smaller than American Express, and competes with it almost exclusively in the US. American Express also competes against Discover's PULSE, a network that increases the compatibility of debit cards and ATMs in the network.
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