2 Most Valuable Businesses for American Express

American Express (NYSE:AXP), Visa (NYSE:V) and MasterCard (NYSE:MA) are the leading financial services companies in the world offering card payment products to consumers and businesses across the globe. American Express is one of the 30 components of Dow Jones Industrial Average and third among the major card companies in the U.S. in terms of transaction volumes. Below we take a quick look at the two most important segments to American Express’ business. Our price estimate for American Express stands at $49.60, which is roughly 10% premium to current market price.

The 2 Most Important Revenue Streams for American Express

1) Card Transaction & Execution Fee – 73% of company stock

The transaction fee (also known as the discount fee) is the commission charged to merchants as a percentage of the dollar value of transaction on American Express cards. American Express charges merchants a higher fee on its card products at close to 2.25% compared to the industry average of 1.9% of the billed amount since American Express customers tend to be higher income and higher spending consumers on average.

American Express leverages its affluent card member base to charge the retailer a higher commission on the transactions. American Express’s transaction fee has faced some push back from merchants and some avoid accepting American Express cards compared to Visa and MasterCard. The transaction fee on American Express cards has reduced from over 2.23% in 2005 to current levels of around 2%, and given the increasingly competitive landscape, the trend is expected to continue well into the future.

2) Net Interest on Credit Cards and Other Investments – 8% of stock

American Express earns a net interest income on the spread between the rate it earns from un-loaned amounts sitting in bank deposits and short-term investments in financial securities and the rates at which it extends credit to card members.

See our full analysis and $49.60 price estimate for American Express.