How American Express Turns High Spending into Higher Margins (That’s AmExceptional !!)

$52.9 billion!!! That’s the total revenue, net of interest expense, American Express (Amex) made in 2022. Despite these impressive earnings, Amex doesn’t dominate the credit card industry in sheer numbers. Its domestic payment volume is significantly lower than that of Visa and MasterCard, and in terms of the number of cards in circulation, it even trails behind Discover. However, Amex isn’t in the game for sheer volume. Instead, they focus on a specific segment of the market: people who use their card frequently, spend a lot, and pay off their balances. And they’ve carved out a niche by offering these high-spending customers premium perks that keep them loyal.

The Amex Strategy: High Spending, High Rewards

Amex has leaned into offering premium perks that go beyond just financial transactions. Whether it’s access to airport lounges, a Walmart Plus membership, Uber cash, or other daily rewards, Amex ensures their card stays at the top of the wallet. Their strategy has paid off handsomely, as the company has seen over a 32% increase in revenue since 2017, and its stock has shown resilience and growth, even in a tumultuous market.

American Express isn’t just a credit card company; it’s a brand that has evolved significantly since its inception in 1850. Starting as a freight forwarding company, Amex began transforming into a payments company in the late 19th century, eventually introducing financial products and travel services. In the 1950s, after its success with traveler checks, Amex introduced its first charge card, setting the stage for the company we know today.

The Closed-Loop System: Amex’s Unique Advantage

One of the key factors that set Amex apart from competitors like Visa and MasterCard is its closed-loop system. While Visa and MasterCard operate in an open-loop system, where they serve as intermediaries between banks, merchants, and cardholders, Amex plays multiple roles in its network. Amex is the issuer, the acquirer, and the network combined. This allows Amex to have direct relationships with both cardholders and merchants, offering unique insights and control over the entire transaction process.

Amex’s closed-loop system also means that it earns money not only from transaction processing but also from interest income. In 2022, the company generated about $9.9 billion in net interest income. However, the real powerhouse of Amex’s revenue comes from discount revenues, which are the fees charged to merchants for accepting Amex cards. In 2022, these fees brought in more than $30 billion, contributing to over 58% of Amex’s total revenue.

Premium Customers: The Lifeblood of Amex

Amex’s business model is spend-centric, focusing on attracting and retaining big spenders who are willing to pay higher annual fees for premium rewards. Reports show that Amex cardholders spend, on average, three times as much annually as non-Amex cardholders. This high spend-centric model allows Amex to offer robust rewards programs that justify the higher fees, such as those associated with the Amex Platinum Card.

The Platinum Card, one of Amex’s flagship products, exemplifies this approach. While it’s marketed as a travel card with benefits like airport lounge access, Amex has also added everyday perks like a Walmart Plus membership to make it a go-to card for more than just travel. This focus on everyday usability helps Amex maintain its position as a premium brand while driving higher spending on its cards.

Leveraging Data for Customized Rewards

Amex’s closed-loop system provides the company with vast amounts of data on cardholder spending. Unlike Visa and MasterCard, which only see the total dollar amount of transactions, Amex knows exactly what its customers are buying. This data allows Amex to create highly customized rewards programs that feel tailor-made for each customer, further strengthening loyalty and card usage.

For example, Amex can offer specialized rewards and offers at top hotels and restaurants, attracting affluent consumers to these establishments. This creates a mutually beneficial relationship between Amex, its cardholders, and the merchants that accept its cards.

Lower Credit Risk: A Key Advantage

Another significant advantage of targeting affluent customers is the reduced credit risk. Amex’s delinquency rates have remained substantially lower than those of other major credit card issuers. This stability makes Amex an attractive option for investors, particularly during economic downturns.

As the economy changes, Amex’s business model provides some insulation from the cyclical nature of credit losses. During recessions, credit losses typically rise in line with unemployment rates, but Amex, with its affluent customer base, tends to experience lower increases in credit losses compared to its peers.

Reaching New Audiences: Millennials and Beyond

In recent years, Amex has made a concerted effort to diversify its customer base, focusing on attracting millennials and underbanked Americans. The company has reported that around 60% of its new card acquisitions are from Gen Z and millennials. By offering experiences like exclusive concerts or dining events, Amex is successfully winning over a younger audience that will be the heavy spenders of tomorrow.

Amex has also invested heavily in technology to stay competitive in an increasingly digital world. The company was the first US-based credit card issuer to gain approval in China, and it continues to explore growth opportunities in regions like Europe, where credit card adoption is still relatively low.

The Future of Amex: Challenges and Opportunities

While Amex has shown remarkable resilience and growth, the company faces significant challenges from competitors like Visa and MasterCard. As technology advances, these open-loop card programs could potentially replicate some of the unique advantages of Amex’s closed-loop system, particularly in data analytics and tailored rewards.

Additionally, new payment models like “buy now, pay later” (BNPL) pose a threat to traditional credit card companies. However, Amex has been proactive in addressing these challenges. The company was the first traditional credit card issuer to unveil its version of BNPL with the “Pay It Plan It” program, demonstrating its ability to adapt to changing consumer preferences.

Despite these challenges, Amex’s focus on affluent customers, its strong rewards programs, and its unique closed-loop system position the company well to continue thriving in the credit card industry. While Amex may not be immune to economic downturns, its high-spending customer base provides a level of security and stability that sets it apart from many of its competitors.

Wrap Up

American Express may not be the largest credit card company, but it has carved out a powerful niche by focusing on premium customers who value the unique rewards and services it offers. With a business model built on high spending, customized rewards, and lower credit risk, Amex continues to grow and evolve in a highly competitive industry. As the company looks to the future, its ability to adapt to new challenges and opportunities will be key to maintaining its position as one of the most respected and valuable brands in the world.