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American Express still faces hurdles from Costco
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After a series of tough quarters, American Express beat analyst expectations in Q3.
The firm’s success was propelled by “strong operating discipline and credit quality,” according to CEO Ken Chenault. But as Amex looks to cut $1 billion in costs over the course of the next several quarters in the wake of the sale of its Costco business, the firm still has hurdles to overcome.
Despite overall gains, Amex saw mediocre results in a few key metrics, largely related to the loss of Costco’s store card portfolio, which Amex sold to Citigroup in June. Costco cardholders represented 8% of the firm’s billed business in 2015.
Here are some key results from the quarter:
Billed business: Amex’s global billed business in the quarter was down 3% year-over-year. But excluding the Costco portfolio, it grew 7%, which indicates the impact that the Costco loss has had on the company. The firm noted that it’s on track to retain 20% of the out-of-store spend of the previous Costco cardholders that it retained, but that’s still a meager portion of the $80 billion Costco cardholders spent in 2015, In addition, loans, which the Costco portfolio represented 20% of, fell by 12% in Q3.
Issued cards: Amex had 108.8 million cards issued globally at the end of Q3 — that’s down by 7 million from the same period in 2015, despite reports of strong new customer acquisition in earlier quarters this year. That’s likely partly due to the loss of the Costco portfolio, which had 11.6 million cardholders.
But the firm plans to invest in initiatives that will help it grow through Q4 and into next year.The firm outlined a few key focus areas that the firm will use to grow.
Premium cards: Amex plans to focus heavily on its Platinum portfolio, likely as a result of the intense premium rewards card competition in the market right now. This portfolio could be particularly lucrative for the firm because of the high fees associated with it, and because premium cardholders will likely have higher spend.
Small businesses: Amex has been working to extend relationships with small businesses through its OptBlue program, which makes it easier for these merchants to accept and use Amex cards. That program has been successful, and the firm has seen growing billed business among small- and medium-sized merchants. In Q4, Amex plans to run a promotion related to Small Business Saturday in order to make it known to cardholders that their acceptance network is growing, which could help encourage customers to spend more on Amex and boost the firm’s billed business.
Marketing and outreach: Amex is looking to build on ongoing US customer acquisition success and ramp up in key international markets. The firm will boost digital marketing initiatives and run an extensive advertising campaign, which could help onboard younger customers or groups in key markets that will spend and provide Amex with additional transaction and card fee-related revenue.
American Express and Costco are part of the much broader payments ecosystem, which includes merchants, acquirers, processors, and more.
Evan Bakker and John Heggestuen, analysts at BI Intelligence, Business Insider's premium research service, have compiled a detailed report on the payments ecosystem that drills into the industry to explain how a broad range of transactions are processed, including prepaid and store cards, as well as revealing which types of companies are in the best and worst position to capitalize on the latest industry trends.
Here are some key takeaways from the report:
2016 will be a watershed year for the payments industry. Payments companies are improving security, expanding their mobile offerings, and building commerce capabilities that will give consumers a more compelling reason to make purchases using digital devices.
Payments is an extremely complex industry. To understand the next big digital opportunity lies, it's critical to understand how the traditional credit- and debit-processing chain works and what roles acquirers, processors, issuing banks, card networks, independent sales organizations, gateways, and software and hardware providers play.
Alternative technologies could disrupt the processing ecosystem. Devices ranging from refrigerators to smartwatches now feature payment capabilities, which will spur changes in consumer payment behaviors. Likewise, blockchain technology, the protocol that underlies Bitcoin, could one day change how consumer card payments are verified.
In full, the report:
Uncovers the key themes and trends affecting the payments industry in 2016 and beyond.
Gives a detailed description of the stakeholders involved in a payment transaction, along with hardware and software providers.
Offers diagrams and infographics explaining how card transactions are processed and which players are involved in each step.
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Analyzes the alternative technologies, including blockchain, which could further disrupt the ecosystem.
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