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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 2.48% 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:
- 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 was a $235 billion in 2013 and is expected to grow at a CAGR of 32% to reach $717 billion in 2017 as an increasing number of phones incorporate near-field communication (NFC) chips to facilitate mobile payments. According to the Federal Reserve Board, 22% of people with mobile phones in the U.S. made a mobile payment in 2014. This figure was 17% in 2013. American Express is collaborating with mobile wallet services of ApplePay, Samsung Pay and Softcard, to capitalize on this trend.
- Greater use of credit and debit cards: Americans are the highest non-cash users. A research by MasterCard indicated that in 2014, non-cash penetration was around 44% of total Personal Consumption Expenditure. This indicates that consumers are spending a significant amount through cards rather than with either cash or checks. The trend is only expected to continue into the future. Outside of the U.S. non-cash penetration is much lower but the use of cards is expected to increase at a higher rate in emerging markets than the mature markets.
- 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.
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Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
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- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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