American Express Puts Its Focus on Platinum Cards, Digital Marketing, and Small Merchants

By Jim Daly
@DTPaymentNews

The loss of its cobranded card and exclusive credit card acceptance relationship with Costco Wholesale Corp. hit American Express Co. hard in the third quarter, but AmEx’s chief financial officer on Wednesday said brighter days lie ahead as the company builds new business.

The quarter ended Sept. 30 was the first full post-Costco period on AmEx’s books in about 16 years. The Costco relationship included about 11 million cards and generated  more than $80 billion in annual dollar volume. But Costco, after giving notice last year, switched its loyalties in June to Visa Inc. as its credit card brand and Citigroup Inc. as its cobranded card issuer.

Thanks largely to the loss of Costco, AmEx’s U.S. card-billed business plunged 9% to $164.6 billion from $180.4 billion in 2015’s third quarter. The decline was partially offset by a 10% increase in international volume to $86.6 billion, bringing AmEx’s total volume to $251.2 billion, up 3%.

AmEx this year also lost the smaller Fidelity Investments card program in which Bank of America Corp. was AmEx’s third-party issuer; the mutual-fund company’s card partners now are Visa and U.S. Bancorp as issuer.

Discount revenue, which AmEx earns from merchants with each transaction, fell 5% to $4.52 billion from $4.78 billion a year earlier. But there was some good news. Excluding the Costco effect, discount revenues would have increased 5%, AmEx said. And average cardholder spending increased 10% year over year.

AmEx’s reported worldwide average discount rate was 2.47% of the sale, up slightly from 2.46% in June 2015. The yield—discount revenue divided by billed business—was 1.80%, down 5 basis points from 1.85% a year earlier.

Total quarterly revenues, net of interest expense, declined 5% to $7.77 billion from last year’s $8.19 billion. Net income fell 10% to $1.14 billion from $1.27 billion, yet it still exceeded analysts’ estimates.

AmEx has plenty going on to build new business, according to executive vice president and CFO Jeffrey C. Campbell. He noted that the company boosted marketing and promotion expenses by 10% to $930 million in the third quarter, with more to come.

“We now anticipate that marketing and promotion expenses for the fourth quarter will be significantly higher sequentially,” he told analysts in a conference call.

Much of the marketing spend is going into improvements in AmEx’s high-end Platinum card. AmEx has dominated the luxury card market, where cards sport annual fees of hundreds of dollars, for three decades, but it faces new competition from other issuers, especially JPMorgan Chase & Co. with its new Chase Sapphire Reserve card. According to Campbell, AmEx has been planning a “steady stream” of changes in the Platinum card and is not being reactive.

“None of those things happened in response to anything in particular by our competitors,” he said.

AmEx also plans to expand its digital-marketing efforts, which it says have helped it issue a record 5.9 million new cards in the U.S. this year. The company also is increasing its support of Small Business Saturday, a promotional campaign to drive volume at small merchants.

“We’re planning a substantial increase in our investment spending,” said Campbell.