American Express Company - SWOT Analysis

SWOT Analysis - Overview

American Express Company (Amex or 'the company') is a leading global provider of travel-related services, payment services, financial advisory services, and banking services. The company's spend-centric credit cards business is its key strength. This business model is further strengthened by the company's global presence and strong brand image. However, the dynamic regulatory landscape that the company is currently encountering could increase compliance costs for Amex.

American Express Company - Strengths

Strength - Ability to forge partnerships across the world

The company has demonstrated its ability to forge partnerships with other influential financial services providers, retailers, and technology providers. For instance, during 2013, Amex signed a partnership agreement with Equity Bank as per which Equity Bank acts as the exclusive issuer of American Express Card products in Kenya, Tanzania, and Uganda. Amex signed an agreement with an investor group led by Certares to create a joint venture for its global business travel division, in March 2014. The company expanded multi-year agreement with Universal Studios that brings the strength of Universal's theme parks and filmed entertainment together with the brand of American Express, in the same month. The agreement also enables Amex to acquire new card members directly through Universal theme parks and websites. Furthermore, China Minsheng Bank (CMBC), a commercial bank in China, and Amex jointly launched the CMBC American Express Multi-Currency Platinum Credit Card, in April 2014. This is the second product that has been launched by CMBC following the rollout of the CMBC Platinum Shangri-La American Express Card in 2012. Amex entered into a new card-issuing partnership with BBVA Compass, which brings together three global brands: BBVA, American Express, and the NBA, in February 2015. During November 2015, Amex and Airbnb together announced a technology integration enabling Amex cardholders to sign up for Airbnb and book stays with Amex user ID and password.

The company's ability to forge strong global partnerships with influential financial services providers, retailers, and technology providers enables it to expand its customer base, and continue product innovation. These, in turn, help the company sustain profitable growth.

Strength - Diversified revenue streams

The company's revenue streams are diversified by product and geographic markets. For instance, in FY2015, Amex generated revenues through four reportable business segments: the US card services (57.3% of total revenues in FY2015), global network and merchant services (16.8%), international card services (15.3%), and global commercial services (10.2%). Additionally, the company generated 0.4% of total revenues from corporate and other activities. Similarly, it generated revenue through four geographic markets: the US, the company's largest geographic market, accounted for 75.2% of the revenues; followed by EMEA (Europe, the Middle East and Africa) (9.6%), JAPA (Japan, Asia/Pacific and Australia) (8%); and LACC (Latin America, Canada and Caribbean) (7.2%). Diversified revenue streams are providing the company with better revenue visibility.

Strength - Spend-centric model in credit cards business

Amex's 'spend-centric' business model (in which the company focuses primarily on generating revenues by driving spending on its cards and secondarily by finance charges and fees) has significant competitive advantages. Card issuers generate the majority of their income through some combination of customer spending (which generates payments from merchants for card transactions), lending (which generates finance charges on revolving credit balances) and customer fees. Amex has strength in all three revenue streams and has a competitive edge in spending. On average, US card-members spend about four times as much on their Amex Cards as they do on other cards. For merchants, Amex card-members' higher spending represents greater value to them in the form of higher sales and loyal customers, which gives the company the ability to earn a premium discount rate. As a result, Amex can generate higher revenues from spending and has the flexibility to offer more attractive rewards and other incentives to keep customers spending more on their cards. This, in turn, drives more business to merchants that accept Amex cards. This business model gives the company a competitive advantage that the company can leverage to provide more value to its card-members, merchants and card-issuing partners. Since Amex follows a spend-centric model, higher customer spends, premium discount rate charged by the company and higher level of card fees give it an overall revenue advantage. Though the company's spread revenues and back-end fees are clearly not as high as its competitors, nevertheless, its funding costs are also proportionately lower given the higher velocity-or spend per dollar of its receivables. As a result, Amex's overall profit per account is greater than its lend-based peers.

American Express Company - Weaknesses

Weakness - Lack of point-of-sale debit card services

Most financial institutions that offer demand deposit accounts also issue debit cards to permit depositors to access their funds. Use of debit cards for point-of-sale purchases has grown as most financial institutions have replaced ATM cards with general purpose debit cards bearing on either the VISA or MasterCard networks. As a result, the volume of transactions

American Express Company- Financial and Strategic Analysis Review Reference Code: GDFS34527FSA Page 3

American Express Company

made with debit cards in the US, as well as globally, continued to increase significantly. Unlike VISA and MasterCard, Amex does not issue point-of-sale debit cards on the Amex merchant network. With debit cards becoming increasingly popular, this puts Amex at a disadvantage against VISA and MasterCard, its most significant competitors.

Weakness - Weak profit management

Amex's profitability is low when compared to its peers such as MasterCard. For instance, in FY2015, MasterCard's revenue per employee ($855,486.7) and net profit per employee ($336,991.2) were higher than Amex's revenue per employee ($598,868.6) and net profit per employee ($94,215.3). Amex's lower profitability is attributable to higher employee base. For instance, in FY2015, Amex employed 54,800, compared to 11,300 employees at MasterCard. Weak profit management is leading to lower profitability at Amex.

American Express Company - Opportunities

Opportunity - Growing e-commerce sales

With an increase in interactive methods and limitless content, retail e-commerce is growing at a faster rate globally. According to the US Census Bureau, the estimate of US retail e-commerce sales for the first quarter of 2015, adjusted for seasonal variation, but not for price changes, was $80.3 billion, an increase of 3.5% from the fourth quarter of 2014. Total retail sales for the first quarter of 2015 were estimated at $1,151.2 billion. The first quarter 2015 e-commerce estimate increased 14.5% from the first quarter of 2014 while total retail sales increased 1.6% in the same period. The e-commerce sales in the first quarter of 2015 accounted for 7% of total sales.

According to industry experts, e-commerce is the fastest growing retail market in Europe. Sales in the UK, Germany, France, Sweden, The Netherlands, Italy, Poland and Spain are expected to grow from £132.05 billion ($217.5 billion) in 2014 to £156.67 billion ($258.1 billion) in 2015 (an increase of 18.4%), reaching £185.44 billion ($305.5 billion) in 2016. In FY2015, overall online sales are expected to grow by 18.4% (same as 2014), but 13.8% in the US on a much larger total.

Amex provides a flexible global solution for accepting most major payment types. The company's American Express Payment Gateway is a global e-commerce solution, which allows merchants to securely accept and route most major payment type transactions from their website or virtual terminal to more than 30 acquiring banks globally. Thus, the growing e-commerce sales would act as a catalyst in increasing the company's top line growth.

Opportunity - Huge opportunity in global small business spending

As per industry estimates, for the vast majority of global small-business spending, only cash and checks are used instead of credit cards. In fact, the US small businesses use credit/charge cards for only about 15% of their spending and that amount is likely to be even lower internationally. Moreover, the midsize companies worldwide use cards for less than 10% of their major purchases such as travel and entertainment and office supplies. As a matter of fact, out of the total global consumer spending of $28 trillion each year, only 14% is carried out on charge, credit and debit cards. The overall spending pattern, however, has been witnessing a continuous shift from cash to cards, which presents a significant opportunity for the company. Considering the fact that the company has more than a billion credit and other payment cards in circulation worldwide, it is well poised to exploit this opportunity.

American Express Company - Threats

Threat - Competitors' converging business practices

Historically, Amex experienced lower card member attrition due to its reward programs and the prestige attached to owning Amex card. However, the company's competitors have also been trying to imitate Amex's reward programs or launch other reward programs. For instance, in 2010, Barclaycard launched Barclaycard Freedom in the UK. The scheme was the first in the UK to offer point-of-sale redemption, with consumers gaining 'reward money' worth 1% of the value of a transaction with a participating merchant, in what is effectively a mix between a cash back system and a coalition loyalty program. Within one year of the launch, the scheme has encouraged Barclaycard Freedom cardholders to spend on average 14% more in partner stores than other credit card customers. The launch of such rewards programs by other competitors could increase the attrition rate among Amex card members.

Threat - Increasing penetration of alternative payment platforms

Penetration of alternative payment platforms has been gaining popularity in recent years. These alternative payment platforms include aggregators (such as PayPal), wireless payment technologies (including using mobile telephone networks to carry out transactions), prepaid systems and systems linked to payment cards, and bank transfer models. New technologies, together with the portability provided by smartphones and tablets and evolving consumer behavior with social networking, are rapidly changing the way people interact with each other and transact business all around the world. In this connection, traditional and non-traditional competitors such as mobile telecommunications companies are working to

American Express Company- Financial and Strategic Analysis Review Reference Code: GDFS34527FSA Page 4

American Express Company

deliver digital and mobile payment services for both consumers and merchants. Increasing penetration of alternative payment platforms makes it difficult for the company to sustain/increase market share.

Threat - Dodd-Frank regulation

Regulatory changes are increasingly turning pro-consumer, and to an extent tough for payment network operators. For instance, Congress passed Dodd-Frank, which the US President Barack Obama signed into law in 2010. Dodd-Frank could limit Amex's income earned through interchange fees. Additionally, Dodd-Frank prohibits payment card networks from restricting merchants from offering discounts or incentives to encourage customers to pay with particular forms of payment such as cash, check, credit or debit card, provided that such offers do not discriminate on the basis of the network or issuer. As a result of these new laws, customers may be incentivized by merchants to move away from the use of charge and credit card products to other forms of payment, such as debit, which could adversely affect Amex's revenues and profitability.

share measurable core strategic Amex goals for each of the three to four areas identified from the SWOT analysis, including contingencies?

prioritize the core strategies of Amex, estimate the ease of achievement and time to completion?

recommend an organizational structure assessing the impact of the strategic plan on organizational culture for Amex?

recommend marketing positions and opportunities for growth for Amex?

explain plans to measure the success of the strategic plan for Amex?