Faced with the imminent loss of its Costco customers and battered by the strong dollar and feisty competition, American Express yesterday said it would cut $1 billion in expenses over the next two years. Marketing and promotional costs are among the areas it will target.
AmEx’s fourth-quarter profits were down 38% from a year ago — $899 million versus $1.44 billion, it announced in a release — but as an indication of how bad things have looked from the outside, that performance actually topped some analysts’ expectations. Its stock was down about 4% in after-hours trading based on glum earning projections.
"Our 2015 results and outlook reflect the reset in co-brand economics, pressures on merchant fees, the evolving regulatory environment and intense competition that have been re-shaping the payments industry,” CEO Ken Chenault said in the release. He also pointed to “cyclical factors in the broader economy.”
“Let me acknowledge that the performance we’re discussing today is not what we or you or I are accustomed to seeing from American Express,” Chenault said on an earnings call, reports Bloomberg’s Elizabeth Dexheimer. “We recognize that we are operating in a new reality.”
The company “earns most of its income on the fees it charges merchants each time one of its customers uses his or her card,” writes the AP’s Ken Sweet. “But aggressive competition from Visa, MasterCard and alternative payment providers like PayPal and Venmo has made AmEx look for alternatives. It has raised fees and interest rates on some of its products, going more for the type of income earned by more traditional credit card-issuing banks.”
Costco announced last March that, starting in April 2016, Citigroup Visa will replace American Express as the exclusive credit card at its 474 warehouse outlets in the U.S. and Puerto Rico. On the bright side of that departure, AmEx expects to earn about billion on the sale of that business.
“The company also lost a critical court case against the Justice Department after a federal judge ruled that AmEx’s merchant rules were anti-competitive,” the Wall Street Journal’s Robin Sidel and Tess Stynes report. “The future of those rules is now up in the air after an appeals court last month said that AmEx can continue to ban merchants from steering customers to other card brands.”
In another blow, “Fidelity Investments announced earlier this month that it would be ending its 12-year partnership with American Express and Bank of America,” CNBC’s Everett Rosenfeld reports. A co-branded partnership with JetBlue Airways also came to a close last year.
“To add to the difficulties, American Express president Edward Gilligan died suddenly while on an airplane. He was largely thought of as a potential successor to the company's long-serving current CEO, Kenneth Chenault,” the AP’s Sweet writes.
But, “the U.S. credit and charge card division did have a relatively strong quarter,” Sweet points out — with net income up 20%. “Its customers spent more, the company raised annual fees on its cards and earned more interest income on customers keeping a balance on their cards.”
That said, “we believe there is still further downside to go,” RBC Capital Markets Corp. analyst Jason Arnold writes in a research note cited by Bloomberg’s Dexheimer. “We continue to believe revenue growth will be tough to attain in the current competitive environment.”
One of the numerous uncertain factors cited in the company’s future, it says, will be its ability “to drive growth by developing and marketing value propositions that appeal to card members and new customers and by offering attractive services and rewards programs, which will depend in part on the company's ongoing investment in product innovation, marketing and promotion and acquisition efforts, including through digital channels; the ability of the company to update its systems and platforms to support new products, services and benefits; the degree of interest of card members in the value proposition offered by the company; the company's ability to tailor new products and services to make them attractive to card members; competition; and brand perceptions and reputation.”
Sounds like what everybody is dealing with, no?