- American Express has been losing share to Visa and MasterCard for years.
- The reason is simple. Visa and MasterCard cost merchants less in terms of discounts and other fees.
- American Express has yet to address these basic problems, and the trend remains in place.
American Express (NYSE:AXP) once meant something special in the markets, to both merchants and customers. It meant quality and low chargebacks. It meant a high-income, free-spending audience of cardholders who paid their bills on time. American Express wasn’t a credit card. It was a “travel and entertainment” card through which corporations maintained control over selling expenses.
This justified high discounts paid by merchants, as much as 5% of the purchase price, compared with the 2.5% standard charge of Visa (NYSE:V), Mastercard (NYSE:MA), and their aligned processors. Banks and Independent Service Organizations undercut American Express still further, offering custom deals with lower discounts, matching American Express’ services and offering credit first.
While American Express had the first mover advantage, over time the difference between the audiences for the cards has been washed away. Banks have aggressively courted American Express corporate accounts, and merchants have found they can get away with accepting the two larger networks and ignoring Amex, and its high costs.
These problems are clear in the examination of the stock prices and relative performance of the three companies. And these problems have yet to be adequately addressed.
The growth in general transaction processing masked these problems from shareholders through most of this decade, and Amex even launched a growth strategy, focused on cash cards for low-income consumers under the name Bluebird (which Walmart (NYSE:WMT) took deposits for right at the cash register), and a healthy relationship with Costco (NASDAQ:COST). But Costco dropped American Express for Citigroup (NYSE:C) and Visa a year ago, and the business has not been replaced, and Bluebird has been proven to be susceptible to fraud, so much so that the company had to crack down this year on its Bluebird service. The whole consumer strategy is in shambles.
Since Costco’s announcement American Express has lost 25% of its value, and those losses began accelerating at the start of this year. Visa and MasterCard are down 5% so far in 2016, but American Express is down almost 14%, and at one point in February it was down over 26%.
Despite this, CEO Ken Chennault is still pulling down $22 million/year. American Express comforts itself with Warren Buffett’s large position, buttressed by a 29 cent/share dividend that has risen from 18 cents five years ago.
You can do better. American Express is no longer in the payments mainstream. Visa and Mastercard control that. American Express’ strategies for recouping consumer market share lie in tatters. Maybe, a year or two from now, the company will find a way to address its merchant processing troubles, and its declining market share, but until they do you can definitely do better almost anywhere in the payments space.