American Express Company

Company Profile
Publication Date: 31 May 2011

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American Express Company

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American Express Company

TABLE OF CONTENTS

TABLE OF CONTENTS
Company Overview..............................................................................................4 Key Facts...............................................................................................................4 SWOT Analysis.....................................................................................................5

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American Express Company

Company Overview

COMPANY OVERVIEW
American Express (Amex or 'the company')) is a leading global provider of travel related services, payment services, financial advisory services and banking services. Amex operates primarily in North America and Europe and in the Asia Pacific region; its products are offered in about 200 countries. It is headquartered in New York City, New York and employs 60,500 people. The company recorded total net revenues of $27,819 million in the financial year (FY) ended December 2010, an increase of 13.4% over FY2009. The operating profit was $5,964 million in FY2010, compared to $2,841 million in FY2009. The net profit was $4,057 million in FY2010, an increase of 90.5% over FY2009.

KEY FACTS
Head Office American Express Company World Financial Center 200 Vesey Street New York City New York USA 1 212 640 2000

Phone Fax Web Address

http://www.americanexpress.com

Revenue / turnover 27,819.0 (USD Mn) Financial Year End Employees New York Ticker December 60,500 AXP

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SWOT Analysis

SWOT ANALYSIS
Amex is one of the ten largest financial services companies in the world and is the largest provider of travel services globally. The company's spend-centric credit cards business is a key strength for Amex. This business model is further strengthened by the company's global presence and strong brand image. However, the dynamic regulatory landscape that the company is currently encountering could increase compliance costs for Amex. Strengths Spend-centric model in credit cards business providing revenue advantage Strong brand image helps in charging premium Ability to forge partnerships across the world sustains growth Opportunities Launch of Serve diversifies payment platforms and helps attract new customers Acquisitions could accelerate long term growth Innovations help retain existing customers and also attract new customers Weaknesses Lack of point-of-sale debit card services, a competitive disadvantage Declining popularity in the US is reducing the scope for revenue expansion

Threats Increasing penetration of alternative payment platforms could check growth Competitors converging business practices may increase member attrition Dodd-Frank regulation could affect revenue and profitability Increasing regulatory fees and compliance spending may affect margins

Strengths

Spend-centric model in credit cards business providing revenue advantage Amex's 'spend-centric' business model (in which the company focuses primarily on generating revenues by driving spending on its cards and secondarily by finance charges and fees) has significant competitive advantages. Card issuers generate the majority of their income through some combination of customer spending (which generates payments from merchants for card transactions), lending (which generates finance charges on revolving credit balances) and customer fees. Amex has strength in all three revenue streams, and has a competitive edge in spending. On average, US card-members spend about four times as much on their American Express Cards as they do on other cards. For merchants, Amex card-members' higher spending represents greater value to them in the form of higher sales and loyal customers, which gives Amex the ability to earn a premium

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SWOT Analysis

discount rate. As a result, Amex can generate higher revenues from spending and has the flexibility to offer more attractive rewards and other incentives to keep customers spending more on their cards. This, in turn, drives more business to merchants that accept Amex cards. This business model gives Amex a competitive advantage that the company can leverage to provide more value to its card-members, merchants and card-issuing partners. Since Amex follows a spend-centric model, higher customer spend, premium discount rate charged by the company and higher level of card fees give it an overall revenue advantage. Though the company's spread revenues and back end fees are clearly not as high as its competitors, nevertheless, its funding costs are also proportionately lower given the higher velocity-or spend per dollar of its receivables. As a result, Amex's overall profit per account is greater than its lend-based peers. Strong brand image helps in charging premium Amex is one of the world's best-known brand names in the financial services industry, placing it at a competitive advantage. According to Interbrand, a leading international branding consultancy specializing in brand services and activities, Amex was ranked as the 24th most valuable brand in 2010. Historically, and in 2010 Interbrand rankings, Amex's brand value remained higher than its competitors such as Visa and MasterCard. The company's strong brand image helps it charge premium. Strong brand image helps it in charging premium. Ability to forge partnerships across the world sustains growth Amex has demonstrated its ability to forge partnerships with other influential financial services provisders, retailers, and technology providers. For instance, in October 2009, All Nippon Airways and American Express International formed a strategic alliance to launch three co-branded credit cards: the ANA American Express Card, the ANA American Express Gold Card and the ANA American Express Super Flyers Gold Card. Macy's, Inc. announced a new partnership under which Macy's and Bloomingdale's credit cards will be co-branded exclusively with American Express and issued by Citi, the issuer of Macy's and Bloomingdale's credit cards, in March 2010. In April 2011, American Express and Payfone, a mobile payment processing service, announced a strategic alliance to create a new global mobile checkout service. The company's ability to forge strong global partnerships with influential financial services providers, retailers, and technology providers enables it to expand its customerbase, and continue product innovation. These in turn help the company sustain profitable growth.

Weaknesses

Lack of point-of-sale debit card services, a competitive disadvantage Most financial institutions that offer demand deposit accounts also issue debit cards to permit depositors to access their funds. Use of debit cards for point-of-sale purchases has grown as most financial institutions have replaced ATM cards with general purpose debit cards bearing on either

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SWOT Analysis

the VISA or MasterCard networks. As a result, the volume of transactions made with debit cards in the US, as well as globally, has continued to increase significantly. Unlike VISA and MasterCard, Amex does not currently issue point-of-sale debit cards on the Amex merchant network. With debit cards becoming increasingly popular, this puts Amex at a disadvantage against VISA and MasterCard, its most significant competitors. Declining popularity in the US is reducing the scope for revenue expansion Amexs popularity is declining in the US, where it generates around 72% of total revenues. The number of Amexs basic cards in force in the US declined from 42 million in 2008 to 38.2 million in 2009. Despite a turnaround in the business volumes, the number of cards declined to 37.9 million in 2010. Due to the decline in the number cards in force, the companys card member loans on managed basis declined from $62.4 billion in 2008 to $51.6 billion in 2010. While declining loan portfolio in the US lowers the interest income from the region, declining number of basic cards in force reduces the scope for revenue expansion.

Opportunities

Launch of Serve diversifies payment platforms and helps attract new customers Amex announced the launch of Serve in March 2011. Serve is a digital payment and commerce platform that gives consumers a new way to spend, send and receive money with services that go beyond the existing global payment networks. With Serve, consumers can make purchases and person-to-person (P2P) payments online (serve.com), via mobile phones, and at millions of merchants who accept American Express cards. Serve unifies multiple payment options into a single account that can be funded from a bank account, debit, credit or charge card, or by receiving money from another Serve account. Serve is a new type of payment platform that isnt tied to a single card or mobile operating system. Launch of Serve diversifies Amexs payment platforms which could help the company attract new customers. Acquisitions could accelerate long term growth Amex increased its focus on inorganic growth in 2010. During the course of the year, the Company purchased Accertify (November 10, 2010) and Revolution Money (January 15, 2010) for a total consideration of $151 million and $305 million, respectively. Accertify is an on-line fraud solution provider and Revolution Money is a provider of secure person-to-person payment services through an internet-based platform. Through this acquisition, Amex acquired $2.2 billion in assets and assumed $63 million in liabilities. These acquisitions are expected to accelerate the companys growth prospects. Moreover, in March 2011, Amex completed the acquisition of Loyalty Partner, a leading marketing services company best known for the loyalty program it operates in Germany, Poland and India. Acquisitions could help the company accelerate its long term growth. Innovations help retain existing customers and also attract new customers

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SWOT Analysis

Amex is known for product and service innovations. For instance, the company successfully introduced luxury rental payments (2003) and luxury condominium down-payments (2006) on the Amex card, home mortgage payments through Amex card (in 2007). Recently, the company launched Zync, a build-your-own charge card that features a selection of lifestyle packs, and AcceptPay, an online invoicing tool that helps small business owners get paid faster. The companys innovative products help it retain existing customers and also attract new customers.

Threats

Increasing penetration of alternative payment platforms could check growth Penetration of alternative payment platforms has been gaining popularity in the recent years. These alternative payment platforms include aggregators (such as PayPal), wireless payment technologies (including using mobile telephone networks to carry out transactions), prepaid systems and systems linked to payment cards, and bank transfer models. New technologies, together with the portability provided by smartphones and tablets and evolving consumer behavior with social networking, are rapidly changing the way people interact with each other and transact business all around the world. In this connection, traditional and non-traditional competitors such as mobile telecommunications companies are working to deliver digital and mobile payment services for both consumers and merchants. Increasing penetration of alternative payment platforms makes it difficult for the company to sustain/increase market share. Competitors converging business practices may increase member attrition Historically Amex experienced lower card member attrition due to its reward programs and the prestige attached to owning Amex card. However, Amexs competitors have also been trying to imitate Amexs reward programs or launch other reward programs. For instance, in March 2010, Barclaycard launched Barclaycard Freedom in the UK. The scheme was the first in the UK to offer point-of-sale redemption, with consumers gaining 'reward money' worth 1% of the value of a transaction with a participating merchant, in what is effectively a mix between a cashback system and a coalition loyalty program. Within one year of the launch, the scheme has encouraged Barclaycard Freedom cardholders to spend on average 14% more in launch partner stores than other credit card customers. Launch of such rewards programs by other competitors could increase attrition rate up among Amex cardmembers. Dodd-Frank regulation could affect revenue and profitability Regulatory changes are increasingly turning pro-consumer, and to an extent tough for payment network operators. For instance, Congress passed Dodd-Frank, which the US President signed into law in July 2010. Dodd-Frank could limit Amexs income earned through interchange fees. Additionally, Dodd-Frank prohibits payment card networks from restricting merchants from offering discounts or incentives to encourage customers to pay with particular forms of payment such as cash, check, credit or debit card, provided that such offers do not discriminate on the basis of the network or

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SWOT Analysis

issuer. As a result of these new laws, customers may be incentivized by merchants to move away from the use of charge and credit card products to other forms of payment, such as debit, which could adversely affect Amexs revenues and profitability. Increasing regulatory fees and compliance spending may affect margins Regulatory fees and compliance spending are expected to increase in the months to come. Banks currently pay fees to Federal Deposit Insurance Corporation (FDIC) for the insurance fund, which is used to make payments to depositors of failed banks, during good times as well as bad. At the end of 2010, the fund had a negative balance of $7.4 billion. FDIC expects to fund this deficit through increasing reserve ratios and other fees. On December 20, 2010, the FDIC issued a final rule setting the increased reserve ratio at 2%. This increase will result in increased costs for Centurion Bank and American Express Bank, FSB (AEBFSB) which are consolidated entities for Amex. Moreover, according to FDIC, bank failures in the US could cost the agency $21 billion between 2011 and 2015. So, the cost of deposit insurance with FDIC will remain high until, the insurance fund turns significantly positive. Moreover, in the months to come Centurion Bank and AEBFSB will be required to follow applicable changes regarding Basel III. As a result, the companys spending on compliance could increase in future.

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