Photo — Please put this mug shot of Chris Hopkins of Barnett & Co. in our system to use every other Wednesday when it will run with his column.Venerable credit card company American Express is a household name. But in a rapidly changing world, AmEx has struggled to keep pace and its stock price is showing the stress.
Shares of American Express are down by a third over the past year, lagging its more nimble competitors Mastercard International (up 7 percent) and Visa (plus 15 percent). Recent developments in alternative payment systems as well as shifting business alliances have left the once-dominant issuer in need of a makeover. Given its brand equity, reputation, and enviable assets like its travel services, the firm still occupies a significant place in the panoply of card issuers. But change is in the wind and AmEx is grappling with options to revive its flagging fortunes.
American Express began life in 1850 as a package delivery service. Two of its founders, Henry Wells and William Fargo, later went on to establish Wells Fargo (which also grew into a major financial services juggernaut). Shipping cargo and parcels from eastern cities to the western frontier was slow, costly and replete with risk of loss. American Express established such a reputation for safe transit that banks came to depend heavily upon them for delivery of stock certificates and currency.
The firm ultimately evolved away from delivering bank paper to issuing its own financial products, beginning with money orders in 1882. They created the traveler’s cheque in 1891, and by the turn of the century had established deep roots in U.S. and European financial markets.
AmEx waded into the travel business during World War I, booking passage on transAtlantic steamship voyages and arranging hotel accommodations for a fee.
Credit cards are ubiquitous today, but when American Express entered the market the concept was still novel. In 1950, Diners’ Club introduced the first true charge card accepted at multiple establishments. American Express introduced the iconic green card we recognize today in 1958, the same year California-based Bank of America launched the “BankAmericard” (known today as Visa).
The company has faced down many existential threats during its lifetime, from two World Wars and the Great Depression to its ill-fated investment banking ventures of the 1970s and 80s. In each case, swift and decisive actions steered the ship away from the rocks. Today new challenges lurk.
After sixteen years, Costco announced it would drop American Express as its sole credit card partner in favor of VISA. Following that disappointing news, Fidelity Investments and Jet Blue also left AmEx for a different dance partner. Those co-branding arrangements had generated millions in marginal revenue that will be difficult to replace and may incent customers to move business to VISA partners.
Meanwhile the company faces an assault on a different front: alternative payment methods. Merchants are generally tied to one of four major payment processors, including AmEx. But a consortium of large retailers is pursuing an alternative clearing technology outside the systems of the card companies. This effort has produced disappointing results so far, but the threat remains and the merchants are clearly motivated to reduce the exchange fees they pay.
If that weren’t enough, the age of direct airline booking and the popularity of flight and hotel resellers like Expedia and Travelocity present obvious impediments to AmEx’s traditional travel agency and planning business.
American Express clearly still enjoys a cachet with business travelers and is not likely to stand idly by as change engulfs its franchise. Planned cost cuts totaling $1 billion through 2017 should help, and the stock is certainly more reasonably valued after its 35 percent decline. Still, investors might hold off until they see another statement or two.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.