AmEx Plans $1 Billion in Cost Cuts As Part of an Effort to Rebound From a Sub-Par 2015

In 2015, American Express Co. had a bad year.

Hit hard by competitive pressures on merchant fees and cobrand-card returns, as well as swooning gasoline prices, the big card network on Thursday reported a 4% decline in revenue net of interest expense for the year to $32.8 billion, its first drop in annual revenue this decade. Net income fell 12% to $5.16 billion.

For the fourth quarter, revenue was down 8%, to $8.39 billion, while net income slid fully 38% to $899 million.

In response, AmEx announced a plan to shave $1 billion in expenses by the end of 2017. The New York City-based company is also cutting back on so-called experimental initiatives. Earlier this week, it retrenched on its Enterprise Growth Group unit, which includes its Serve prepaid card program aimed at unbanked customers.

While the card program remains in place, AmEx has shut down offices and cut back on research efforts. It took a $419 million charge ($335 million after-tax) in the fourth quarter that included an impairment of goodwill and technology assets, in addition to restructuring costs within the Enterprise Growth Group.

The company faces other challenges, as well. At mid-year, its long-term cobranded card and merchant-acceptance agreement with Costco Wholesale Corp. will end. That relationship, which accounts for 11.2 million cards, contributes 8% of AmEx’s worldwide dollar volume. Costco has turned to Citigroup Inc. and Visa Inc. to replace AmEx as a cobrand partner.

On top of that, a federal court early last year struck down an AmEx rule prohibiting merchants from steering customers to other card brands. AmEx has appealed the ruling.

The company’s financial results for last year were disappointing enough to prompt Kenneth I. Chenault, AmEx’s chief executive, to make a rare appearance on a fourth-quarter earnings call Thursday with analysts. “The performance we are discussing today is not what we expected from American Express,” he said. “We are taking significant action to change our trajectory.”

That trajectory includes softening discount rates on merchant sales. AmEx’s average merchant rate was 2.42% in the fourth quarter, down from 2.44% a year earlier. “We anticipate our discount rate will decline in 2016,” Chenault warned analysts on the call, largely because of competitive pressure from other acquirers and because of the growth of AmEx’s own OptBlue program, which uses bank card acquirers to sign merchants. Overall, discount revenue dropped 1% in the quarter to $4.91 billion.

In other results, U.S. card-billed business for 2015 totaled $721 billion, up 4.8% over 2014. For the quarter, volume was $273.2 billion, up 2%.

Besides the cost-cutting campaign and the move to shut down no-growth businesses, AmEx is also pushing OptBlue to sign up more acceptance locations. “With our OptBlue program, we’re moving toward parity” with the bank card networks, Chenault said.