Under the Spotlight Wall St: American Express Company (AXP)
One of America’s longest standing financial institutions, American Express, has become one of the backbones of the world’s credit and payment system. Let’s put it Under the Spotlight.
The world of finance is constantly evolving, with new companies emerging and established ones struggling to stay afloat. One company that’s managed to not only survive, but thrive in this competitive industry is American Express.
American Express ($AXP), often simply known as Amex, was founded in 1850 by three friends. Two of them are actually better known for their roles in another company: Wells Fargo ($WFC). The company initially started out as an express mail business, but soon expanded into the financial sector by introducing money orders and traveller’s cheques in 1891, pioneering an industry. The company’s reliability was one of the key drivers of its early success: in WW1, Amex was one of the few traveller’s cheques redeemable by Americans in Europe.
Today, the company is primarily known for its charge and credit cards, used by millions of people all over the world, most of them with higher incomes. To differentiate itself from its competitors, American Express focuses on providing high-quality customer service and exclusive cardholder benefits.
Targeting high-income consumers, who are more likely to use credit cards for travel and entertainment expenses. American Express has partnerships with companies across a variety of sectors, including airlines, hotels, and retailers, to offer exclusive discounts and rewards to its cardholders. Of course, this comes at a hefty price, not only for its customers but also for retailers accepting it as a payment, which leads to lower acceptance rate than its competitors.
Focusing on wealthier individuals is not only a branding matter: unlike its competitors Visa ($V) and MasterCard ($MA), Amex acts not only as a payment processor, but also issues the credit card themselves. Therefore, having higher income customers is important to reduce the chances of default. And though bigger prices for retailers might keep some businesses away, other companies simply cannot afford to refuse demand for wealthier clients.
The combo of payment processing and card issuance, in addition to a wealthy customer base, makes for a high barrier to entry for competitors, or as Warren Buffett likes to call it, a big moat. And the Oracle of Omaha himself has invested in the company twice, first in 1964, and then again in 1994.
The credit card giant suffered some heavy defaults during the 1960s and Buffett bought shares believing that they were undervalued. After quickly doubling his money, he sold his stock, re-opening his position 30 years later. Since then, Berkshire Hathaway ($BRK.B) still has Amex shares. They’ve become one of its biggest holdings, considering Amex’s value has risen by more than 15x since that investment was made.
Despite facing competition from other financial services companies, American Express has remained a highly profitable business. In 2022, the company reported net income of US$8.1b, processing US$1.3t in payments and achieving 33.7% return on equity (ROE). The company's ability to consistently generate revenue and profits is due in large part to its loyal customer base, which is willing to pay annual fees and interest rates for the exclusive benefits and rewards that come with the company’s cards.
Looking to the future, Amex will need to continue to adapt to changing times and consumer preferences. The rise of mobile payments and alternative payment methods poses a threat to the traditional credit card business, but American Express’ biggest concern might be the fact that it remains remarkably American.
Approximately 70% of its customers are from the U.S. and its high fees make it difficult to gain traction in emerging markets. With the rise of fintechs, new payment and credit alternatives, it remains to be seen whether Amex will still be a leading player in the industry, or like its old express mail business, will become a thing of the past.