The Great American (Express) Spin-off?

Not long after noted British writer Alec Waugh celebrated his 70^th birthday, he decided to write a book about the most interesting year of his life – a year so interesting that he’d live it over again if given the chance. Waugh, a globetrotting man of the world (credited with inventing the cocktail party when he reportedly served Rum Swizzles to friends he’d invited for tea one afternoon) chose 1931. That year, Waugh believed, captured the unusual state of the world between World Wars, two years into the Great Depression, two years before the repeal of Prohibition here in the U.S. and, more personally, the last year he was single and living in New York. His book, "A Year To Remember" was published in 1975, the year Waugh turned 77.
1975 was also the year that American Express launched its famous “Don’t Leave Home Without It” campaign starring Karl Malden. This iconic advertising campaign carried a message designed to burnish the company’s image as the status symbol for credit card-carrying consumers. That image – a card with lavish rewards and carried by the most affluent consumers and discriminating globe-trotting corporate travelers – simply furthered a brand positioning introduced to the world in 1958 when it launched.

Forty years later, 2015 is anything but the year that Amex would like to remember.

[bctt tweet="Forty years later, 2015 is anything but the year that Amex would like to remember."]

The Amex share price has fallen nearly 14 percent over the last 52 weeks.

At the close of the market on Friday (Aug. 21), its market cap had fallen, too, to $78.86 billion - more than $100 billion less than Visa’s (at $179 billion) and almost $30 billion less than MasterCard (at $107 billion).

Amex announced that it lost one of its crown jewel partnerships, the Costco card, to Visa/Citi in February. The Costco relationship accounted for 10 percent of Amex cards, 20 percent of its loans and a healthy portion of its annual volume. A few weeks later, JetBlue, a card partnership that Amex had since 2005 also pulled the plug in favor of a deal with Barclays and MasterCard.

In late July, Amex was hit with a class action suit over claims that it failed to disclose how material Costco was to Amex’s business. That announcement tanked its stock and wiped out close to $9 billion from its market cap.

Also back in February, a Federal District Court judge ruled against Amex in a lawsuit over its current practice to prohibit merchants from steering consumers away from its high-priced card to cheaper Discover, Visa and MasterCard cards. Unless it gets the decision reversed on appeal, Amex may be forced to lower its merchant fees so that merchants don’t do that. That decision would cause Amex to lose billions in fee revenue and, in the words of CEO Ken Chenault, to battle for its very “survival.”

In May, Amex tragically lost its President and successor to CEO Ken Chenault, Ed Gilligan. Chenault was forced to suddenly reshuffle the executive decks to fill the very large void that Gilligan left.

And, finally, in early August, activist investor, ValueAct ponied up a little more than a billion dollars to take a 1.1 percent stake in Amex. Amex management, in response, said that they “look forward to…a constructive dialogue” while some analysts say that they don’t expect big changes as a result of the ValueAct investment. Yeah, right. ValueAct may not be the scorched earth sort of activist that others in the category are, but no one plunks down a billion dollars simply to exchange pleasantries with management. ValueAct and its leader, Jeff Ubben, obviously sees value in the brand, but will likely force changes in order to recapture what it's recently lost.

Amex can certainly use the help.

The brand that has reinvented itself successfully any number of times over its 165-year-history — from Pony Express messenger to traveler’s cheque innovator to premium charge card product — is perhaps at its most important crossroads yet as a brand.

It, frankly, seems a little lost.

While the rest of the world has spent the last several years aggressively prepping for the shift to digital and mobile, Amex seems like a passive bystander.

It made a big splash with the hiring of a few senior execs from a few mobile payments startups in 2012, but it’s been crickets ever since. Granted, it did a few things with Foursquare and card-linked offers, made a couple of investments in mobile innovators, was part of the Apple Pay launch in September of 2014 and finally launched its own version of a digital buy button last month (Express Checkout), but it hasn’t exactly set the world on fire with any of its digital/ mobile payments initiatives, thus far. And, traction has been elusive.

The Enterprise Growth side of Amex, the group positioned internally and externally as the engine of its future growth, seems even more adrift. Aside from the BlueBird/Serve deal with Walmart driven by now-PayPal CEO Dan Schulman when he led that group, it seems like a total flail. Serve’s announcement last week that it would pay rewards on debit cards was met with a collective yawn across the payments ecosystem. Who knows, maybe that’s the best that can be done with a group that’s prohibited from leveraging existing Amex assets to build innovative new businesses and instead is forced to use the bad technology it inherited as part of the failed Revolution Money acquisition for $300 million in 2009 to create new things.

The only thing of recent note that shows any signs of life is the launch of Plenti, the coalition loyalty program that assembles non-competing merchants into a single program in which any consumer — Amex cardholder or not — can participate, even if that cardholder uses cash to pay for purchases at Plenti-affiliated merchants. Plenti CEO Abeer Bhatia reports strong results so far, with millions of consumers having enrolled in the program, and a robust pipeline of interested merchants. Merchant coalitions have never been raging successes though, and it remains to be seen whether Plenti’s pledge of no competing merchants will prevent it from getting the scale it needs to attract and engage consumers.

The big head-scratcher is how all of this has happened to such a stellar brand with such an enviable customer base and, until recently, rock solid financial performance.

Amex’s preeminent brand in the credit card world has been honed on the backs of the consumers who it courts and who use its card products. Amex is quite public – and proud – of the fact that its cardholders earn, on average, 60 percent more than the run-of-the-mill credit card holder. Those cardholders charge more than half of all of their personal spending on the card because they like the rewards they get when they do. And, they can —cardholders earn enough income to pay off the balances each month on a card that offers most of them virtually unlimited monthly spending privileges. (Non-Amex customers, by comparison, charge roughly a third of personal spending on their credit cards.)

If you need further convincing of the spending sway of the Amex customers, look no further than the results of its second annual Platinum Card Luxury Survey. The Amex Platinum card carries a $450 annual fee and offers a number of VIP and concierge services in exchange. A press release announcing the results touts that the “wealthy are spending lavishly on luxury goods and services.” The households surveyed – Platinum cardholders — are described as being in the top 8 percent of income earners in the U.S. who spend 20 percent of their income on luxury goods and services and who live in households with annual incomes of ~$236,000.

Affluent customers are also among the most demanding, so it costs lots of money to shower such cardholders with enough goodies and services to keep them happy – and happy enough to pay the annual membership fee to keep the card. That’s, of course, at the root of the love-hate relationship Amex has with merchants.

On the one hand, Amex has been able to support higher merchant fees because of the caliber of customer it drives to merchants. Consumers who spend 20 percent of their income on non-essential stuff certainly fall into the category of consumers that merchants want most to attract and least to offend.

On the other, consumers walking around with 3.7 cards in their wallets – and affluent customers in particular, have multiple ways to pay. It’s not hard for such a consumer to reach into her wallet to find another card to use at a merchant that either doesn’t accept or doesn’t want to accept an Amex card for a purchase they want to make.

Speaking of acceptance, that’s a bit of a sticky wicket for Amex, too. Outside of travel (airlines, hotels) and major merchants, Amex has a whole bunch of gaps in credit acceptance domestically and globally. And it has Z.E.R.O. debit capabilities. Yes, Serve is intended to be a debit stand-in, but prepaid has been a tough sell for just everyone in the space, and Serve is no exception. And, for the customers that Amex serves today, it is a total non-starter.

So, all of this then begs the question: What’s Amex to do?

There is no shortage of free advice out there.

TIME magazine said in June that MasterCard should buy it. Sure. That’s about as likely as Kim Kardashian swearing off selfies. And, the DOJ trustbusters would laugh that one out of D.C.

There’s of course the “why wouldn’t Apple buy them?” school of thought. Apple has a stash of cash and payments ambitions that need something to get those ambitions off the ground. And Apple Pay’s integration with Amex is among the more elegant. Amex cardholders and iOS users also overlap nicely in terms of both demographics, spending power and the subset of merchants at which it has acceptance and where those consumers like to shop. In fact, before Apple Pay launched last year, I wrote a piece intimating that Apple Pay could become the Amex of mobile payments. But I’m not so sure that Apple cares that much about payments to blow a hole in their bank account buying an asset whose future earnings are tied to the outcome of an Appeals Court hearing that could blow a big hole in its bottom line. Maybe that’s a wait and see more than anything, if anything at all.

A mash-up with Google would seem just as illogical for many of the same reasons and then some.

Then there’s the brand that has taken lots of pages out of the Amex playbook, as well as many of its top executives: Chase. Nah. They have their own plans and strategies to serve the customer base that Amex has and wants to grow – affluents and small business – with a lot of the assets and capabilities that Amex doesn’t have – digital and mobile – not to mention lots of the banking relationships of the Amex Platinum and Centurion cardholders. Chase doesn’t need Amex – they’re out to best them.

Then there’s PayPal. I said in June that I thought that Amex might be looking wistfully at PayPal or maybe even vice versa for some sort of a mash-up. For PayPal, an Amex mash-up would get them access to lots of cardholders who spend a lot of money and who probably have PayPal accounts but may not use them – and a data/loyalty engine that is second to none. For Amex, a tie-up with PayPal would give them instant digital street cred. And then there’s the interesting and obviously ironic turn of events that would come with PayPal CEO Dan Schulman getting his corner office back (or more likely Chenault’s) as a way to solve for Amex’s succession issues. But with a PayPal valuation at $50 billion, they’re much too much for Amex to swallow.

In fact, at this point, Amex might be hard-pressed to make any big moves along those lines.

Unless.

Amex breaks itself apart. And spins off everything but the part of the Amex franchise that is sticky and drives a ton of spend today.

Corporate cards.

And becomes a wickedly competitive corporate/business to business payments operation.

According to Amex’s website, the Corporate American Express Card offers a range of cards and services in more than 40 countries. There are cards for various corporate use cases (e.g. meeting cards and purchase cards). There’s also the American Express Business Card, which offers many of the same benefits, with the main difference being who assumes liability for purchases made on the card (for the Business card, the individual business owner is liable, not the company).

As a closed loop player, data is an asset that Amex has plenty of and says it offers businesses a number of online data and reporting tools that make expense reconciliation easy and transparent. On the B2B side of payments, that’s critical, often hard to obtain and one of the real areas of friction that holds B2B payments innovation back. Amex also offers a range of P-card solutions that came along with an acquisition it made of GE’s corporate payment services business in 2008.

Its acceptance limitations are less of an issue on the corporate and business side, too. Those cards are accepted at all of the places corporate/business users need to use them: hotels, airlines and transportation and travel bookings sites that corporate road warriors use when out and about, along with a variety of vendors that businesses use to make purchases. Along with that acceptance, at least for the large players, probably comes already negotiated merchant discounts.

And, importantly, the corporate card space doesn’t come with the regulatory overhang that the consumer card business – and Amex, in particular, has to deal with.

Amex has a compelling set of assets on the corporate and business card side, and a set of rails that is used today to move money between corporate cardholders and the places they use their cards, and tomorrow, potentially the downstream businesses that those businesses do business with. The corporate/commercial payments space is one that’s ripe for innovation using solutions that Amex seems in a position to enable – and even ignite, in a space that could really use it.

We could also really use a specialized high-class B2B payments provider. That’s an area with huge potential—and revenue. Sure, it’s not as sexy as Apple Pay, or lots of the whiz-bangy consumer initiatives coming out of Silicon Valley, but, hey, shareholders like Warren Buffett aren’t investing in Amex to be cool.

Of course, this is all sheer speculation on my part – I have absolutely no knowledge of anything that may be afoot, and if I did, I’d obviously not be writing about it. But Amex is shedding (or has shed) some of its assets – the travel business and its publishing operation. So, getting more focused on its core is definitely on its mind. Focusing only on commercial/corporate payments core would open up an interesting set of possibilities for Amex to shed the part of its business that’s most at risk today – its consumer card portfolio - to concentrate on what could hold the most potential tomorrow.

So, with activist investors’ afoot and a little corporate soul-searching, 2015 could turn out to be a year for Amex to remember after all. There’s still four months to go.

(P.S. Like this discussion? There’s lots more where this came from at our 2^nd annual “What’s Next In B2B Payments Innovation” Summit in NY on October 14^th. Why talk about the same-old, same-old when you can be part of a real discussion on the future of business to business payments and move the business forward productively. To join me and some of brightest minds in commercial/business payments driven to move the sector forward, the innovators who are emerging to help lead the way and the investors who are putting their money where their insights are, register here.)