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Investment Overview for American Express Company (NYSE:AXP)
American Express is a global financial services company, whose principal products and services include charge and credit payment card products along with travel-related services to consumers and businesses across the globe. It's the third largest player in card transaction volumes in the U.S. after Visa and MasterCard.
American Express has four business segments: U.S. Card Services, International Card Services, Global Network and Merchant Services, and Global Commercial Services.
- Spend-Centric Strategy: The American Express Issued (proprietary) Cards command an average Discount Fee (commission charged to merchants as a percentage of dollar value of transaction) of about 2.56% compared to the industry average of 1.9% primarily on account of a higher income/spending cardmember base with an average spending per cardmember 2-4 times that of the competitors’. This lets American Express charge higher Interchange rates (the portion of Discount Fee that goes to the Issuing Bank) since it brings higher spending customers to merchants. In order to maintain and attract high-income consumers, American Express offers higher promotions and membership rewards, which again are afforded only by the higher Interchange Rate. This is the American Express’ s much-publicized ‘Spend-Centric Model’ wherein American Express stands to earn more per transaction (4-8 times per transaction compared to competition) leading to a higher proportion of Transaction Fees compared to competitors.
- Closed-Loop Network: American Express’ crucial competitive advantage is its Closed-Loop Network, wherein it serves as the Issuing Bank, the Network Provider and also the Acquiring Bank in a proprietary card transaction. This not only lets American Express earn the entire Discount Fee on any transaction but also analyze the trends and spending patterns among the various segments of its cardmember base and provide targeted marketing, analytical and value-added services to the merchants in the process.
Below are some trends which could have a significant impact on American Express and the credit card industry in general:
- Greater use of credit and debit cards: Americans spent more using cards than with either cash or checks for the first time in 2006 and the trend is only expected to continue into the future. Even outside the U.S., there has been increasing use of cards for making payments.
- Growth in Online Shopping: Cards are a preferred mode of payment for online shopping. Online retail sales in the U.S. have been growing at a staggering rate over the past decade. The card transactions volumes have moved from predominantly travel sales (air tickets, car rentals and hotel reservations) to non-travel and entertainment (T&E) areas such as personal and home care products, electronics, books and clothing. Rising online sales are expected to benefit card transaction volumes.
- Credit CARD Act: The U.S. government in February 2010 passed into legislation the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, which enforces more disclosure about interest rates, caps on service fee within the first year, well-defined grace periods and also makes it difficult for people under the age of 21 to obtain cards. This is expected to negatively impact the growth in the number of Cards-in-Use but lead to lower net write-off rates on credit card loans and defaults by cardmembers, and higher Average Cardmember Spending on account of greater credibility and transparency in billing.
- Growth In Mobile Payments: Mobile phone payments are rapidly gaining popularity, coinciding with the surge in smartphone sales. Although the technology is still in a nascent phase of development, mobile payments already account for 5% of retail store sales in the U.S. This number expected to rise to 19%, by 2016 as an increasing number of phones incorporate near-field communication (NFC) chips to facilitate mobile payments. American Express is collaborating with mobile wallet service, Isis to capitalize on this trend.
- New Modes of Payments: Alternative modes of payment are constantly being developed to make it quicker and easier for consumers to make payments and shop online. Debit cards, net banking and electronic payments (like PayPal) have already gained widespread acceptance.
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- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
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See more on: DCF Methodology
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