AmEx's (AXP) Cost Containment, Other Strategies to Aid Growth
American Express Co. AXP revenues have been increasing since 2016, led by a number of growth initiatives, such as product launches, enhancement of the existing features, price modification, signing of agreements and forging alliances among others.
However, the COVID-led fall in business volumes, which hurt American Express cross border as well as domestic business, weighed on the company’s full-year revenues. In 2020, the company’s non-interest revenues were down 20% year over year. We expect revenues to remain stressed for at least in the first half of 2021 as discount revenues, the biggest revenue driver and dependent on billed business, are expected to remain suppressed.
The company’s billed business is dependent on travel and entertainment expenditure, and non-T&E spend. As the T&E expense remains low, it will drag down the overall revenues. Another company in the same space is Discover Financial Services DFS, which too suffered COVID-led business declines.
Net interest income fell 7% in 2020 due to lower loans. This revenue driver is likely to stay at subdued levels at least through the first half of 2021 as demand for loans remains suppressed.
The company was, however, able to protect its bottom line via its cost-control efforts. Its total expenses declined 14% in 2020 as the company regulated its expense base while selectively investing in the areas crucial for long-term strategies. In 2021, the company expects its operating expenses to be $11.5 billion, indicating a fall from the reported 2019 levels as it steadily controls its operating expenses. This decline in expenses will aid margins.
American Express has been experiencing a rise in reward expenses and card member services for the past many years. These two categories constitute nearly 40% of the company’s total expenses. However, these expenses decreased in 2020. While card member rewards dropped 23% due to weak billed business, card member services plunged 45% due to contraction in usage of travel-related benefits following COVID-induced travel decline. This downtrend in card member rewards and card member services is expected to continue for some time now, given that billed business and travel are likely to stay muted. Reduction in the expense category will in turn aid the company’s bottom line.
Nevertheless, its progress in navigating the pandemic over the last year confirms the resilience of its differentiated business model, which includes a loyal and diverse customer base, a valued brand, its global merchant network and an integrated payments platform.
American Express received an approval to begin operating in China and to date, it has signed card-issuing agreements with 16 bank partners as well as merchant acquiring agreements with 17 partners. Plus, it formed key relationships with Alipay and WeChat.
The company continued to make consistent advancement in expanding its merchant acceptance footprint internationally, adding 3.7 million locations outside the United States that accept American Express while maintaining virtual parity acceptance with Visa Inc. V and Mastercard Inc. MA in the United States.
American Express began to ramp up its investments in rebuilding growth momentum. Its plan is to accelerate its investment activities in 2021 with a focus on firing up its core growth engine and scaling key next-horizon opportunities while retaining its financial strength and flexibility.
In its consumer and commercial business, American Express plans to constantly step up its Card Member acquisition activities, inject additional value into targeted products and continue with its strategy of periodic upgrades of its premium products.
Additionally, in its commercial business, the company plans to continue pushing its cash flow and supplier payment solutions beyond the card. In this vein, last year, the company acquired the assets and the team of Kabbage, a leading fintech company that provides cash-management solutions to small businesses. It is also making concerted efforts to expand the penetration of its AP automation solutions whereby volumes doubled last year albeit from a small base.
American Express is also investing heavily in new and expanded digital capabilities including its industry-leading mobile app, which received the highest ranking in terms of customer satisfaction in the J.D. Power 2020 U.S. Credit Card Mobile App Satisfaction Study.
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