Why Prosperous People Indulge in AmEx

$52.9 billion. That's the total revenuesnet of interest expense Amex made in 2022. But despite its impressiveearnings, Amex is far from dominating the credit cardindustry. Its domestic payment volumeis far behind that of Visa and MasterCard, and it lagsbehind Discover based on the number of cards incirculation. It's a difficult businessfor American Express to be.

In, given the threats posedby Visa and MasterCard. What they've leaned into arepeople who use the card a lot, spend a lot of money,and pay it off, and they're willing to cater to thatcrowd by giving them premium perks, whether that's atthe airport or things they can use every day. Whether that's a Walmartplus membership or Uber cash or things that keep youusing that card, keep it at the top of your wallet.

Armed with impressiverewards and a loyal customer base, Amex has achievedimpressive growth. The company's revenue hasincreased over 32% since 2017 and shares of thecompany have shown resilience and growth in atumultuous market. Amex, I would think of themas a bit more of a what we call a quality compounder,like a very steady, stable business. Growing revenues,high single-digit to 10% and then they get a little bitof operating leverage on top.

Of that. They grow earningsin the low double digits. They've learned a lotthrough COVID. They've diversified theirbusiness model. They've sharpened theirpencils on what matters to their customers. And it'sreally showing and they're coming back strong. So what is the secret toAmex's success and where is it headed next? American Express began as afreight forwarding company.

In 1850, transportingvarious goods across a rapidly expanding nation. It wasn't until the late19th century that it began its transformation into apayments company. It began to introducefinancial products and travel services. Then, in the 1950s,following its high success from traveler checks, itintroduced its first charge card to offer customers amore convenient way to pay.

Where the brand truly beginsas we know it today, in my opinion. You know, they'vehad multiple products come out, the gold card, theplatinum card, and really focusing on the consumerand the corporate card business. What sets Amex apart fromthe rest of the industry is the way in which theirnetwork operates. Most credit cards fromcompanies like Visa and MasterCard function inwhat's called an open-loop.

System. When a cardholderuses the card in their network to make a purchasefrom a merchant, they generate revenue byrelaying that information from the issuers, usuallythe banks that have issued the cards to the acquirers,or the merchant's Bank. Amex, on the other hand,operates in a closed-loop system where it functions asthe issuer, the acquirer, and the network combined. Amex is different from Visaand MasterCard because Amex.

Is a lender. Visa and MasterCard aremerely card networks, so they process transactions,but they're not actually issuing credit. American Express is both. They are a lender of creditand also a card network, a processor of transactions. That really enables them tosee exactly what their customers are spending downto the item and have all.

That extra data where theycan then advertise or target different reward spansacross that. That's going to be verydifferent than what Visa and MasterCard can see, whichwould be just really total dollar amounts. It allows them to tailorsome of those deals, especially on the merchantside. If there's a reason whythey want a specific merchant's business, theycan change their normal.

Terms in order to fit thatsituation. They don't have to worryabout a bank being upset about what those termsare, whereas Visa and MasterCard would. This closed-loop system alsoallows Amex to earn money from interest, unlike Visaand MasterCard. The company generated about$9.9 billion in net interest income in 2022. It's advantageous to bediversified.

So they get paid any time atransaction is processed and then there are also otherlevers like people who pay annual fees or carry debtor other things that incur charges. But interest income is justthe tip of the iceberg when it comes to Amex's totalrevenue. Discount revenues, or feescharged to merchants that accept its cards brought inmore than $30 billion in 2022, contributing to morethan 58% of Amex's total.

Revenue net of interestexpense for that year. They charge a premium totheir merchants to take their cards, and themerchants are willing to pay that premium becauseAmerican Express is bringing them the most affluent,biggest spenders. They make the discountrevenue off of the swiping and so they charge themerchants a certain discount rate, two and a half or so,it depends. This can vary by merchantsize, actually, but a lot of.

Their revenue, unlike theircompetitors, is coming from this swipe fee versus netinterest income. Because of its reliance ondiscount fees, big spenders are Amex's most importantasset. Recent reports claim thatAmex card members spend, on average three times as muchannually as those who aren't members. Amex targets theseaffluent cardholders through a spend-centric model thatfocuses on generating revenues primarily bydriving spending on its.

Cards. That's where rewardscome in. In just 2022, Amex spentalmost $17 billion providing services and rewards to itscard members. When they talk about a spend-centric model. They're really talkingabout being your go-to card. And I think a really goodexample of this is the Amex Platinum Card, one of theirflagship premium products. On the face of it, this isa travel card and it has a lot of tr avel benefits withrewards and airport lounges.

And all that fun stuff. But you can also get a freeWalmart plus membership and you can get a whole bunchof other everyday kind of credits. They're trying tomake this a go-to, every day, not just somethingthat you pull out a few times a year when you'retraveling. That high spend-centric model is the reason why they can provide such strongrewards that they do and why the customers are willingto pay those higher annual.

Fees than for other cardsbecause they're getting the benefits of the spend andthe rewards. Because the people that arespending are actually making this up in their spendbehavior. Having a closed-loop systemmeans how much the cardholder spends isusually more important than the number of transactionsmade. Amex also utilizes theimmense information gathered through its closed-loop system to create offers that.

Attract and retaincustomers. A lot of the tricky partabout rewards programs in kind of big, kind of moremainstream cards is that the rewards are a little bit oflike ad hoc, like they might have very cool, interestingrewards, but they might not be things that you as aconsumer value. In American Express's casebecause of that closed-loop dynamic and because theyknow you and they know the merchant, they can createrewards that feel to you as.

The consumer, like thisprogram was custom designed for me. Like they can goout and recruit all of the top hotels and all of thetop restaurants and have specialized offers andspecialized rewards and stuff to bring consumers,the affluent consumers, to those hotels, to thoserestaurants. And everyone sees benefits from theirrole in the middle of connecting those dots. Having an affluent customerbase also gives the bonus.

Advantage of decreasedcredit risk. Delinquency rates for Amexhave remained substantially lower compared to othermajor issuing banks. Credit losses through thecycle will move really closely with unemployment,as you would expect. If you think about thechanges in unemployment, they roughly go up between1.7 times and 2.25 times in a recession, and the primecredit card issuer will see roughly that same sort ofincrease in credit losses.

Over that time frame,whereas an American Express could actually see a littlebit less than that. So if it was to go up twotimes, you might see American Express go up 1.8times. And so that makes a bigdifference as far as the cyclicality of thebusiness, the overall risk to earnings, and returns. It's really one of thereasons why investors kind of focus on this stock in adownturn.

It's considered a safetyplay and that's why we're outperformed with the stocktoday. In recent years, Amex hasbegun to diversify its customers further, mainlytargeting millennials and underbanked Americans. I really think that Amex isdoing a good job winning over younger customers aswell. They've talked about howabout 60% of their new card acquisitions are Gen Z andMillennials, and I think.

They've done some creativethings there with experiences, whether it'stravel or dining or exclusive concerts, likethey did one with Jack Harlow. And, you know,they're just trying to reach a younger audience thatwill be the leaders and heavy spenders of tomorrow. Amex has also mademeaningful investments in scaling and improving itstechnology, allowing its offerings to be morecompetitive against the rise.

Of alternative premiumcards. They continue to makeprogress abroad. They were actually thefirst US based credit card issuer to win approval inChina, and they're partnering with localbrands there to really tap into that increasinglyaffluent consumer audience. In Europe, this is likeFrance, Germany, credit card adoption, both by affluentconsumers and by small businesses, is much lower,much lower than it is, say,.

In the US, the UK andAustralia, where it's quite high. And so there's a hugeamount of just growth opportunity. I think increasingly they'realso tech companies in a way that whether that's theapps and the web experiences that they provide or all ofthe data that they're gathering. You know, somepeople say that a concept like buy now, pay latercould be a big threat to the Amex model.

They actually were thefirst traditional credit card issuer to unveil theirversion of that. A few years ago, they cameout with Amex Pay It Plan It, which I think againspeaks to offering something for everybody. The biggest threat for Amexis the competition within the credit card industry. To me, the biggest weaknessor danger for American Express really is thatmarketplace power of Visa.

And MasterCard and whatthey may decide to do with it, which may or may not beanything that American Express can control. The value that they are ableto offer from the closed-loop model isdistinctive and unique. But as things like dataanalytics and AI get better and the wholeprocess of issuing cards and managing card programsbecomes more digitized, as their technology advances,those open-loop card.

Programs can betterreplicate what American Express is able to douniquely. So they can run betteranalytics to understand your consumer spending so theycan better tailor your rewards. But while loan lossprovisions have increased following a period of highinflation, experts believe that Amex is more thanready to weather a possible recession.

They're not by any meansimmune to a downturn. But at the same time, withthat high-spender affluent customer, those creditlosses are likely significantly lower thansome of the peers that are more focused on averageconsumer, even subprime borrowers. And so there'sno reason to think that American Express won't havea strong customer base after the next recession.

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