- American Express have lost their partnership deal with Costco.
- E-commerce payment processors such as Paypal are proving a threat.
- Amex needs a greater focus on savvy marketing and pay attention to consumer needs.
American Express (NYSE:AXP) lost their lucrative credit card partnership with Costco (NSDQ:COST). As a result, Visa (NYSE:V) will be launching a new credit card in partnership with Costco from late June. To quantify the size of this loss, Amex’s partnership with Costco was responsible for 20% of the global volume of loans processed by the credit card giant. In a move to mitigate this loss as much as possible, Amex is spending an undisclosed sum of money to acquire new customers. This is a move meant to reduce the impact of the loss.
Notably, acquiring credit card customers doesn’t come cheap, and American Express isn’t revealing the cost; however, that is to be expected. The risk with this strategy is that should the ROI from this investment fail to compensate for the loss of the Costco deal, their revenue figures will take a hit. As a result, investors will look elsewhere. Unfortunately for American Express, this couldn’t have come at a worse time. Payment providers are increasing at a rapid pace, and some are providing services comparable to that of a credit card company. For instance, “Paypal Credit” is very similar to a credit card offering and is proving very popular with sellers and buyers. Moreover, Visa and Mastercard (NYSE:MA) are also offering customers with attractive solutions.
We are living in a very competitive time for the financial services industry.
After losing Costco, it might be more efficient for American Express to partner with a similar sized company in order to spur growth.
Notably, American Express has still been able to grow its user base by 6% YoY. Impressively, they managed to add 2.1 million cardholders in the US alone during Q1 of 2016. On the other hand, we are yet to see the effect the severing of their partnership with Costco will have on user growth.
American Express is popular around the world; however, one big market they have struggled to make a breakthrough in is China. This is due to Union Pay’s huge market share which currently stands at more than 50%. Interestingly, Visa and Mastercard are also ahead of American Express in the region.
Despite China’s economic issues in recent times, they have a fast growing middle class which likes to spend. In fact, their credit card debt just hit its record high. It is worth noting that Chinese culture used to be against borrowing, with a preference for frugality/saving. However, their millennial generation is steadily changing that due to their affinity for high-end electronics and designer clothes. In fact, consumer spending is on the rise in China. This makes the country a good candidate for American Express to pay special attention to with regard to marketing. There is intense competition with Alibaba’s Alipay offering dominating eCommerce in China; however, American Express can leverage their brand image to succeed.
In comparison to their competitors in the U.S, Amex performed admirably in the last fiscal year. Net profits came in at a strong $5.2 billion, beating Mastercard's $3.8 billion and $2.3 billion by Discover Financial Services. However, Visa managed to make much more in net profit. This can be attributed to Visa’s robust marketing strategy and ability to take advantage of opportunities to grow their brand.
For example, during the last Fifa World Cup hosted in Brazil, Visa offered prepaid cards to people entering the stadium. This was exciting for consumers because prepaid cards are rare in Brazil. Moreover, Visa continues to build strategic partnerships with growing companies and benefits from the momentum. It is this innovative thinking, and ability to understand the needs of people, which has caused Visa stock to have a general growth YoY over the past 8 years.
Amex will do well to take a page from Visa’s marketing book.
Payment processing is moving increasingly online, and savvy companies such as Paypal Holdings (NSDQ:PYPL) stand to take market share from giants such as Amex and Visa. Quite simply, consumers have more choice now than ever. Therefore, American Express shouldn’t rest on their laurels.
In conclusion, Amex is still a strong company worth investing in; however, the future looks uncertain. They aren’t the “safest” financial services stock to invest in. This is due to Visa’s consistency over the past 8 years and their drive for growth. This makes me believe that they will grow at a faster rate than Amex over the next 5 years.