AXP - American Express

[bookie71]

For what it is worth, (I charge about 3,500 per month and a bit more when we are traveling) I have just about decided to not renew (reapply) for the AMEX. I dropped them in about 1978 or 79 when I discovered I had only charged once and a yearly fee of 50 seemed ridiculous. We were using our Alaska Airlines card to get the mileage and the companion ticket.  Didn't miss them.  Got the card again  when Costco sent the card with executive membership.

I guess it also irritates me that I need to reapply when they have about 10+ years history.  But then I'm old and grouchy.

 

[Aberhound]

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.

 

Amex has a decent history of innovating as shown when they launched the credit card business so well and when they signed Costco. Eventually one of the companies will abandon cards in favour of using a cell phone app tied to an online bank account. Are they starting to do this with the Amex App and Online bank such as the one in Canada? Does anyone use these services?

 

https://www.americanexpress.com/ca/en/content/online-banking.html

 

Imagine Amex designing a phone where there is security to prevent fraudulent use so that Amex's interest to prevent fraud matches the phone user's interest not to be defrauded. Higher value of charges means they can subsidize the phone more. People love their phones and it would be a good way to strengthen the brand. The phones would make it possible to sign up merchants by collecting and providing more data to improve customer loyalty programs and point of sale video ads could be incorporated to alert potential buyers to special offers. Phones over more opportunities to innovate. Doesn't their closed system makes this easier compared to Visa/MC? Visa/MC can't operate a bank if banks are their main sales channel.

 

I have also wondered why they haven't made it easy for wealthy foreigners to deposit funds in multiple currencies and have those deposits converted into USD. They should be making a fortune on currency exchange with the increasing currency volatility. How many wealthy people internationally would prefer to have their deposits with Amex rather than an Italian bank or whatever. Eventually Amex would become a virtual bank like ING Direct and then make money from the float and leverage. It would be perceived as a much safer place to keep your money in a time of international bank failures.

[HJ]

One thing to think about is how is Amex getting the spend volume vs. competitors. 

 

While anecdotal, I'm quite certain that a big chunk of it is through corporate cards, where the expenditures are disproportionately large vs. personal expenditures - a single business trip can produce a higher dollar spend than someone swiping his cards at grocery store for months.  Company pays the annual fee, I get the miles.  What's not to love.  How was Amex able to have a lock on that business?  Through it's lock on the corporate travel / expense business, which came from the root of the company as a travel company, a bit of legacy from the days when flying was a still a premium service.  Well, Amex sold Concur last year.  While I don't falt the management for doing that - corporate travel / expense management business is simply a different business today vs 20 years ago, and in any case fewer companies (certainly among the financial service companies in NY) are doing corporate cards anymore, I've observed more corporates going with "bring your own card to work" policy.  So it is a reasoned decision to get the gain from Concur when the market is willing to pay you for it.  What it does show though, is how its moat is weakened around the edges, not through any falt of the company.  Another anecdotal story along this line - when Morgan Stanley owned Discover (through the Dean Witter merger), they at some point tried to get their banker to use Discover card as their corporate card, which caused a banker revolt.  The experiment was dead before it got started.  If mobile payment is going to take off in the restaurants, I would venture to guess the revolt that proposal would cause wouldn't be anywhere close to the one you had 20 years ago.  Either way, you are whipping out an I-phone, as long as it's not a ZTE.  There are start up businesses where the entire business model is to save corporate travel dollars for big companies.  And today, all credit card issuers are competing in the travel / lodging space more aggressively than ever, and airline themselves are also trying to realize the most value they can from these deals.

 

While Amex is still getting a disproportionate share of spend today, it always has.  And its dominance in the market place today is not close to the lock it had on these market even as late as 20 years ago when they had the "American Express, don't leave home without it" campaign.    As the current market place stands, it is still the big dog, certainly in the spend centric business.  But I see its moat giving way around the edges, and it's been going on for a while, with Costco just the latest manifestation of the evolution of world around it.  From what I read and hear for the consumer finance industry, mobile is taking off.  Whenever big technological shifts happen, the establishment gets weakened by the new comer. 

 

This is a great American company with a storied history.  But I see a severe lack of urgency on the part of the company to figure out how it should compete for the next 20 years.  At 10x it's certainly statistically cheap, but to me, it's hard to see its future as bright as its past. 

[Guest Schwab711]

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 don't think this is a fair comparison. Amex users charge 3-4x more per year, but only 1.5x more per txn. However, Costco members will probably spend the exact same amount at Costco, regardless of the card. I think this is why some folks don't think the Costco deal affects the Amex brand at all (though it will certainly effect the financials). I don't think 5th Saks or Neiman Marcus has any questions on what members spend more per trip to the store, nor will a Costco announcement change their mind.

[vinod1]

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.

 

It is apples and oranges IMO.

 

What Amex has with Costco is a partnership card and Costco probably pays very little in discount fees. Costco drives spend volume and also has some members who will carry balances - all incrementally very profitable to Amex.

 

For other merchants it is totally different issue.

 

Vinod

 

Vinod

[vinod1]

One thing to think about is how is Amex getting the spend volume vs. competitors. 

 

While anecdotal, I'm quite certain that a big chunk of it is through corporate cards, where the expenditures are disproportionately large vs. personal expenditures - a single business trip can produce a higher dollar spend than someone swiping his cards at grocery store for months.  Company pays the annual fee, I get the miles.  What's not to love.  How was Amex able to have a lock on that business?  Through it's lock on the corporate travel / expense business, which came from the root of the company as a travel company, a bit of legacy from the days when flying was a still a premium service.  Well, Amex sold Concur last year.  While I don't falt the management for doing that - corporate travel / expense management business is simply a different business today vs 20 years ago, and in any case fewer companies (certainly among the financial service companies in NY) are doing corporate cards anymore, I've observed more corporates going with "bring your own card to work" policy.  So it is a reasoned decision to get the gain from Concur when the market is willing to pay you for it.  What it does show though, is how its moat is weakened around the edges, not through any falt of the company.  Another anecdotal story along this line - when Morgan Stanley owned Discover (through the Dean Witter merger), they at some point tried to get their banker to use Discover card as their corporate card, which caused a banker revolt.  The experiment was dead before it got started.  If mobile payment is going to take off in the restaurants, I would venture to guess the revolt that proposal would cause wouldn't be anywhere close to the one you had 20 years ago.  Either way, you are whipping out an I-phone, as long as it's not a ZTE.  There are start up businesses where the entire business model is to save corporate travel dollars for big companies.  And today, all credit card issuers are competing in the travel / lodging space more aggressively than ever, and airline themselves are also trying to realize the most value they can from these deals.

 

While Amex is still getting a disproportionate share of spend today, it always has.  And its dominance in the market place today is not close to the lock it had on these market even as late as 20 years ago when they had the "American Express, don't leave home without it" campaign.    As the current market place stands, it is still the big dog, certainly in the spend centric business.  But I see its moat giving way around the edges, and it's been going on for a while, with Costco just the latest manifestation of the evolution of world around it.  From what I read and hear for the consumer finance industry, mobile is taking off.  Whenever big technological shifts happen, the establishment gets weakened by the new comer. 

 

This is a great American company with a storied history.  But I see a severe lack of urgency on the part of the company to figure out how it should compete for the next 20 years.  At 10x it's certainly statistically cheap, but to me, it's hard to see its future as bright as its past.

 

Corporate card numbers are reported in commercial segment and spend per card there is around $27,000. This is a very profitable and still very much dominated by Amex. Here their scale advantage relative to peers helps it to offer pretty good discounts from merchants to the card users. It also provides lots of advantages to merchants - quicker and cheaper payments.

 

Vinod

 

[DanielGMask]

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?

 

American Express is not only credit cards, it's also service cards! I'm a platinum customer and I pay almost $500 USD per year for my two cards (my wife's and mine), and I do it dilligently and gladly. My service card doesn't even give me credit since I have to pay all the balance at the specified date, but that's my most precious card even though is not even a credit card and is by far the most expensive.

 

So why? First because Amex is by far the most secure and most friendly card there is. In all of my experiences with cloned cards and charges not recognized Amex has been the best there is to first cancel the charge or reissue the card and then starting the clarification process. Second because they have an amazing concierge service for getting tickets to concerts and sport events that other cards don't even come close to match. And third because their travel services program is very good, both in their milleage program as well as in their travel agent service.

 

I don't think or percieve that moat to be diminishing (at least not in Mexico where I live). And about Costco, I just want to point that I'm from Spain and nobody there know's what's Costco, but everybody knows what's Amex. And in Mexico a few know what's Costco but everybody knows what's Amex.

 

And last, I have no friend or colleague that chooses Visa or MasterCard because of the brand, they simply go to their bank and take the one that bank issues. With Amex that's very different, very!

 

I have no position but considering starting it.

[dabuff]

I can definitely recognize the brand value of the Amex as well as its value as a service.

But I wonder how much of a draw the rewards are as a whole - I've been looking at offers recently and it seems that several other cards (Citi Double, Bank of America Preferred) offer no-fee cards that are straightforward (no miles, conversion from points, etc.) with much better rewards per dollar spent. And on this basis alone I would prefer to use the aforementioned cards, even though they may not come with the service.

Of course I'm not sure  everyone is making that cold mathematical calculation every time s/he is making a purchase, but how many do? Or is the business customer so important (Pareto principle) that it's not so much a consideration?

[Guest notorious546]

http://www.bloomberg.com/news/articles/2016-02-17/amex-plans-to-reduce-jobs-in-1-billion-cost-cutting-effort

 

[Mephistopheles]

Rumor of Wells-Amex buyout:

 

http://mobile.reuters.com/article/idUSKCN0W92CW

 

Just a rumor and WFC denied it. Nevertheless would be a interesting pair up. I'm not a banking guy, but wouldn't this not be attractive since Wells would have to hold extra capital since they are a sifi?

[Green King]

lets start trading on rumor.  :D

[coc]

One thing to think about is how is Amex getting the spend volume vs. competitors. 

 

While anecdotal, I'm quite certain that a big chunk of it is through corporate cards, where the expenditures are disproportionately large vs. personal expenditures - a single business trip can produce a higher dollar spend than someone swiping his cards at grocery store for months.  Company pays the annual fee, I get the miles.  What's not to love.  How was Amex able to have a lock on that business?  Through it's lock on the corporate travel / expense business, which came from the root of the company as a travel company, a bit of legacy from the days when flying was a still a premium service.  Well, Amex sold Concur last year.  While I don't falt the management for doing that - corporate travel / expense management business is simply a different business today vs 20 years ago, and in any case fewer companies (certainly among the financial service companies in NY) are doing corporate cards anymore, I've observed more corporates going with "bring your own card to work" policy.  So it is a reasoned decision to get the gain from Concur when the market is willing to pay you for it.  What it does show though, is how its moat is weakened around the edges, not through any falt of the company.  Another anecdotal story along this line - when Morgan Stanley owned Discover (through the Dean Witter merger), they at some point tried to get their banker to use Discover card as their corporate card, which caused a banker revolt.  The experiment was dead before it got started.  If mobile payment is going to take off in the restaurants, I would venture to guess the revolt that proposal would cause wouldn't be anywhere close to the one you had 20 years ago.  Either way, you are whipping out an I-phone, as long as it's not a ZTE.  There are start up businesses where the entire business model is to save corporate travel dollars for big companies.  And today, all credit card issuers are competing in the travel / lodging space more aggressively than ever, and airline themselves are also trying to realize the most value they can from these deals.

 

While Amex is still getting a disproportionate share of spend today, it always has.  And its dominance in the market place today is not close to the lock it had on these market even as late as 20 years ago when they had the "American Express, don't leave home without it" campaign.    As the current market place stands, it is still the big dog, certainly in the spend centric business.  But I see its moat giving way around the edges, and it's been going on for a while, with Costco just the latest manifestation of the evolution of world around it.  From what I read and hear for the consumer finance industry, mobile is taking off.  Whenever big technological shifts happen, the establishment gets weakened by the new comer. 

 

This is a great American company with a storied history.  But I see a severe lack of urgency on the part of the company to figure out how it should compete for the next 20 years.  At 10x it's certainly statistically cheap, but to me, it's hard to see its future as bright as its past.

 

This is really thoughtful, thanks HJ. It's a good question as to whether they can expand that moat out in other directions as they have been able to do before in times of change. (Introduction of the card for example.)

 

[jgyetzer]

I finally listened to the investor day presentation.  Did it bother anyone that they present their revenues as compared to the card networks, but the returns on capital to other card issuers.  It seems like cherry picking and not terribly intellectually honest.  Is that just me?

[Peregrine]

I finally listened to the investor day presentation.  Did it bother anyone that they present their revenues as compared to the card networks, but the returns on capital to other card issuers.  It seems like cherry picking and not terribly intellectually honest.  Is that just me?

 

Card networks are toll roads that don't have any tangible assets in the way of loans and receivables. Their returns on tangible equity are probably infinite.

 

Of course, AMEX's returns on capital should be compared with the credit card business segments of other banks.

[krazeenyc]

FWIW, I spoke with someone today who works in the Citi Credit Cards team ... I told him how I noticed CITI was being so aggressive in marketing their high end credit cards -- almost like AMEX. I'm sure this is common knowledge in the industry, but he told me that the CEO of CITI Credit Cards is a former AMEX exec.  And basically, the entire leadership team was poached from Amex! Certainly explains a lot.

[sleepydragon]

Same as JP morgan's head of credit card, who left amex and came to JPM and started the slate card

[TwoCitiesCapital]

https://beta.finance.yahoo.com/news/sheraton-owner-starwood-accepts-higher-112136918.html

 

Not the best news for AmEx :/

[jmp8822]

FWIW, I spoke with someone today who works in the Citi Credit Cards team ... I told him how I noticed CITI was being so aggressive in marketing their high end credit cards -- almost like AMEX. I'm sure this is common knowledge in the industry, but he told me that the CEO of CITI Credit Cards is a former AMEX exec.  And basically, the entire leadership team was poached from Amex! Certainly explains a lot.

 

Personal opinion here, for those that don't follow credit card products closely: the Citi Prestige is the best premium credit card on the market right now, better than the historically-best Amex Platinum.

 

The Prestige has a $450 annual fee like the Amex Platinum. The Prestige offers three free rounds of golf per year at premium golf courses around the world, included in the annual fee. For instance, TPC Sawgrass and TPC Scottsdale and hundreds of other courses available. Many priced at $200+ per round included. The Prestige has a $250 annual flight credit for any airfare or any airline fee/upgrade. If you are a golfer, that alone is $850 of value, for a cost of $450 in perpetuity. There are other benefits too that I won't list.

 

Again personal opinion, I think Amex is in trouble from a product standpoint because even their premium consumer card's value is becoming eroded by a better Citi card.

[TwoCitiesCapital]

http://www.bloomberg.com/news/articles/2016-03-21/morgan-stanley-chases-millionaires-cash-with-free-platinum-amex

 

Morgan Stanley pushing the AmEx platinum and refunding the annual membership to new clients with more than $1M in assets transferred.

[gjangal]

Let's say 50% of the Costco card holders get a new Amex and maintain some sort of spending on the card ( not the billed business from Costco, but other spending like expensive purchases ), wouldn't that be a positive for Amex?. If they can grow revenues again after the Costco loss, it would be a positive for the stock, but it looks like we have to wait post 2017 for that. It's hard to believe that market is pricing a secular revenue decline for Amex

[TwoCitiesCapital]

Let's say 50% of the Costco card holders get a new Amex and maintain some sort of spending on the card ( not the billed business from Costco, but other spending like expensive purchases ), wouldn't that be a positive for Amex?. If they can grow revenues again after the Costco loss, it would be a positive for the stock, but it looks like we have to wait post 2017 for that. It's hard to believe that market is pricing a secular revenue decline for Amex

 

You can make up any numbers you want to make the situation appear positive. But the reality is that the number is going to be closer to 0%. If they wanted an AmEx card for the benefits outside of Costco, they'd already have another AmEx card. If they only had the AmEx card because of Costco, they're likely to throw the AmEx out and take whatever new card Costco gives them when the transition is final.

 

I'm not saying it's a secular revenue decline for American Express. I'm a huge fan of the company and their cards, but they are fighting against competitors who are willing to enter into deals that are far less economic to tap into the scale/synergies that come with having high net worth, private banking clients. So these competitors are offering incredibly lucrative rewards programs and lowering the costs to participate and to accept their cards - both will hurt American Express' revenue growth and cost structure by reducing customers AND increasing costs to retain the fewer customers left.

 

American Express will need to find a way to make it's offering more palatable to consumers and/or find a way to increase the value they offer partners/companies who accept American Express. If they don't do this, they'll need to start competing on price which will only cut into revenues further.

 

That being said, $50-60 appears to be a semi-attractive price for that uncertainty, so maybe it's all priced in.

[Nnejad]

I don't know, "closer to 0%" sounds pretty unrealistic to me. I didn't have another AmEx card before this (why would I have had another AmEx?) and I'm in the process of looking for a new one. I may just accept the one they keep barraging me with through the mail.

 

Just anecdotal, anyhow.

[TwoCitiesCapital]

I don't know, "closer to 0%" sounds pretty unrealistic to me. I didn't have another AmEx card before this (why would I have had another AmEx?)

 

Different AmEx cards come with different benefits. The AmEx card issued through Costco has none of the same travel benefits provided by the Platinum and Gold cards.

 

From what I recall, I think the Costco card had benefits like 3% back on gas, 2% back on restaurants, and the annual cash back award could only be redeemed at Costco. Plus, the typical benefits you get from credit cards like increased warranty, etc. Nothing like the typical AmEx card.

 

If you wanted the points multiplier on travel spending, access to American Express/Delta/Priority Pass lounges, the $250 travel voucher, access to Hilton and SPG elevated rewards programs, discounts on car rentals, free TSA pre-check, etc. etc. etc. then you'd have needed another AmEx card (in this example, the Platinum). AmEx is mostly known for travel benefits - people who have AmEx typically travel quite a bit. They do have cash back cards, but the offerings aren't as competitive as their travel cards that make up the bulk of their customers.

 

If they only owned an AmEx through Costco, it's likely that the benefits of a travel card were lost on them (which is why they didn't have another AmEx travel card to begin with) and there's no reason for that to change just because Costco terminated the relationship and will be sending them a new card with a different logo in the corner.

 

 

 

 

[Ross812]

I think the Blue Cash Everyday card is a really compelling replacement for a lot of costco shoppers:

3% Cash Back at U.S. supermarkets, up to $6,000 per year in purchases (then 1%); 2% cash back at U.S. gas stations; 2% Cash Back at select U.S. department stores; and 1% Cash Back on other purchases.

 

Better yet Amex can offer to double the rewards with the blue cash preferred card which runs $75 per year. They could waive the first year to make it more appealing...

[bookie71]

From what I recall, I think the Costco card had benefits like 3% back on gas, 2% back on restaurants, and the annual cash back award could only be redeemed at Costco. Plus, the typical benefits you get from credit cards like increased warranty, etc. Nothing like the typical AmEx card.

 

BUT you can cash it at Costco and spend elsewhere.  I'll take cash any day and buy a bargain airline ticket.  I have the new card but probably won't use it much as if you read the small print, the rewards aren't all that great.