American Express reported quarterly earnings a couple of weeks ago and investors roundly booed, sending the share price down 5%. Having had some time to digest the details, I think the reaction is unfair.
Going into the quarter, the issues surrounding the company were well known. Front and center was the ongoing transition away from being the exclusive credit card accepted at Costco Wholesale. The other unusual factor impacting earnings was the stronger US Dollar, an issue that has been so prevalent with global consumer companies that I can’t possibly fathom it catching anyone off guard.
Despite these headwinds, the company managed to limit its decline in revenue to 1%. The company cannot do a single thing about a stronger USD—and the negative impact from the currency in no way reflected a fall off in Amex’s transaction volumes or commercial activity. If the USD were at the same rate it was a year ago, revenue would have actually risen 3%.
I think that is a rather laudable achievement given Amex is losing one of its biggest pools of customers. Of course, they will need to increase their marketing to fill the hole left by Costco; and indeed, expenses were up in the quarter. But that investment seemed to pay off as US cardholders increased at a pace far above average.
There’s no doubt Amex faces a bumpy road over the next 12-14 months. But all things considered, they appear to be treading water while setting themselves up for a better long-term future.
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Hi Kevin,
A bit off the tangent… I’m curious how disruptive mobile payment is to the existing payment networks (Amex, Visa and Mastercard). At the moment, things like ApplePay are the customers of these networks. How much moat do they have? Once ApplePay and the likes take hold of the channel to reach the consumers, how hard is it for them to bypass the incumbent networks? If I understand correctly, Paypal has its own payment processing network which doesn’t rely on Amex/Visa/Mastercard. So, it looks like is entirely feasible to set up an alternative processing network?
Hi John – great questions without easy answers. The payments network business is an extremely tough nut to crack. The credit card networks connect thousands of financial institutions with hundreds of millions of consumers and merchants globally, and they provide the physical infrastructure that actually authorizes, clears and settles billions of electronic transactions, all at 99.9% reliability. It is almost impossible to recreate that kind of network, and indeed, virtually all of the alternative payment platforms that have come about have chosen to partner with the existing credit card networks. Nobody, including Paypal, has the ability to process a credit transaction by themselves. That’s an important distinction from debit/cash transfer transactions which are being disrupted by Paypal and other platforms. There are also the card issuing banks (of which Amex is one) who create powerful feedback loops via rewards programs¬–they have no interest in enabling any new network intent on disrupting one of their most important revenue stream (interchange). And without their participation, credit is impossible. So while the pace of change in mobile payments has certainly accelerated, it’s not something I’m worried about presently – Kevin