AXP - American Express

[TheAiGuy]

(...) I can't help but see similarities between the Costco contract and the salad oil scandal

 

This is a bad analogy. The salad oil scandal was orthogonal to the business of Amex, they were scammed. The loss of the Costco contract is material to their business and represents a loss of future revenue and customers that the salad oil scandal did not. You may very well be right about Amex generally, though.

[bookie71]

Just out of curiosity, how many Costco members are going to renew their AMEX card? 

I haven't decided yet, whether or not to get one or not.

[jtvalue]

(...) I can't help but see similarities between the Costco contract and the salad oil scandal

 

This is a bad analogy. The salad oil scandal was orthogonal to the business of Amex, they were scammed. The loss of the Costco contract is material to their business and represents a loss of future revenue and customers that the salad oil scandal did not. You may very well be right about Amex generally, though.

 

By similarities, I mean the stock market driving AXP down to bargain levels over a short-term issue. The stock is down 38% from its 52 week high over losing maybe 5% of their revenue. Let's also not forget that AXP's highly respected management walked away from a Costco renewal over price. Would there be all these worries over AXP's competitive position if they simply renewed the deal at lower economics?

[gary17]

I think many of our US forum members should know that outside of the U.S.A.; AXP is practically used by very few people and not very well accepted. 

 

Visa is used almost everywhere -  I actually don't know of a place in Canada that accepts credit cards that doesn't accept Visa - however, Amex is generally not accepted.

[jgyetzer]

I think many of our US forum members should know that outside of the U.S.A.; AXP is practically used by very few people and not very well accepted. 

 

Visa is used almost everywhere -  I actually don't know of a place in Canada that accepts credit cards that doesn't accept Visa - however, Amex is generally not accepted.

 

Has it not had far lower acceptance internationally for quite some time?  I am under the impression that this is not a new phenomenon.

[TheAiGuy]

(...) I can't help but see similarities between the Costco contract and the salad oil scandal

 

This is a bad analogy. The salad oil scandal was orthogonal to the business of Amex, they were scammed. The loss of the Costco contract is material to their business and represents a loss of future revenue and customers that the salad oil scandal did not. You may very well be right about Amex generally, though.

 

By similarities, I mean the stock market driving AXP down to bargain levels over a short-term issue. The stock is down 38% from its 52 week high over losing maybe 5% of their revenue. Let's also not forget that AXP's highly respected management walked away from a Costco renewal over price. Would there be all these worries over AXP's competitive position if they simply renewed the deal at lower economics?

 

Its under dispute if Amex "walked away" from the costco deal (http://www.bloomberg.com/features/2015-how-amex-lost-costco/).

 

Haven't done a deep dive on this one but there are a couple of red flags in how Amex is running their business, that is, to suggest it is actively being miss-managed.

[TheAiGuy]

By similarities, I mean the stock market driving AXP down to bargain levels over a short-term issue. The stock is down 38% from its 52 week high over losing maybe 5% of their revenue. Let's also not forget that AXP's highly respected management walked away from a Costco renewal over price. Would there be all these worries over AXP's competitive position if they simply renewed the deal at lower economics?

 

or for a better credentialed opinion:

http://www.forbes.com/sites/phildemuth/2015/04/13/charlie-mungers-2015-daily-journal-annual-meeting-part-2/#114279d54673

 

Q: I’d like to get your thoughts on American Express [AMEX]. Do you think its moat has narrowed recently?

 

Mr. Munger: I don’t think it was desirable that it lost its contract with Costco [COST]. Again, that’s an example of what tough capitalism is. Obviously, other people are willing to do it cheaper. It just shows how tough a position that looks impregnable can be in modern capitalism. It’s what makes everything difficult.

 

To those who already have some money, I think that’s just the way it is, and American Express has had a long period of very extreme achievement and prosperity. I think they’ll have a lot of prosperity in the future, but it doesn’t look quite as easy as it once did. Now, the head guy would say it’s always been hard, he’s been battling hard, but we paddled hard here too, and what good did it do us in Daily Journal’s print business? We paddled like crazy, didn’t we Gerry?

 

Mr. Salzman: We tried. It was hard.

 

Mr. Munger: Yeah, what happened is you just keep receding and receding. Welcome to adult life.

[\quote]

[gary17]

I think many of our US forum members should know that outside of the U.S.A.; AXP is practically used by very few people and not very well accepted. 

 

Visa is used almost everywhere -  I actually don't know of a place in Canada that accepts credit cards that doesn't accept Visa - however, Amex is generally not accepted.

 

Has it not had far lower acceptance internationally for quite some time?  I am under the impression that this is not a new phenomenon.

 

yah. so the last 30 years probably not so critical.  next 30 years it probably will. 

[ccplz]

http://valuewalkposts.tumblr.com/post/137820495325/as-buffett-refuses-management-changes-valueact

[jtvalue]

By similarities, I mean the stock market driving AXP down to bargain levels over a short-term issue. The stock is down 38% from its 52 week high over losing maybe 5% of their revenue. Let's also not forget that AXP's highly respected management walked away from a Costco renewal over price. Would there be all these worries over AXP's competitive position if they simply renewed the deal at lower economics?

 

or for a better credentialed opinion:

http://www.forbes.com/sites/phildemuth/2015/04/13/charlie-mungers-2015-daily-journal-annual-meeting-part-2/#114279d54673

 

Q: I’d like to get your thoughts on American Express [AMEX]. Do you think its moat has narrowed recently?

 

Mr. Munger: I don’t think it was desirable that it lost its contract with Costco [COST]. Again, that’s an example of what tough capitalism is. Obviously, other people are willing to do it cheaper. It just shows how tough a position that looks impregnable can be in modern capitalism. It’s what makes everything difficult.

 

To those who already have some money, I think that’s just the way it is, and American Express has had a long period of very extreme achievement and prosperity. I think they’ll have a lot of prosperity in the future, but it doesn’t look quite as easy as it once did. Now, the head guy would say it’s always been hard, he’s been battling hard, but we paddled hard here too, and what good did it do us in Daily Journal’s print business? We paddled like crazy, didn’t we Gerry?

 

Mr. Salzman: We tried. It was hard.

 

Mr. Munger: Yeah, what happened is you just keep receding and receding. Welcome to adult life.

[\quote]

 

I can throw out Buffett quotes to contradict Munger.

 

“American Express is still a very, very special company,” Buffett said Saturday at Berkshire’s annual meeting in Omaha, Nebraska.

 

CEO "Ken has done a sensational job anticipating some of these trends and guiding it into some of those markets"

 

http://www.bloomberg.com/news/articles/2015-05-02/buffett-endures-amex-slump-while-praising-sensational-chenault

 

At the end of the day, while I respect Munger's comments, I did my own work and came to my own conclusion.

 

 

[jgyetzer]

I think many of our US forum members should know that outside of the U.S.A.; AXP is practically used by very few people and not very well accepted. 

 

Visa is used almost everywhere -  I actually don't know of a place in Canada that accepts credit cards that doesn't accept Visa - however, Amex is generally not accepted.

 

Has it not had far lower acceptance internationally for quite some time?  I am under the impression that this is not a new phenomenon.

 

yah. so the last 30 years probably not so critical.  next 30 years it probably will.

 

I sincerely do not mean to be obtuse, but why now does international market share become so critical?  There are plenty of businesses with low total market share that remain quite profitable.

[vinod1]

It is better to analyze the strengths and weakness of each segment separately. 

 

For US Card Services, the relevant scale and merchant acceptance criteria is U.S.

 

The median Amex U.S. card holder does not give much importance about Amex card acceptance in Japan or China or even Europe. They care predominantly about acceptance within US. Granted it is still smaller, 6.8 million acceptance locations for Amex vs. 9.5 million for V/MA. But it has crossed the critical acceptance level in US to make it attractive for consumers.

 

Their OptBlue program specially addresses this gap and they are doing a pretty good job on this front.

 

As to scale, Amex purchase volume in credit cards in US exceeds the sum of all the banks issuing under MasterCard.

 

Vinod

[vinod1]

I don't see much mention of the commercial services segment which is a gem and a gold standard in the industry.

 

Vinod

[bizaro86]

I think many of our US forum members should know that outside of the U.S.A.; AXP is practically used by very few people and not very well accepted. 

 

Visa is used almost everywhere -  I actually don't know of a place in Canada that accepts credit cards that doesn't accept Visa - however, Amex is generally not accepted.

 

Interestingly enough,  the independent small business man who repaired my furnace yesterday (in Canada) volunteered that he takes Amex when I asked him how I could pay. Then he whipped out the square reader on his phone.

 

If 3rd party platforms become common and Amex is on them, it could make thrm more ubiquitous.

 

I was very surprised, I almost never find small businesses that take Amex, and many large ones don't here either. (Eg Canada's largest grocery chain)

[TheAiGuy]

Fwiw, square losses money on every Amex transaction. They eat the higher fee

[TheAiGuy]

At the end of the day, while I respect Munger's comments, I did my own work and came to my own conclusion.

 

Fair enough

[eburnside]

American Express is a wonderful business. It has been a wonderful business for a long time, as defined by its history of superior economics. The trouble is, we live in a fiercely capitalistic society, and superior economics attract competition. That is the nature of things.

 

Card issuing banks are facing tremendous headwinds in their attempt to earn returns on their capital. Regulation has constrained their opportunity set to very traditional and conservative lines of business. One such line of business is card services. A quick glance at the quarterly financials of any major banking institution would give you a sense for how superior the economics of this business are relative to its other lines of business. If you were operating such a bank would you not find it in your self interest to aggressively expand this line of business? You can utilize the payment infrastructure of Visa and Mastercard at incredibly inexpensive rates. You can leverage your existing customer base. You can offer rewards and incentives that match existing card issuers such as American Express. In fact, you could offer better rewards, because you're willing to give up a couple of points of return in exchange for quicker customer adoption.

 

The above is simply a thought exercise. Could it be possible that banks are pursuing the credit card business more aggressively than ever before because they are seeking ways to boost their returns on capital? Is it possible that American Express's discount merchant rate, being as high as it is, makes them particularly vulnerable to competition. Jeff Bezos once said, "the other guys margin is our opportunity." Could that not be a valid explanation for the recent intensification of competition?

 

I am not drawing any particular conclusion here. I am simply trying to better understand Charlie Munger's comments, and the nature of the industry as it is today and what it might be in the future. And even if the future is less bright for American Express, does the current price more than compensate for it?

 

 

 

[jgyetzer]

I think eburnside asks relevant questions. To add to that - What if Amex were to lower discount rates and pursue a more traditional credit lending business with its closed loop model as an advantage?  It seems returns would have to more closely reflect those of the competition, but would not be a catastrophic scenario. Alternatively, if management refuses to accept lower returns, but continues to return excess capital to shareholders, will the present business survive long enough to provide a good return at the current price?

[Guest Schwab711]

I think eburnside asks relevant questions. To add to that - What if Amex were to lower discount rates and pursue a more traditional credit lending business with its closed loop model as an advantage?  It seems returns would have to more closely reflect those of the competition, but would not be a catastrophic scenario. Alternatively, if management refuses to accept lower returns, but continues to return excess capital to shareholders, will the present business survive long enough to provide a good return at the current price?

 

If they lower their swipe fees it would seem like they could be more desirable than competitors because their $/transaction advantage and the ever-decreasing costs of POS hardware. Without Costco, AXP will still be #1 or #2 issuer with > ~12% of card issuance market share (from 17% today).

 

http://www.creditcards.com/credit-card-news/credit-card-market-share-statistics-1264.php

http://www.relbanks.com/rankings/top-credit-card-issuers

[flesh]

Just read this thread, just recently interested in AXP.

 

1. I had a business for a decade that did a substantial amount of credit card transactions. I told all my sales people to ask people specifically for visa or mc if somebody tried to use their amex. We were processing charges for 2000-15000 and it's a no brainer as the savings went directly into my pocket.

 

2. As a business owner dealing with amex was tough, I had a 1% chargeback rate and with amex I almost never won, they always protect their customers compared to anyone else. I would always mention this to my salespeople because charge backs came out of a retention account that was deducted from their commissions and capped at a certain level. They really didn't seem to care what evidence I provided, the customer was always right, even when the customer outright lied. I'm not sure if the +/- here is good or bad on balance. After a couple years of dealing with amex the only customers who would use it are those that only had an amex and/or absolutely refused to pay with another card (which we tracked and found these people were likely to cancel anyways so they were seeking the added protection).

 

3. Personally, I used amex cards for a number of years and switched to capital one cash back, 1.5% on everything, no annual fee. For my business I switched to cap 1, 2% cash back on everything, annual fee of like 60ish. When I ran the numbers the miles I was getting were worth about 2% however I wasn't always able to get the dates/destinations/seats I wanted and I decided I'd prefer to take a small hit for greater optionality.

 

4. It seems to me with the growing rewards options being handed out by anyone that the moat may be getting narrower. Also, with the younger generations I'm not seeing anyone talking about amex as a better brand/exclusivity. I wonder how meaningful this is as the baby boomers begin to pass away.

 

I suppose I'm biased coming from the business owners perspective, but I can't get past the fact you have to pay them higher fees, 1% of sales is usually a large portion of profits for most small businesses. On the other hand, if this was such an issue, they wouldn't have done so well.

[Peregrine]

American Express is a wonderful business. It has been a wonderful business for a long time, as defined by its history of superior economics. The trouble is, we live in a fiercely capitalistic society, and superior economics attract competition. That is the nature of things.

 

Card issuing banks are facing tremendous headwinds in their attempt to earn returns on their capital. Regulation has constrained their opportunity set to very traditional and conservative lines of business. One such line of business is card services. A quick glance at the quarterly financials of any major banking institution would give you a sense for how superior the economics of this business are relative to its other lines of business. If you were operating such a bank would you not find it in your self interest to aggressively expand this line of business? You can utilize the payment infrastructure of Visa and Mastercard at incredibly inexpensive rates. You can leverage your existing customer base. You can offer rewards and incentives that match existing card issuers such as American Express. In fact, you could offer better rewards, because you're willing to give up a couple of points of return in exchange for quicker customer adoption.

 

The above is simply a thought exercise. Could it be possible that banks are pursuing the credit card business more aggressively than ever before because they are seeking ways to boost their returns on capital? Is it possible that American Express's discount merchant rate, being as high as it is, makes them particularly vulnerable to competition. Jeff Bezos once said, "the other guys margin is our opportunity." Could that not be a valid explanation for the recent intensification of competition?

 

I am not drawing any particular conclusion here. I am simply trying to better understand Charlie Munger's comments, and the nature of the industry as it is today and what it might be in the future. And even if the future is less bright for American Express, does the current price more than compensate for it?

 

Great questions. AMEX has had superior economics compared to the card businesses of other banks for a long, long time. Yet none have been able to duplicate what AMEX has.

 

You are absolutely right that the low return environment has made competition even more intense. However, I believe that the AMEX model is still intact. Why?

 

AMEX caters to the high spending customer, on average they spend 3-4x more than the general Visa/Mastercard cardholder. Because the AMEX cardholder spends so much, merchants value them highly and (for the most part) are willing to pay the somewhat higher swipe fee. On average, these fees are 2.5% at AMEX compared to 2% for Visa/Mastercard. But that is on average - interchange fees differ widely across merchants and some will find that the cost is greater than the value received.

 

What gets AMEX cardholders coming back to their cards? No question it's the value of the rewards and services that they get when they're a cardholder. And the value of that is only attainable due to the higher merchant fees that AMEX charges. In effect, this is a self-reinforcing loop.

 

Now, there is no question that the economics have gotten tougher, particularly given the low return environment. I see some AMEX cardholders migrating to a Chase or Capital One card because they find that they get more value. That's fine in my view since AMEX cannot and will not cater to all segments of the affluent. But that has always been the case as well.

 

Fundamentally I do not see this model breaking down, although the company may not be quite as profitable as it was in the past.

[cmlber]

American Express is a wonderful business. It has been a wonderful business for a long time, as defined by its history of superior economics. The trouble is, we live in a fiercely capitalistic society, and superior economics attract competition. That is the nature of things.

 

Card issuing banks are facing tremendous headwinds in their attempt to earn returns on their capital. Regulation has constrained their opportunity set to very traditional and conservative lines of business. One such line of business is card services. A quick glance at the quarterly financials of any major banking institution would give you a sense for how superior the economics of this business are relative to its other lines of business. If you were operating such a bank would you not find it in your self interest to aggressively expand this line of business? You can utilize the payment infrastructure of Visa and Mastercard at incredibly inexpensive rates. You can leverage your existing customer base. You can offer rewards and incentives that match existing card issuers such as American Express. In fact, you could offer better rewards, because you're willing to give up a couple of points of return in exchange for quicker customer adoption.

 

The above is simply a thought exercise. Could it be possible that banks are pursuing the credit card business more aggressively than ever before because they are seeking ways to boost their returns on capital? Is it possible that American Express's discount merchant rate, being as high as it is, makes them particularly vulnerable to competition. Jeff Bezos once said, "the other guys margin is our opportunity." Could that not be a valid explanation for the recent intensification of competition?

 

I am not drawing any particular conclusion here. I am simply trying to better understand Charlie Munger's comments, and the nature of the industry as it is today and what it might be in the future. And even if the future is less bright for American Express, does the current price more than compensate for it?

 

Great questions. AMEX has had superior economics compared to the card businesses of other banks for a long, long time. Yet none have been able to duplicate what AMEX has.

 

You are absolutely right that the low return environment has made competition even more intense. However, I believe that the AMEX model is still intact. Why?

 

AMEX caters to the high spending customer, on average they spend 3-4x more than the general Visa/Mastercard cardholder. Because the AMEX cardholder spends so much, merchants value them highly and (for the most part) are willing to pay the somewhat higher swipe fee. On average, these fees are 2.5% at AMEX compared to 2% for Visa/Mastercard. But that is on average - interchange fees differ widely across merchants and some will find that the cost is greater than the value received.

 

What gets AMEX cardholders coming back to their cards? No question it's the value of the rewards and services that they get when they're a cardholder. And the value of that is only attainable due to the higher merchant fees that AMEX charges. In effect, this is a self-reinforcing loop.

 

Now, there is no question that the economics have gotten tougher, particularly given the low return environment. I see some AMEX cardholders migrating to a Chase or Capital One card because they find that they get more value. That's fine in my view since AMEX cannot and will not cater to all segments of the affluent. But that has always been the case as well.

 

Fundamentally I do not see this model breaking down, although the company may not be quite as profitable as it was in the past.

 

I have an amex and a visa.  If a merchant told me they wouldn't accept amex, I would just use my visa.  Are there really customers who refuse to give business to merchants that don't accept amex?  It seems bizarre to me that this would be the case, but it must be or merchants wouldn't accept amex... 

[Rasputin]

AMEX caters to the high spending customer, on average they spend 3-4x more than the general Visa/Mastercard cardholder. Because the AMEX cardholder spends so much, merchants value them highly and (for the most part) are willing to pay the somewhat higher swipe fee. On average, these fees are 2.5% at AMEX compared to 2% for Visa/Mastercard. But that is on average - interchange fees differ widely across merchants and some will find that the cost is greater than the value received.

 

I think it's likely that Costco will announce that they detect no decrease in members' spend after they dumped Amex for Visa.  This will make other retailers question the value of the higher discount fees. 

[TwoCitiesCapital]

American Express is a wonderful business. It has been a wonderful business for a long time, as defined by its history of superior economics. The trouble is, we live in a fiercely capitalistic society, and superior economics attract competition. That is the nature of things.

 

Card issuing banks are facing tremendous headwinds in their attempt to earn returns on their capital. Regulation has constrained their opportunity set to very traditional and conservative lines of business. One such line of business is card services. A quick glance at the quarterly financials of any major banking institution would give you a sense for how superior the economics of this business are relative to its other lines of business. If you were operating such a bank would you not find it in your self interest to aggressively expand this line of business? You can utilize the payment infrastructure of Visa and Mastercard at incredibly inexpensive rates. You can leverage your existing customer base. You can offer rewards and incentives that match existing card issuers such as American Express. In fact, you could offer better rewards, because you're willing to give up a couple of points of return in exchange for quicker customer adoption.

 

The above is simply a thought exercise. Could it be possible that banks are pursuing the credit card business more aggressively than ever before because they are seeking ways to boost their returns on capital? Is it possible that American Express's discount merchant rate, being as high as it is, makes them particularly vulnerable to competition. Jeff Bezos once said, "the other guys margin is our opportunity." Could that not be a valid explanation for the recent intensification of competition?

 

I am not drawing any particular conclusion here. I am simply trying to better understand Charlie Munger's comments, and the nature of the industry as it is today and what it might be in the future. And even if the future is less bright for American Express, does the current price more than compensate for it?

 

Great questions. AMEX has had superior economics compared to the card businesses of other banks for a long, long time. Yet none have been able to duplicate what AMEX has.

 

You are absolutely right that the low return environment has made competition even more intense. However, I believe that the AMEX model is still intact. Why?

 

AMEX caters to the high spending customer, on average they spend 3-4x more than the general Visa/Mastercard cardholder. Because the AMEX cardholder spends so much, merchants value them highly and (for the most part) are willing to pay the somewhat higher swipe fee. On average, these fees are 2.5% at AMEX compared to 2% for Visa/Mastercard. But that is on average - interchange fees differ widely across merchants and some will find that the cost is greater than the value received.

 

What gets AMEX cardholders coming back to their cards? No question it's the value of the rewards and services that they get when they're a cardholder. And the value of that is only attainable due to the higher merchant fees that AMEX charges. In effect, this is a self-reinforcing loop.

 

Now, there is no question that the economics have gotten tougher, particularly given the low return environment. I see some AMEX cardholders migrating to a Chase or Capital One card because they find that they get more value. That's fine in my view since AMEX cannot and will not cater to all segments of the affluent. But that has always been the case as well.

 

Fundamentally I do not see this model breaking down, although the company may not be quite as profitable as it was in the past.

 

I have an amex and a visa.  If a merchant told me they wouldn't accept amex, I would just use my visa.  Are there really customers who refuse to give business to merchants that don't accept amex?  It seems bizarre to me that this would be the case, but it must be or merchants wouldn't accept amex...

 

I have. I don't do it everytime, but there have been a handful of occasions where a merchant has asked if I would mind using another card where I used the AmEx anyways. Normally it's when I'm trying to accrue miles for an upcoming trip or if I am trying to achieve minimum spend for a points award (for example, my gold card gave me additional points if I spent $3,000 in the first 3 months of owning the card and another upgrade if I spent $30,000 over the course of a year). In those instances, I would push to use the American Express to get the dollars to count towards those spending goals.

[Peregrine]

AMEX caters to the high spending customer, on average they spend 3-4x more than the general Visa/Mastercard cardholder. Because the AMEX cardholder spends so much, merchants value them highly and (for the most part) are willing to pay the somewhat higher swipe fee. On average, these fees are 2.5% at AMEX compared to 2% for Visa/Mastercard. But that is on average - interchange fees differ widely across merchants and some will find that the cost is greater than the value received.

 

I think it's likely that Costco will announce that they detect no decrease in members' spend after they dumped Amex for Visa.  This will make other retailers question the value of the higher discount fees.

 

I bet Costco wouldn't be affected much at all.

 

But remember, a significant portion of the spending on the Costco/AMEX co-brand card was at merchants other than Costco. Cardholders may very well use a different card for that spend (which AMEX will also be vying for).