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Products: American Express Company (AXP)

Card Transaction and Execution Fees(Card Transaction and Execution Fees)
Interest from Credit Cards and Investments(Interest from Credit Cards and Investments)
Credit Card Securitization and Publishing(Credit Card Securitization and Publishing)

Card Transaction and Execution Fees

Transaction Fee, also known as the Discount Fee, is the commission charged to merchants as a percentage of the dollar value of transaction on American Express cards.

The Discount Fee (%) is split between:

  1. The Acquiring Bank (the bank, which processes credit card transactions for a merchant, including crediting the merchant’s account for the net value, charged to a credit card),
  2. The Issuing Bank (the bank, which issues the consumer's credit card; This is the bank a consumer is responsible for repaying after making a credit card purchase), and
  3. The Network Service Provider (which serves as the link between the acquiring bank and the issuing bank, which have relationships with the network rather than with each other).

The average discount fee in the U.S. is 1.9%, of which 0.1% goes to the Acquiring Bank, 0.09% goes to the Network (Visa, MasterCard etc) and the remaining 1.7% to the Issuing Bank.

American Express charges a significantly higher Discount Fee of around 2.48% (58 bps higher than industry average) since it brings forth to the merchant high income/spending cardholders, under its well-publicized Spend-Centric Strategy (Discussed in Company Overview).

On Third-Party Issued cards, American Express charges the commission on account of serving the Network Provider Role and/or Acquiring Bank Role. Since it does not assume the credit risk and costs associated with extending credit (which is predominantly, the interest on sources of funding), it does not claim the Interchange Rate. However, American Express charges merchants for the value added services such as targeted marketing and analytical support (drawn from cardmember spending pattern) and point-of-sale products and services (which includes processing transactions for the merchant etc) that it provides under the Global Merchant Services leg of business.

International Cardmember Spend

International Cardmember Spend is the average spending by a cardholder on proprietary American Express cards in a year. It is computed by dividing the dollar value of total billed business by the number of cardmembers (as revealed by the number of Cards-in-Force).

American Express has a significantly higher Average Cardmember Spending (2-4 times) compared to other payment service providers such as Visa and MasterCard. This lets American Express implement its Spend Centric Model™. Under this, American Express charges retailers higher commission (known as Discount Rate) on the sales since it brings forth to retailer, higher income and hence higher spending consumers. At the same time, it offers cardmembers higher membership rewards and benefits (afforded by higher commission charged) so as to attract higher income consumers and to entice them to use American Express Cards for any purchase.

The Average Card member Spending grew from $12,221 in 2012 to $12,297 in 2014. The figure declined to 11,459 in 2015, due to the negative impact of currency fluctuations. As global economic conditions begin to gradually improve.

Chart: International Cardmember Spend

Transaction Fee on Amex-Issued U.S. Cards

Transaction Fee on Amex-Issued U.S. Cards, also known as the Discount Fee, is the commission charged to merchants as a percentage of the dollar value of transaction on American Express issued cards.

This goes to the Issuing Bank (the bank, which issues the consumer's credit card; This is the bank, a consumer is responsible for repaying after making a credit card purchase) for extending credit to the cardholder and assuming credit risk associated with the transaction, in the process.

This goes to the Network Service Provider (which serves as the link between the acquiring bank and the issuing bank, which have relationships with the network rather than with each other). It is to compensate for the costs associated with maintaining the communication systems, databases and servers that are used in processing any card transaction.

The industry average Transaction Fee in the U.S. is 1.9%, of which 0.1% goes to the Acquiring Bank, 0.09% goes to the Network (Visa, MasterCard etc) and the remaining 1.7% to the Issuing Bank.

Chart: Transaction Fee on Amex-Issued U.S. Cards

U.S. Cardmember Spend on Amex-Issued Cards

U.S. Cardmember Spend on Amex-Issued Cards is the average spending by a cardholder on proprietary American Express cards in a year. It is computed by dividing the dollar value of total billed business by the number of cardmembers (as revealed by the number of Cards-in-Force).

American Express has a significantly higher Average Cardmember Spending (2-4 times) compared to other payment service providers such as Visa and MasterCard. This lets American Express implement its Spend Centric Model™. Under this, American Express charges retailers higher commission (known as Discount Rate) on the Sales since it brings forth to retailer higher income and hence higher spending consumers. At the same time, it offers cardmembers higher membership rewards and benefits (afforded by higher commission charged) so as to attract higher income consumers and to entice them to use American Express Cards for any purchase.

Chart: U.S. Cardmember Spend on Amex-Issued Cards

Interest from Credit Cards and Investments

American Express earns a Net Interest Income on the spread between the rate at which it raises funds in the form of Debt and Customer Deposits and the rates at which it extends credit to the cardmembers and at which it parks away the un-loaned amount in the form of Bank Deposits and Investments in ST Securities.

Unlike other card issuing financial institutions, on account of its Spend-Centric Strategy™ (Discussed in Company Overview), American Express earns a relatively higher proportion of its Total Revenues from Transaction Fee. Otherwise for most, the Net Interest Income is the major component of Total Revenues.

Interest Expense on Sources of Funds

The main sources of funds, for extending credit to cardmembers, are Short Term and Long Term Debt and Customer Deposits with Centurion Bank and AEBFSB, the fully owned subsidiary banks of American Express Travel Related Services. On these sources of funds, American Express incurs an interest expense.

Interest Income on Uses of Funds

The funds raised are then extended as credit to charge and credit cardmembers. The Credit Card Loan balance has perhaps the highest interest rate in the range of 24% to 36% per annum, which again depends on the creditworthiness of the cardmember.

There is however, no interest on Charge Card Receivables, which earn American Express revenue only through Transaction Fee (commission charged to the merchant on the transaction).

However, the entire amount of funds raised is not extended as credit at any point. Funds are raised in bulk at regular intervals while credit is extended continuously with transactions on American Express Cards. The un-loaned amount (that which has not been lent to cardmembers yet) is invested in ST Securities and Bank Deposits, which earn American Express an Interest Income in the process.

Transaction Fee on Amex-Issued Corporate Cards

Transaction Fee on Amex-Issued Corporate Cards, also known as the Discount Fee, is the commission charged to merchants as a percentage of the dollar value of transaction on American Express issued cards.

This goes to the Acquiring Bank (the bank, which processes credit card transactions for a merchant, including crediting the merchant's account for the net value, charged to a credit card)

This goes to the Issuing Bank (the bank, which issues the consumer's credit card; This is the bank, a consumer is responsible for repaying after making a credit card purchase) for extending credit to the cardholder and assuming credit risk associated with the transaction, in the process.

This goes to the Network Service Provider (which serves as the link between the acquiring bank and the issuing bank, which have relationships with the network rather than with each other). It is to compensate for the costs associated with maintaining the communication systems, databases and servers that are used in processing any card transaction.

The industry average Transaction Fee in US is 1.9%, of which 0.1% goes to the Acquiring Bank, 0.09% goes to the Network (Visa, MasterCard etc) and the remaining 1.7% to the Issuing Bank.

The Transaction Fee on Amex-Issued Corporate Cards declined from 1.76% in 2009 to 1.65% in 2013. The figure increased to 1.98% in 2014 but declined to 1.63% in 2015.

 

Chart: Transaction Fee on Amex-Issued Corporate Cards

Chart: Corporate Cardmember Spend on Amex-Issued Cards

Credit Card Securitization and Publishing

Credit Card Securitization

Apart from meeting its funding needs from unsecured (not backed by any collateral) medium and long term notes, customer deposits and long term committed borrowing facilities from banks, American Express partly finances its credit card loans and charge card receivables by selling Asset (Loan Receivables) Backed Securities.

American Express takes care of billing and collection of receivables, customer care and other services on these securitized loans, for which it charges a commission which constitutes the Securitization Income. Historically, the Securitization Income has averaged around 4% of the Average Credit Card Loan Balance.

Publishing

American Express caters to a high-income consumer base and provides them payment solutions and travel services. Taking advantage of its affluent cardmember base, American Express has partnered with Time Inc. in a profit sharing agreement where it publishes luxury lifestyle magazines such as Travel + Leisure, Food & Wine and Departures; travel resources such as SkyGuide; business resources such as American Express Appointment Book and SkyGuide Executive Travel and even maintains websites such as travelandleisure.com, foodandwine.com, eskyguid.com etc.

Most of these publications come free as a value-added service to the consumers, which are essentially American Express cardholders. The publishing business has a focused and accessible consumer base and helps American Express earn revenue from advertising in these publications.

Cardmember Spend on Third-Party Issued Cards

This refers to the average spending by a cardholder on third-party issued American Express cards in a year. It is computed by dividing the dollar value of total billed business by the number of cardmembers (as revealed by the number of Cards-in-Use).

Cardmember Spend on Third-Party Issued Cards jumped from $2,730 in 2009 to $3,162 in 2010 primarily on account of macroeconomic recovery. The figure stood at $3,426 in 2012. Thereafter, it grew at a steady rate of around 3% each year to reach $3,652 in 2014. The figure declined to $3,502 in 2015.

Chart: Cardmember Spend on Third-Party Issued Cards

Fees as % of Global Transaction Volume

American Express sells its portfolio of credit card loans as Asset (Loan Receivables) Backed Securities to Institutional and Retail Investors. It is however still involved in monitoring the credit worthiness of cardmembers, billing and collection of outstanding loan balance, in providing sales, marketing and customer care and in processing of transactions associated with these loans, for which it charges a commission (as a percentage of Securitized Loans), which is termed as Securitization Income.

The Securitization Income varies in accordance with the Credit Cards Loans portfolio from 6% of Loans in 2005 to as low as 1.54% of Loans in 2009.

Reason for a steep decline in Securitization Income (as a percentage of Loans) in 2008-09: The recession in 2008-09 was ushered in by subprime mortgage crisis. The investor confidence was low in general and the securitized loans (albeit of a high quality, given the relatively higher income American Express Cardmembers), had significantly lower valuations. Selling the loans portfolio at such lower valuations didn't make financial sense during recessionary times. As a result, the Securitization Income declined.

Chart: Fees as % of Global Transaction Volume