New American Express chief prepares for battle in rewards war – Financial Times


Membership has its privileges, ran the celebrated American Express tagline in the 1980s. The campaign helped the brand come to symbolise personal prosperity.

But three decades on, its place in the wallets of the well-heeled no longer looks so assured.

As longtime chairman and chief executive Kenneth Chenault prepares to hand the reins to colleague Stephen Squeri, American Express has found itself fighting an intense “rewards war” for customers. For critics, it is unclear if the company is winning.

“Their product offering is nowhere near as attractive as it was,” says Jason Arnold, managing director at RBC Capital Markets.

Certainly, the benefits attached to Amex cards remain considerable. Holders of the flagship Platinum card are entitled to $200 worth of airline credits and $200 of Uber rides each year, a concierge service, and access to a wide range of airport lounges. The sign-up points windfall alone is worth an estimated $1,140.

Even taking account of a $550 annual fee, calculations by Barclays’ credit card analysts indicate that a high-spending customer would net about $5,800 worth of perks over 10 years.

However, big spenders could do even better elsewhere. Unlike rivals, the Platinum travel credits cover only incidental expenses, not tickets. And not everyone uses Uber.

The biggest competitor to the Platinum, JPMorgan Chase’s Sapphire Reserve, allows holders to rack up three times more points through dining than Amex users. The Barclays analysts attached an $8,000 value over the 10-year period to the Chase offer, as well as $6,700 to a rival card from Citi although its terms have recently become less favourable.

Other deals keep rolling in. From this week, consumers will be able to apply for Uber’s new no-fee card, which offers especially generous points for dining.

Mr Chenault has urged investors to see that some of the advantages of the Platinum — access to hard-to-book restaurants, for instance — are “not as easy to work into a math equation of value”.

If there is such an equation, it would still seem to be working in the company’s favour. Every year since 2010 the group has generated a return on equity (ROE) of at least 23 per cent, according to Bloomberg data.

Large banks, meanwhile, have struggled to produce ROEs in the double digits. Low interest rates have eroded returns from their traditional businesses, while post-crisis regulation has further curbed their ability to profit from less creditworthy consumers.

Little wonder, then, that they are keen to draw the consumers long targeted by Amex to get a cut of their card purchases — as well as the possibility of charging high interest rates if users fall behind on repayments.

“Now that a lot of these big banks have got a taste for the upper end of the space, I think they’ll stick with it,” argues Mr Arnold. American Express’s margins “have been really nice, but in future they’re going to prove a lot harder to attain”.

Mr Squeri has yet to unveil a detailed plan for American Express’s future, although among other initiatives the incoming chief wants to expand its roster of corporate partners and serve more small and medium-sized businesses. He notes, too, that the brand remains “world-class”.

Perhaps more importantly, say analysts, he has made clear a desire to better capitalise on the company’s “data advantage”.

In contrast to banks and the payment networks MasterCard and Visa, American Express operates a “closed-loop” — an all-encompassing business model. The company handles everything from issuing the cards to processing the payments, and charges merchants a fee of 2.4 per cent for every transaction.

The model brings with it its own challenges: Amex is in legal dispute with the US government over claims it breaches antitrust rules by preventing merchants from directing customers to cards that carry lower fees.

Yet it also means the company knows more than rivals about spending patterns. “The big, religious, questions inside Amex are about how valuable their data is,” says James Friedman, analyst at SIG Susquehanna.

As Mr Squeri puts it: “We’ll focus on becoming the most innovative network by leveraging the fact that we are one integrated business model.”

The new chief will be starting from “a position of strength”, Mr Chenault says. In contrast to his first day as chairman 16 years ago, which was marred by a profit warning, the day Mr Chenault chose to announce his departure was more upbeat: the company also announced that quarterly net income was up 19 per cent from a year ago.

Shares in Amex have risen almost 90 per cent from lows last year, when its loss of a longstanding tie-up with the retailer Costco brought to the fore concerns about mounting competition. Amex has since struck a deal with Hilton to be the exclusive issuer of its Honors credit cards in the US from next year.

“They can’t grow as fast as they used to, but they can still grow decently — and with high returns,” says Jason Deleeuw, analyst at Piper Jaffray.

The company’s “best days are ahead of us”, adds Mr Chenault. “We’ve navigated through the tragedy of 9/11, the disruption of natural disasters, the financial crisis of 2008 and 2009 and attacks on our business model — and we’ve come out stronger every time.”

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