HE IS leaving with the share price rising and the announcement, on October 18th, of earnings that were largely well received. Better still, Kenneth Chenault, American Express’s chief executive for 16 years, accomplished a feat rare in the upper reaches of American finance: to stand down without an obvious helping shove. No grandstanding senators hounded him out (see Wells Fargo). No boardroom coup hastened the end (Citigroup). The financial crisis left him untouched (take your pick). His successor, Stephen Squeri, promoted from within and apparently groomed for the job, takes over in February.
For all that, Mr Chenault’s long tenure has not been an unequivocal triumph. Though generating strong returns on assets and equity, American Express has continued its slide within the fast-changing and competitive payments industry. According to Nilson, an industry bible, in 1974 the amount of money for purchases channelled through American Express was equivalent to 50% of what went through MasterCard and 70% of what went through Visa. By 2016, those ratios had shrunk to 30% and 14%.
American Express has grown nonetheless, as credit-card usage has surged. But the best days may be over. Its share price, revenues and profits all peaked in 2014. Buried in the details of its latest earnings release are hints that raise questions about how strong its numbers are, and suggestions that its strategy—which increasingly relies on lending to replace diminishing transaction fees—may be heading into more turbulent conditions.
Cutting the cards
Competitive pressure looms on all sides. MasterCard’s market capitalisation is twice that of American Express; Visa’s, three times as big. PayPal, spun off from eBay in 2015 and run by a former American Express executive, has a tiny fraction of Amex’s revenues and profits but on the eve of the earnings announcement passed it in market value (see chart). Its sales and profits have grown much faster, and it was born online.
Rather than a card, PayPal provides a payments platform for individuals, on smartphones or computers, using accounts at their bank or tied to American Express, Visa or MasterCard. In the process it collects a fee. It also offers systems such as Venmo (intended for payments between individuals but sometimes used by businesses, too), Braintree, a financial link used by Uber and Airbnb, and Xoom, a remittance service.
Competition abroad is just as keen. American Express entered Asia early and once had an enviable position there, but its presence has faded. In 2007 it sold (to Standard Chartered) a private bank created almost a century ago that had languished from inattention. Japan’s JCB has issued almost as many cards (but still accounts for far less in transactions). China’s UnionPay boasts the world’s biggest transaction volume, eight times that of American Express, and 55% of cards issued globally.
These conventional competitors may matter less than electronic networks such as Alibaba’s Alipay and Tencent’s Tenpay and a profusion of still little-known startups. The entire mechanics of payments are being rethought, with cards being replaced by QR codes, biometrics and more.
In this noisy hothouse, Mr Chenault deserves respect for keeping American Express healthy. It has supported its market share through deals with banks and other financial institutions that can now issue American Express cards (and generate fees by transacting through Amex’s systems). In the past decade the number of businesses accepting its cards has doubled. But these victories have come at a cost. Twenty-five years ago American Express collected a 3.2% fee on every transaction, according to Sanford Bernstein, an investment research firm. Now, it makes less than 1.8%. Competitive pressure will squeeze this further.
In the past, merchants were willing to pay for American Express transactions because its cardholders were well-off and willing to spend. But now large banks are going after these customers. JPMorgan Chase and Citigroup, both with card businesses headed by ex-Amexers, have issued cards that provide benefits broadly regarded as better than those from American Express. Soon Bank of America will follow. Banks have also taken aim at lucrative co-branding deals carrying exclusive rewards for customers. In 2015 American Express lost one such deal with Costco, a large retailer that accounted for 10% of its transaction volume, to Citigroup. Another, with JetBlue, an airline, went to Barclays.
To rely less on revenue from transaction fees, American Express has become more banklike, lending more. Net interest income made up 18% of revenues in 2012 and should bring in 28% in 2018, predicts Nomura/Instinet, a brokerage. That has looked good lately, because funds have been cheap and credit quality high, but the environment may be changing. Citigroup and JPMorgan Chase, among others, began expanding their consumer-loan portfolios in 2015. Now quality may be worsening. In the two most recent quarters, analysts were surprised by the size of American Express’s provisions for credit losses. Other banks also increased provisions.
Credit is cyclical and it would be a surprise if this time were different. A new concern is electronic fraud, notwithstanding companies’ efforts to thwart it. Still, the business that American Express joined 60 years ago will continue to grow, and American Express may well be a beneficiary. But others may be better placed. Mr Chenault’s tenure may thus be remembered merely as a pause before the end of an era.