Cardholder Spending Lifts AmEx’s Discount Revenue Despite Declining Rates

Boosted by higher cardholder spending, American Express Co.’s discount revenue grew 9% in the first quarter despite a year-over-year decline in its average worldwide discount rate.

AmEx reported late Wednesday that discount revenue hit $5.89 billion compared with $5.39 billion a year earlier. Discount revenue is by far AmEx’s largest source of income, which also includes cardholder fees and interest from its credit cards.

Traditionally the highest-cost card of the major card brands for merchants to accept, AmEx in March said it would lower its worldwide discount rate, which has been trending down gradually for years, more than it had previously predicted in order to make its cards more attractive to merchants. In the first quarter, AmEx’s average worldwide discount rate was 2.37% of the sale, unchanged from 2017’s fourth quarter but lower than the 2.43% average of a year earlier. 

Card-billed business, which drives discount revenue, grew 10% year-over-year in the U.S. to $182.5 billion. International billings rose 17% to $101.3 billion, bringing AmEx’s total to $283.8 billion, a 12% increase. 

“Our year is off to a good start with double-digit growth in billed business, revenues, and earnings,” Stephen J. Squeri, AmEx’s new chairman and chief executive, said in a news release. Squeri also noted that AmEx added 3.5 million new cards in the quarter, partly from the conversion of Citigroup’s Inc.’s side of the Hilton Hotels cobranded portfolio to AmEx, which had been Hilton’s co-issuer but now is its exclusive issuer.

AmEx lost its big cobranded card and exclusive credit card acceptance deal with Costco Wholesale Corp. in 2016, but the company has been working to enhance its cobranded presence and cardholder rewards to help fill the void. AmEx boosted spending on rewards by 14% in the first quarter to $2.35 billion.

“Today’s results are showing good returns on the investments we’ve been making to drive growth in the premium sector, with cobrand partners, in our merchant network, and with small and mid-sized businesses,” Squeri said. “We plan to continue these investments this year and support our initiatives with the global brand campaign we launched this month.”

AmEx’s biggest cobrand is now the Delta Air Lines card, which in 2017 accounted for 8% of the company’s worldwide billed business—an estimated $86.8 billion.

While cardholders are spending away, a growing number of them aren’t repaying their balances on time. AmEx increased its provision for loan losses by 35% year-over-year to $775 million. Still, the company said the increase was in line with its expectations and reflected the growth of its loan portfolio as well as an increase in chargeoff and delinquency rates.

Boosted by lower federal taxes from the December tax law, AmEx posted net income of $1.63 billion, up 31% from $1.25 billion a year earlier. Total revenues net of interest expense grew 12% to $9.72 billion from $8.71 billion in 2017’s first quarter.