Membership rewards. Premium perks. A charge card with swagger. An iconic brand built on exclusivity. American Express (AmEx) is in the spotlight.
For over 170 years, AmEx has set itself apart in the competitive financial services space. But with shifting consumer behaviors and growing competition, how can the company continue to lead?
In this segment of Business Breakdowns, Jenny Rae Le Roux and Namaan Mian unpack the AmEx business model, pinpoint opportunities for growth, and offer bold takes on what’s next for the brand.
Will American Express remain the gold standard in the industry? Tune in to find out.
Disclaimer: AmEx is a Management Consulted executive communication partner - learn more.
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More About AmEx
- AmEx Investor Relations Site
- AmEx financial documents
Partner Links
- More info on Palm Tree careers
Transcription:
0:05
Welcome to this episode of Business Breakdowns.
My name is Namaan.
I'm joined by my colleague Jenny Ray.
Today we are breaking down one of our favorite businesses in the world today, American Express.
And before we dive in, I just want to be really, really clear and transparent with everybody.
That management consultant has had a professional relationship with American Express in the past.
0:23
There are teams inside of American Express that have gone through our presentation and storytelling training, but we did not use any proprietary data that we get access to to conduct that training to put this episode together today.
The goal of this episode was to look at American Express as outside advisors or as people who would be going through the interview process at the strategic planning group inside of the company.
0:46
And to take a look at the P&L.
To take a look at the data and try and figure out how the heck American Express makes money, what their business model is, and the metrics that we would be paying attention to if we were applying for a role inside of the strategy group at American Express.
1:02
So Jenny Rae, with that intro, I want to turn things over to you so we can get a little bit of background information on the business and just some of the key stats that folks should be aware of.
Yeah, absolutely.
Thanks, Namaan.
American Express is an amazing company.
And I think that everybody knows some emotional relationship with American Express and credit cards based on your upbringing, based on your first corporate job.
1:28
My first American Express card was sponsored by the Bannon company.
They said, hey, you need a card.
It can't be a debit card.
It's got to be a credit card because we need to be able to book things on it like rental cars.
And so I immediately went out to my colleagues and I said, which one should I get?
I was in the Atlanta office.
1:45
And so the Delta American Express has been a staple in my wallet for more than 20 years.
And so I, I really thought before this call had never sat back to look at the mechanics of what's under the hood at American Express.
And so I'm really excited today to walk through it at a high level.
2:03
American Express is one of the smaller card providers in the world.
They have about 140 million cards issued out to individual users.
That might not sound like a small number, but relative to the Visas and the Mastercards, the big issuers, that's one of the, the, you know, big differences is that they're smaller however, on a per transaction basis and traditionally has the highest fees out of the interchange options.
2:32
And so some of what I'm really interested in talking about today are some of the opportunities that that offers and also some of the challenges that that brings.
Because of this, American Express just at a high level has a very healthy amount of revenue.
2:49
Their total revenue net of their interest expense, which is how they think about their total annual revenue is about $60 billion and their expenses are pretty nominally small off of that, only about $45 billion.
3:05
So about $15 billion of profit in a business that has been growing healthily over the last couple of years.
So at a high level, American Express issues cards to users, issues the technology to collect those cards to merchants and then closes the gap on the back end.
3:25
Really excited to talk through some of the specifics of that as we go into it.
Namaan, do you want to go over a couple of the key metrics and the business structure for American Express as we dive into this?
Yeah, absolutely.
So when I think of American Express, I think of a classic fixed cost business.
3:42
Whenever you are building a platform, you are building a business that's built on fixed costs.
And there are advantages and disadvantages to that.
But one of the main advantages is that if you can achieve scale, you can achieve really impressive levels of profitability.
3:57
And so when you think about American Express, it's an interchange platform primarily that's their business and an interchange platform, you make an upfront capital investment, you have ongoing investments that you're making to just maintain the platform.
But there is not an incremental cost to American Express for every additional transaction that is conducted over their network.
4:20
So because there is no incremental cost for every additional transaction, this is a primarily fixed cost business.
And because it's a primarily fixed cost business, the name of the game for American Express is volume.
They are looking to maximize the number of transactions and just the dollar amount of transactions that are processed on their platform every single year.
4:42
So with that in mind, I thought through, OK, what are some of the metrics that I'd be paying attention to if I was interviewing for a role at the Strategic Planning Group in American Express and I got a case interview.
And if the case interview asked me, hey, how should American Express continue to grow?
4:57
What should we pay attention to?
And these are the three things that I thought of.
Number one, I thought of growth in my premium and my small business tiers #2 I thought of optimized merchant fees and #3 I thought of merchant services growth.
And so let me start with #1 premium and small business tier growth.
5:16
American Express is already positioned in the market as a premium card provider for the affluent.
And if I was at American Express, I would want to lean into that. My premium users, my small business users spend more on each card that they have and they also pay more in higher membership fees.
5:36
So I am generating increased merchant fees on every transaction that they are processing and the higher membership fees that they're paying relative to me. My lower end segments are pure profit for me as American Express.
We recently broke down Costco and we talked about how a big profit driver for Costco was its membership fee.
5:58
American Express is not dissimilar in that way.
We're a large profit driver for the company are their membership fees.
And so I want to be paying attention to the segments of my customer base that will pay me higher membership fees because they're pure profit and they also end up spending more on each card that they have, which leads to higher merchant fees.
6:18
So I would be really looking to drive growth inside of my premium tier and inside of my small business tier.
And one lever that American Express does pulls to to drive that kind of growth are Co branded relationships.
So for example, American Express has a very famous relationship with Delta Airlines where they are the exclusive provider of Delta Co branded cards.
6:40
Jenny Rae, you just said you've had one in your wallet for 20 years.
And so the spend on Co branded Delta and American Express credit cards in the US is equivalent to 1% of GDP, which means that American Express is getting a cut of 1%, the equivalent of 1% of GDP spent every single year.
6:59
And so one of the the growth avenues that I'm sure they are looking at are additional Co brand relationships that make sense to target an affluent customer base.
So that's number one premium and small business tier growth #2 I'd be looking to optimize my merchant fees.
7:17
Now, just for the uninitiated or for folks who haven't really gotten familiar with the credit card business, merchant fees are fees that retailers pay the network that is processing that transaction that they're that they're running.
So for example, when I run an American Express credit card at my local bakery, my local bakery is paying a small percentage of that transaction to American Express for the right to process that payment.
7:44
And so these fees are typically anywhere from 2 to 3% of a particular transaction.
And so American Express charges higher merchant fees than Visa and MasterCard really for the same service that they're providing.
So from American Express's perspective.
8:01
Not really exactly the same service.
Exactly the same service.
It's, they're just, they're just processing a transaction, a payment.
And what they're charging more for is the right for that business to service higher end customers because it's higher end customers that typically own American Express and put spend on American Express.
8:20
And so I charge higher merchant fees at American Express than Visa and MasterCard.
My goal is to keep these optimized so that I earn the Max amount per transaction while I can, while also maximizing merchant acceptance of my cards.
So one of the reasons historically that American Express has not been accepted everywhere is because they charge those higher, higher merchant fees to retailers.
8:43
So my goal is to keep the merchant fees as high as possible while also maintaining maximum acceptance at merchants and retailers.
And, and that's really been the sweet spot for American Express. 3rd, I'd be looking at merchant services growth.
8:59
One of the things I think that a lot of people don't realize is that American Express offers payment processing.
It offers customer analytics to retailers, right?
It offers services that enable retailers and merchants to get to know their customers better and hopefully grow their businesses as a result of better data that they have access to at their fingertips.
9:18
And so the more that I can grow my services revenue as a company like American Express, the more I'm able to smooth out my revenue.
I am able to generate more consistent revenue over time.
I'm able to turn more of my revenue into subscription revenue.
And it allows me, those merchant services allow me to build deeper relationships with the merchants that I need to accept my cards.
9:39
And so I would be looking at merchant services growth as a driver for continued expansion in American Express.
So those are the three metrics I'd be paying attention to Jenny Rae.
How about you?
Well, Namaan, this was an interesting one for me because whereas sometimes you can see the costs of a business pretty transparently, I actually don't think that Amex's costs are incredibly evident.
10:04
You have to be a little bit more thoughtful about it.
So I actually just want to walk everybody through tactically what I did to figure out Amex from the back end and then how that led me to a couple of my key questions.
So when I don't know exactly what the business dynamics are or when I have a hunch when I think of this as a fixed cost business, but I want to double check myself, I just go straight to the number.
10:25
So I opened up the American Express website.
I'm going to do it while I'm talking through it so I can get to the same document.
I went to their investor relations section on the website to their SEC filings annual and to the 10K and then I ended up at the consolidated statements of income which if for the 2020 three 10K that was published in February of 2024 that it was the year ended December 31st, 2023.
10:54
I went through and I looked at all the numbers and what I found really interesting is that for some different businesses, the revenue line is one line.
It's just a very, very simplified line for American Express.
About half of their consolidated statements of income of their PNL is revenue, which speaks to the diverse types of revenue that they have and also the subsections of each of those.
11:22
I'll walk through those numbers in just a second.
And then the expenses are actually incredibly limited.
So I always go first when I'm trying to figure out fixed cost or variable cost business, which by the way, Daman, I agree with you.
This is a fixed cost business.
I go to the expenses and they're not daintily sectored out.
11:39
It's not like this one's a fixed cost and this one's a variable cost.
It tells you exactly what they're spending money on.
So for one, you've got card member rewards, what you're paying out on behalf of the card members.
And if you've ever thought about getting a card from a different credit card company, one of their the maximum forms of optimization is offering rewards to members that members perceive value in so that they'll sign up in the card and they'll use the card, but then not actually redeeming those rewards.
12:09
So these are probably actual redeemed rewards.
This is going to be a variable portion of their expenses because the more cards they have and the more that the members use them, the more rewards they would have to redeem.
So that's one of my first metrics would be how they optimize for the laundry list or the potential value of the rewards that may or may not be redeemed.
12:33
I'll give you a great example.
For my Delta American Express card, I am issued a companion ticket every year.
That companion ticket enables me to bring somebody for free on a trip.
With Delta.
Last year I didn't redeem it.
I didn't take enough complete round trips.
12:51
I took a lot of single segments.
I would bring people on a portion of that.
I would fly with people but on different days.
So I did not have an opportunity or make a plan to utilize that ticket.
So I have perceived value in it.
It was a ticket worth 6 hundred, $800.00 for me.
13:08
I would continue to renew my card at the very high annual card fee for it and I never redeemed it.
That's an optimal I was, I was a * customer for Amex last year because they did not have to pay their Co branded partner for the redemption of that.
13:24
And they're constantly thinking about ways that they can add value in situations like that, that are perceived to the customer without actually redeeming them.
So that's my point #1 Then if you go through the rest of the expenses, business development, card member services, marketing salaries and employee benefits, and you add those up, this is just my really simplistic back of the napkin.
13:45
All of those added up as well as the other category are about $30 billion whereas the card member rewards are about $15 billion.
The other portion of linear expense is what they call their expense, the interest expense on their income.
14:07
So you have the total interest expense of about $7 billion in total.
So when you look at the portion of the variable expenses versus the fixed expenses, you'll see that fixed expenses are higher across the board.
That's one indication for me to verify that this is a fixed cost business.
14:26
But it also points to the fact that American Express I, I kind of asked the secondary question.
So could American Express lower its interest expense?
I, I, I don't, I don't think that's going to be a key operating metric of the business.
It's a very small portion of what they do.
14:43
So I'm, I'm both ruling things in thinking about the card member reward optimization.
How could they offer these things that people have perceived value and that they don't actually utilize?
And then secondarily, what do they not think about?
I'm going to go up to the discount revenue, which is their fees from merchants, the $33 billion that they made from that last year.
15:03
Iman, you mentioned that they trade the ability to attract these high, you know, paying customers.
I just wanted to point out, I actually had a very specific memorable experience this year or the Sacramento airport, a place that I fly out of very regularly that supports business travelers who often carry American Express cards, began to not accept the American Express as a form of payment.
15:30
So now at the Sacramento airport, you have to use a Visa, a MasterCard or a Discover and you cannot use American Express.
So one of my metric points would be merchant churn, not necessarily the new merchants that I'm not able to capture, which is a really hard rate to measure the close rate of those, but more specifically merchants that used to offer American Express that no longer are offering that.
15:58
And I wouldn't look at it in terms of the percentage of merchants.
I would look at it as the percentage of spend because the amount of card volume going through the Sacramento airport system is so much higher than your local Baker that those are the customers that I would be particularly worried about losing.
16:15
And there could be a place there.
There most likely is and will be a place I would expect in the future where American Express would continue to charge a premium, but not the premium that they've been charging.
So running just a constant like risk and scenario analysis on those specific numbers, I think that they've made an assessment so far that big merchants, Delta Airlines, etcetera, that those merchants are going to be places where they're able to drive enough incremental value and they can't do without them that that premium is super worth it.
16:47
But I'm not sure that forever it will be.
And I think the more we find democratized payments, the more that part of my payments history was in these kinds of wallets, the more that we find these like self branded cards when management consultants have gift cards that people use regularly.
17:03
When people use a Starbucks gift card at Starbucks instead of their American Express like those are the risks or the rise of these kinds of NB card systems.
And the final one for me.
What's really interesting is, in 2018, American Express actually dropped its merchant fees to become more competitive with Visa and MasterCard.
17:22
And it just from this one anecdote you're talking about in terms of the Sacramento airport, it seems like the value and the perceived value might be out of whack again, a little bit in terms of how merchants are perceiving the value that American Express brings.
But it's interesting to note that they did significantly lower their fees in 2018 and there might be more of that coming down the road.
17:43
I think it's still just my third metric that ties exactly to that, right?
Why can the Sacramento airport do that?
It's because they assume that absolutely everybody has a Visa or a MasterCard.
And I think part of that historically has been international travel, that internationally Amex is the least recognized.
18:02
It's called American Express of these major card brands.
But one of the motes that the other card brands have established for themselves is that they are accepted absolutely everywhere.
And so I would never travel.
I would never go on the road.
I would never go out of the country.
18:18
I would never travel without having a Visa or a MasterCard.
I would shift a lot of my spend over.
But that creates a business risk for American Express because if I am at the Sacramento airport and I assume that I can use a card to pay, then I'm going to, as a merchant, become more strategic about which cards I allow.
18:39
And you know, Amex has constantly had in their merchant fees requirements that you can't charge an extra fee to use in Amex.
But merchants don't care.
There's no reporting system.
There's no mafia of the credit card world that's checking up on that.
And so, so, you know, as consumers become more empowered, if they're going to have to become advocates, Amex will have to begin to use the consumers as its advocates to try to change this.
19:07
The Sacramento airport will only start accepting Amex again if people get fussy about it.
19:59
So Jenny Rae, as we look to wrap up our conversation around American Express, regular listeners will know that we usually end with a hot take each.
Around what we think is the future of the business or what we think is coming down the Pike in the next 24 to 48 months.
20:15
And so my hot take for American Express is that soon you will see a credit card with a $1000 annual fee.
And so right now American Express's most popular card is the American Express Platinum.
It has around a $600.00 annual fee, but it has exploded in popularity and that has made it feel less premium.
20:36
Anyone who's travelled recently who has access to the Centurion lounges or access to the Delta lounges through American Express Platinum can attest to the fact that it seems like everybody and their brother has an Amex Platinum that gives them lounge access.
And they're, they don't feel like they're getting the premium experience they paid for because the annual fee is so low.
20:55
And so right now you have the $600.00 premium card and then there's nothing between the $600.00 card and the $5000 invite only Centurion card.
And so there is like a higher tier of premium that I think American Express is going to start to tap into right where they can offer some elevated benefits, but elevated benefits that don't cost as much as the incremental increase of the annual fee.
21:21
And so I think here within the next two years, you will see $1000 dollar annual fee cards rolled out by American Express as they look to kind of move upstream in terms of the consumers that they're capturing and the spend that they're able to leverage against some of these or with some of these merchants.
21:41
I love that Namaan.
I mean, I think my hot take is that if you, if you look at the revenue drivers, this is a fixed cost business, I'm assuming that I'm trying to drive maximum revenue with the standard of fixed costs that I have.
I'm not trying to grow my fixed costs in a linear measure to my revenue.
21:56
So I'm trying to just pump revenue through.
And one of the things that I've seen Amex do really strategically is focus on card benefits.
By the way, I don't disagree with you.
I think that I think that is a hot take, but I don't disagree with you.
But I think that the main focus is going to be on extravagant benefits for the cards because I think that the and I think the benefits are going to be less tied to having the card.
22:23
When you look at the split between their card fee and their usage fee, I think it's going to be more tied to using the card.
So I think you're going to see something similar to an MQM model when you are flying on a standard credit card where you unlock levels of benefits as you use the card more on an annual basis.
22:46
And I am actually a little surprised when I looked at this business that we haven't seen more of that in the credit card space.
So I know that it's the time of year when I'm tracking this. Five years ago it was the mileage run time to go do that last trip before the end of the year to get your status on the airlines.
23:03
But I think that the Amex is well positioned to drive its own status tiers where you actually only unlock the ability to have that 1000, you know, your annual fee if you spend $300,000 on Amex in the 1st place.
23:21
And I think you're going to find these carrots that they're going to put into place where they build their own metrics systems, where you try to unlock these gamified tiers so that they're getting you to spend more so that they're collecting more on their main revenue driver, which is merchant fees.
23:37
I think that makes a lot of sense.
They're already doing that at the upper upper echelon with the Centurion card.
You only get the invite.
Rumor has it if you spend a quarter million or a half, $1,000,000 a year, no one actually knows how much you have to spend to get the invite right.
It's a little bit of a block box.
But it makes sense to me that they would move those incentives down the value chain a little bit and kind of gamify the system for everybody and not just for their top 1% of spenders.
24:02
And, and I think the, the idea of offering more, we'll call them sexy benefits, right, has 22 real hooks to it #1 they're attractive to people #2 The more elaborate the benefit is, the more difficult it is to take advantage of.
24:19
So it, it sounds really exciting, everyone ideally idealistically thinks, yes, I'll absolutely call the concierge everyday if I had access to a concierge.
They never do, right?
And so the more elaborate you can make a benefit, the more likely you are to drive perceived value while actually keeping the usage quite low.
24:37
And you can already actually see this with the Delta partnership that this year they've made it so that now you can find first class with a companion ticket.
Now you can fly to the Caribbean with the companion ticket.
Who knows, in a year we may be having the same conversation where I never used that sexier version of the companion ticket.
24:57
But it's exactly what you're talking about.
Just the perceived benefit of it is enough for me to say, oh, it was my fault I didn't use it.
I'm still happy to fork out the 6/7 $700.00 on that annual fee.
So when you, when you see all of the different options that are associated with these cards, I think you're going to see the menu slim down and more super premium offerings replace some of the things that really don't end up creating stickiness with consumers.
25:26
But more importantly, I think you're going to see the focus less on retention of a customer and more on utilization.
All right, anything final you want to say about American Express?
Should we just go spend some money?
I've got some Christmas shopping to do.
Thanks, Namaan, it was really good to have this conversation today.