Founded in 1950, New York based
) is a leading global financial services company offering card
payment products and travel-related services to consumers and
businesses across the globe. It is now the third largest player in
the US in terms of card transaction volumes, after Visa (
) and MasterCard (
). It also competes with other financial institutions that have
credit card services like
) and Capital One (
What differentiates American Express from MasterCard and Visa is
its relatively more affluent customer base, which it maintains by
offering generous benefits and reward programs. Since American
Express brings higher spending consumers to merchants, it can
charge a higher commission (known as the interchange fee) on sales.
Also, unlike Visa and MasterCard, American Express only issues
charge and credit card products but not debit cards, which have
been gaining widespread acceptance over the past couple of years.
With these critical differences in mind, we explore the
opportunities that lie ahead for American Express in an evolving
Our price estimate is $47.16
, which is just slightly higher than the current market price.
Impact of regulatory reforms
The Obama Administration in February 2010 passed the
Credit Card Accountability, Responsibility and Disclosure
, or the
which enforces more disclosure about interest rates, caps on
service fees, grace periods and also makes it difficult for people
under the age of 21 to obtain cards. All this is expected to
negatively impact the growth in the number of cards in use but lead
to lower net write-off rates and defaults by card members.
, enacted in July 2010, granted the Fed the power to control the
levels of this fee. In December, the Fed enforced one such limit -
12 cents per debit card transaction. (Cap on Debit Card Interchange
Fee is a Positive for American Express, Trefis, Jan 12′ 2011) While
this adversely affects the two largest card payments-processing
networks Visa and MasterCard, which also issue debit cards, we
believe it presents upside opportunity for American Express as
credit cards would gain prominence over debit cards, at least from
the issuers' end.
Improving economic conditions
The macroeconomic conditions are improving in the US, albeit at
a slow pace. The unemployment levels are still close to historical
high levels but on a downward slope, declining from 9.8% in
November 2010 to 9.4% in December 2010. Consumer spending has
picked up and so have the corresponding card transactions.
Household purchases, which constitute about 70% of the economy,
grew at 4.4% in December 2010, the highest since the first quarter
of 2006. American Express' card delinquency rates (the proportion
of outstanding balances past the due date to total balances)
continues to decline month on month to 2.1% from 2.5% in the
previous quarter. Charge-offs (the loans deemed uncollectible and
hence, written-off) also declined from 5.2% to 4.4% over the same
period. Improvements in macroeconomic conditions hint at more
relaxed card-issuing criteria and higher credit limits.
If spending increases more than we currently forecast, this
could improve our price estimate. Drag the trend line in the
modifiable chart above to see the impact. For example, a 5%
increase in annual spending in 2012 per customer translates to
around a 2% improvement in our price estimate.
See our estimates for American Express.