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In an effort to reduce operating costs, American Express is cutting 5,400 jobs in its travel services division. As one of its financial goals for the future, Amex is looking to keep operating expense growth to less than 3 percent per year.

American Express targets the young, underbanked in bid to bolster bottom line

by Anthony Valentino
Mar 5, 2013

A changing commercial landscape has forced the American Express Co. to make some difficult business decisions of late.

The most recent chapter in the story of the esteemed New York-based global services company has been marred by a fourth-quarter $400 million restructuring charge related to the elimination of more than 5,400 jobs in Amex’s fabled travel services division.

From the perspective of its travel business, it would appear that not all is well with American Express. Reality, however, paints a somewhat sunnier picture.

The company has navigated a tempestuous global economy by reshaping itself through improvements to its existing product portfolio, the creation of new products and services and the acquisition of new business entities such as the Munich-based marketing firm Loyalty Partners GmbH.

Amex’s post-recession journey has included the recognition that perhaps its travel division is moving toward obsolescence with its viability in the market being quashed by the age of self-bookings and seemingly boundless online travel portals.

“We are reengineering the business model in Global Business Travel to reduce our cost structure and invest in capabilities related to the shift of customer volumes to online channels and automated servicing tools,” said Amex’s vice president of corporate affairs and communications Diana Postemsky.

While reinvention of an individual business segment holds promise for Amex, perhaps most crucial to lasting growth going forward is the company’s ability to shed its traditional reputation as the high-income earner’s card.

And executives at American Express have accepted that this type of revenue diversification is a pressing matter. Over the past few years, the company has introduced products that target financially underserved and lower-income households, in a strategic shift that demonstrates that the company is serious about making inroads with new customer bases.

In March of 2011 the company introduced Serve, a digital wallet and payment account that looked to usurp Paypal’s overwhelming footprint in that market.

In the fall of 2012 the company again expanded beyond its historic target market. This time, Amex teamed up with Wal-Mart Stores Inc. to introduce Bluebird, a prepaid debit card product that functions as an alternative to fee-based checking accounts, and also offers bill pay services.

“The financial services landscape is changing. Technological advances, regulatory changes, and evolving consumer needs are redefining payments ranging from prepaid, to checking and debit,” said Dan Schulman, Amex’s group president of Enterprise Growth. “Bluebird is our solution to help consumers who currently may be poorly served by traditional banking products.”

Bluebird has been a success story for American Express , providing non-credit card revenue momentum that Amex looks to continue well into 2013 and beyond.

Since its inception last autumn, around 575,000 accounts have been opened with $275 million in funds added. Officials say 85 percent of enrollees are new customers to the American Express franchise and 45 percent are under the age of 35, another demographic where Amex customarily lacks staying power.

And Wall Street has taken notice. “In terms of the Bluebird program, we estimate that it could add around 10 to 15 cents to earnings per share over the next three years,” said Sameer Gokhale, managing director of consumer finance equity research at Janney Capital Markets. “It’s a very new program, so it will take a while for it to be fully adopted. Having the distribution into the market through Wal-Mart is very attractive for customers.”

American Express is also making its once-unconventional appeal to Generation Y through social media. The company recently announced an enterprise with Twitter that allows customers to pay for goods and services by using a hashtag in tweets.

But to varying degrees, credit card providers and issuers face an unstable future.

Both the Durbin Amendment to 2010’s Dodd-Frank regulation and the Credit CARD Act of 2009 have fundamentally reshaped the environment in which American Express and its competitors operate.

The former has taken a major toll on the profitability of the debit card market for America’s megabanks. It mandates that banks with over $10 billion in assets charge equitable and proportional debit interchange fees. Amex, with its across-the-board reliance on credit rather than debit payments has escaped largely unscathed.

The latter, signed into law in May 2009 by President Barack Obama, places certain limits on how credit card companies can squeeze fees out of consumers.

To make up for lost revenue in the debit card sector, banks that are also credit card providers are making -- and will presumably continue to make -- a momentous push to bring consumers back into the credit card market. This is an area that had seen a substantial contraction during the recession due to tighter underwriting standards and general consumer apprehension.

The shift for many of Amex’s competitors will be tricky, however.

Several big banks are shrinking their credit card portfolios substantially in an effort to control costs or dispose of riskier assets. In just the past few years alone Bank of America has pared its card portfolio from nearly 150 cards to less than 50 and in 2010 Citigroup unloaded more than $1.5 billion in private-label credit cards to GE Capital.

At a Feb. 6 financial conference, , Chennault and Stephen Squeri, group president of global corporate services presented Amex’s specific financial goals for the future.

Most importantly, these targets included 8 percent revenue growth, a 25 percent return on equity and 12 to 15 percent EPS growth, the latter of which is expected to come from tightly controlling the company’s operating expenses. Company officials also stated that they hope to see operating expense growth held to less than 3 percent in the future.

Because Amex can manage capital with stock buybacks, the earnings per share target is achievable, but will be tough, notes Scott Valentin, managing director at Arlington, VA-based FBR Capital Markets.

“I think the ROE will definitely be the easiest to achieve for them. Even without growth they can achieve 25 percent ROE,” he said.

When the travel division layoffs were announced Amex also revealed that its total staff at the conclusion of 2013 is expected to be in the neighborhood of 4 to 6 percent less than where it began the year. Since CEO Kenneth Chennault took over the company’s reins in 2001, Amex has shed more than 17,000 from its payroll. At present, American Express has about 63,500 employees.

“A lean operating structure is a critical advantage for any business,” said Chennault. “That, along with the flexibility to allocate resources toward growth initiatives, should put us in an even better position as we seek to deliver strong results for shareholders.”

Even though 2012 revenue for Amex grew 5.4 percent to $31.6 billion, from $30 billion the prior year,the company’s net income sank more than 9 percent to $4.5 billion, $3.89 a diluted share. . Amex’s net income was dragged down partially by heightened operating costs, which surged nearly six percent in 2012 to $23.1 billon.

Amex has also kept its delinquencies low, with a 1.2 percent rate in November and December 2012. That number was the lowest amongst the six largest card issuers and was well below the 3.61 percent noted by Capital One Financial Corp.

Despite a sputtering U.S. economy, Amex shareholders have been treated to a 53 percent rise in the company’s stock price since the start of 2011. When looking at its primary competitors, however, the company’s stock growth looks tepid.

Shares of both Mastercard Inc. and Visa Inc. more than doubled during the same time period, and shares of Discover Financial Services surged more than 80 percent. At midday Tuesday AXP was trading around $64 per share.

To catch up with its rivals, experts say, American Express will need to achieve the financial goals its executives set forth.

All have their challenges, but perhaps the most critical will be growing revenue and controlling operating expenses. If the company meets those goals, Amex would likely see the earnings per share growth that its executives have been promoting.

Generally speaking, revenue growth for Amex is intricately tied in with the progress made by the U.S. economy. The company’s billed business, or the dollar amount of charges on all its cards, reflects personal consumption trends in the economy..

Since the first quarter of 2009, U.S. quarterly GDP growth has exceeded 4 percent just once, in the fourth quarter of 2011. This, coupled with unimpressive personal consumption and gross investment growth, could pose problems for Amex.

“The fact that they have done it in the past does not necessarily mean they will be able to achieve it going forward,” said Gokhale. “The thing that they are very careful to emphasize that it is an 8 percent on average over time estimate. In the current environment, it is possible they come in shy of that number.”

Gokhale expects Discover, Capital One and JPMorgan Chase to provide the sternest competition for American Express going forward. However, he says Amex holds a capital investment advantage over its competitors that could pay huge dividends down the line as card companies fight for share of a limited pool of customers.

“There are few large competitors and they are all going after the same market share,” the analyst said. “The question is who will be able to pull ahead of the pack? To the extent that (Amex is) able to reinvest in marketing, promotion and rewards when other companies will not be able to invest as much -- that may set them apart going forward.”