American Express, also known as Amex, is a multinational financial services corporation that operates in more than 130 countries worldwide. Despite fierce competition from companies like Visa and MasterCard, Amex has managed to maintain its position as a major player in the credit card industry. In 2022, the company generated 52.9 billion in total revenues net of interest expense, an impressive feat considering the challenges posed by its rivals.
One of the key factors that sets Amex apart from the rest of the industry is its closed-loop system. Unlike Visa and MasterCard, which operate in an open-loop system, Amex functions as the issuer, the acquirer, and the network combined.
This allows the company to earn money from interest, a source of revenue that is not available to Visa and MasterCard. In 2022, Amex generated about $9.9 billion in net interest income, which was only a small part of its total revenue.
Another important source of revenue for Amex is discount fees charged to merchants that accept its cards. These fees brought in more than $30 billion in 2022, contributing to more than 58% of Amex’s total revenue net of interest expense for that year.
This reliance on discount fees means that big spenders are Amex’s most important asset. Recent reports claim that Amex card members spend on average three times as much annually as those who aren’t members.
To attract and retain these affluent cardholders, Amex has developed a spend-centric model that focuses on generating revenues primarily by driving spending on its cards. This is where rewards come in. In 2022, Amex spent almost $17 billion on services and rewards for its card members.
One example of this is the Amex Platinum card, a flagship premium product that offers a range of travel benefits, including rewards and airport lounges, as well as additional perks such as a free Walmart plus membership and Uber cash.
Amex’s closed-loop system also gives the company a significant advantage when it comes to data. Since the company is both the issuer and the acquirer, it has access to much more detailed information about its customers’ spending habits. This enables Amex to tailor rewards and deals to specific merchants and customers, giving it a competitive edge over Visa and MasterCard.
While Amex’s business model has proven to be successful, it is important to note that it is not without its challenges. The company’s domestic payment volume is far behind that of Visa and MasterCard, and it lags behind Discover based on the number of cards in circulation. Additionally, Amex’s closed-loop system means that the company is more exposed to credit risk than its rivals.
Despite these challenges, Amex has managed to achieve impressive growth in recent years. The company’s revenue has increased over 32% since 2017, and shares of the company have shown resilience and growth in a tumultuous market. Amex is often referred to as a “quality compounder,” with steady, stable growth in revenues and earnings.
In conclusion, American Express has a long history that began as a freight forwarding company in 1850, but over the time it transformed into a payments company by introducing financial products and travel services and that was the start of the brand we know today.
Amex’s closed-loop system and spend-centric model have proven to be major assets, allowing the company to generate significant revenues from interest and discount fees. However, the company faces significant competition from Visa and MasterCard and must continue to adapt to changing market conditions in order to maintain its position in the industry.
