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In Q4 2020, American Express reported revenues of $9.35 billion, which was 18% less than the previous year. This could be attributed to an 18% y-o-y drop in Non-Interest Revenues coupled with a 17% decline in net interest income. Further, the provision for credit losses increased to $4.7 billion full year 2020, as compared to $3.6 billion in the year-ago period.
American Express has suffered due to the Covid-19 pandemic, as consumer spending dropped, leading to lower business for the credit card giant. The company has co-branding card arrangements with several hotel chains and airlines, e.g., Delta Air Lines, Marriott International, British Airways, Hilton Worldwide Holdings, etc. Notably, the Delta co-brand portfolio represented approximately 8% of its worldwide billed business and roughly 22% of worldwide Card Member loans as of December 31, 2019. With hotel occupancy rates and the global travel industry being worst hit by the Coronavirus outbreak due to travel bans and widespread panic, it impacted the credit card giant’s revenue prospects in 2020. While the Q3 and Q4 revenues were lower than the respective year-ago periods, we believe the company’s results for Q1 FY2021 will follow the same trend.
American Express is a global financial services company, whose principal products and services include charge and credit 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 with $1.1 trillion of billed business in 2018.
American Express has three operating business segments: Global Consumer Services Group, Global Commercial Services, and Global Merchant and Network Services.
The American Express Issued (proprietary) Cards command an average Discount Fee (commission charged to merchants as a percentage of the dollar value of the 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 greater promotions and membership rewards, which again are afforded only by the higher Interchange Rate. This is American Express’s much-publicized ‘Spend-Centric Model’ wherein American Express stands to earn more per transaction (4-8 times per transaction compared to the competition), leading to a higher proportion of Transaction Fees compared to competitors.
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 allows it to 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:
Mobile phone payments are rapidly gaining popularity, coinciding with the surge in smartphone sales. An increasing number of smartphones manufactured now utilize near-field communication (NFC) chips, which facilitate mobile payments. Mobile payments stood at $620 billion in 2016 and are expected to reach $1 trillion in 2020, as an increasing number of phones incorporate near-field communication (NFC) chips to facilitate mobile payments. Meanwhile, mobile payments in the U.S. are expected to grow from $27 billion in 2015 to $100 billion in 2020, with per-user spend set to close to double from $720 in 2016 to $3,000 in 2020. Over the 2017-2020 period, the percentage of smartphone users making payments through mobile phones is expected to grow from 15.3% to 27.3%, with the average spend per user growing from $721 to $3,017.
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 in 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.
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 transaction 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.