Amex Return on Investment Research Paper

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American Express

Creating ROI in a New Environment

American Express (Amex) is one of the world's largest financial services company in the world, as well as the largest provider of many travel services. The company has a long history of building value for consumers by offering many services that are often free to them. Most credit card companies charge the consumer an interest rate for the use of their services, however Amex created an innovative strategy to differentiate that model. AMEX typically does not charge interest rates and the company generates its revenue through merchant processing activities, annual fees, and various fees. However, has struggled with many of its growth initiatives in recent years and faces and increasingly competitive environment in the financial services industry as there is a high level of innovation from within the industry. This analysis will consider the company's current operations in light of the evolving industry and recommend a strategy for capturing greater returns on their investment in future initiates.

Statement of the Problem

There has been a substantial amount of evidence presented that indicates that Amex will have to innovate to stay competitive in the evolving industry. For decades the company had a strong niche with loyal clients, but it is now experiencing increased competition and has lost some key clients. Costco, for example, is ending its 15-year relationship with AmEx and defecting to Citigroup and Visa (Franklin, 2015). It has also lost a major antitrust lawsuit that will influence its future opportunities. Therefore, the problem for Amex is that its current model will no longer provide the same types of returns and the company will have to create a new strategy based on internal and external aspects that can help it diversify its product and service mix.

Purpose of the Paper

This analysis will conduct research on the company, the industry, and the regulatory environment and formulate a strategy for increasing the company's returns on its future investments and recommend where it might best focus its resources.

Research

It has been estimated that card companies charge merchants more than $50 billion a year to process consumer transactions (Stempel, 2015). For decades, American Express was the undisputed credit card of choice among corporate road warriors, the wealthy and the well-traveled, who lived by the company's slogan, "Don't leave home without it" (Franklin, 2015). They developed a model that was different than most of its competitors and did not charge them a monthly interest rate to use Amex service but rather charged the merchants a higher rate instead. They also offered many useful services that were relevant to the business class consumers and was able to create a strong brand image and loyal consumer base. Furthermore, Amex was also able to craft many sub-niches in which conduct more focused target marketing such as these segments (DogFrog, 2016):

The American Express Costco credit card targets an audience who shops at bulk warehouse retailer Costco. The card offers an annual rebate for redemption at Costco warehouses for cash or merchandise.

The American Express Mercedes-Benz credit card targets niche, high-income earners and spenders that are loyal to the Mercedes-Benz brand. Signing up for this American Express card option ties the user to both luxury, prestigious brands.

The partnership that Amex formed with Costco represented an exclusive partnership that lasted sixteen years before Costco announced that it was breaking ties. The loss of this client for Amex represented a fairly major announcement since Costco was a valuable client. For some consumers, American Express's exclusive relationship with Costco was the only reason to get an American Express card at all, said Eric Wasserstrom, a managing director at Guggenheim Securities LLC, who covers American Express (LaMagna, 2016). Furthermore, consumers tend to be brand loyal, especially in the Amex niches, and will be loyal clients for many years. As one industry analyst explains " ... and AmEx, more than any credit-card issuer has cultivated that sort of brand loyalty over the years. People are like, 'Well, I'm an AmEx user,' and when that changes, that can be disruptive" (LaMagna, 2016).

Costco will automatically be sending their customers new Visa cards to their members and this segment will be transferred from Amex's accounts all at one time. Thus Amex will be losing a bulk of its clients all at once. While this is expected to have obvious economic impacts on the company, it is only one of several segments that they manage.

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American Express's Chief Executive Ken Chenault has said losing the partnership with Costco will impact one in 10 AmEx cards in circulation and would likely eat into the company's earnings in 2015 and 2016 (LaMagna, 2016). Furthermore, it is likely that Amex will use this opportunity to make special offers to this segment and could potential recapture some of its loses from the separation.

The other recent event that was highly publicized and will affect Amex's future operations is the decision by U.S. District Judge Nicholas Garaufis in Brooklyn to enter a ruling that Amex's policy of denying its merchants to make recommendations to their customers about charge card choices and this "imposed actual, concrete harms on competition in the credit and charge card network services market," Garaufis wrote in a 150-page decision (Stempel, 2015). When entering into a contractual agreement to accept Amex cards, Amex required to the merchants to stay neutral due to the fact that Amex charged higher fees and thus the merchants would have an incentive to persuade consumers to use other payment options if they had the ability to do so. It also said its merchant rules help it compete with Visa and MasterCard, which together have more than 1.1 billion cards in the United States versus 55 million for American Express and plans to appeal the decision (Stempel, 2015).

Beyond these two issues, Amex also faces a significantly volatile environment due to the evolution of the industry. The way that consumers are paying for things in general has been revolutionized by the technological capabilities that are driving them. The ability to pay for goods and service on mobile platforms without actually having to use their cards is affecting both traditional commerce as well as online commerce. For example, when a customer uses a service like Uber for example, the payment is processed through the mobile app, not in person, and this trend is accelerating over similar platforms.

American Express CEO Kenneth Chenault previously described the trend as:

"Mobile is redefining both online and offline commerce. The penetration of m-commerce in e-commerce was around 0.09% [Meaning that less than one percent of e-commerce transactions happened on mobile devices --Ed.]. By 2017, it's projected to be at 26% and that's just penetration in e-commerce" (Hempel, 2014).

This creates something of a challenge as well as an opportunity for Amex. One of the company's strengths is that it has the largest global integrated platform however it needs to leverage this platform to make seamless transactions in new mediums. For example, one initiative already under development is that Amex has begun teaming up with various businesses to allow cardholders to pay with their Amex points at the point of sale, including Amazon, the car-sharing service Uber, New York City taxis and McDonald's (PYMTS, 2015).

The data that the research collected can be summarized in the following SWOT graphic

Recommendations

The first recommendation is to target the lost Costco market with a new service offering as soon as possible. It is likely that this niche will have a positive perception of their previous relationship with the Costco/Amex card and it is reasonable to suspect that this predisposition will lead to a high conversation rate on a new offer from Amex. Furthermore, this would help to mitigate the losses that were recently experienced through the break up with Costco. Given the data the research identified, the is reason to suspect that the industry will continue to evolve into mobile spaces. It is thus recommended that Amex devote a substantial amount of resources to innovations in this space to proactively capture as much market share as possible.

Conclusion

American Express (Amex) is one of the world's largest financial services company in the world, as well as the largest provider of many travel services. It has developed a substantial loyal client base, especially with business customers, has a strong brand image, and the leading global payments platform. However, recent events such as the Costco break up and the recent court decision has shaken many investors' confidence levels and the stock price has dropped significantly. It was recommended that Amex first mitigate the damages from these events as comprehensively and as quickly as possible by creating new service offerings. It was further recommended that Amex try to innovate in the mobile platforms which the research indicated will likely be the next major.....

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