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Could Apple Be The Next Amex, Or Could Amex Be The Next Apple?

We all watched yesterday as two of the NFL’s crown jewels battled it out for a chance at Super Bowl 50. Manning and Brady did not disappoint – unless you are a Pats fan. In which case, you’re pretty bummed out. Which I am — and I am. Oh well, there’s always next season.    

As earnings season hits its stride, we all watch as tech and financial services players take the field, too  – battling it out for the affections of analysts and investors whose expectations become the basis for stock prices and market caps and, often, their own fair share of bummed out fans. One of those segments’ crown jewels, American Express, took the field last week, and Apple will this week. Both have sterling global brands, incredible assets and seemingly untouchable positions of leadership in their categories. Yet each had 2015 performances that didn’t deliver as planned, setting themselves up for a challenging 2016 and questions about the future of their respective franchises.

So, should Amex be looking to Apple for advice, or should Apple be looking at Amex for inspiration? Sounds like a couple of crazy questions. But read on and I’ll tell you why it might not be as crazy as it sounds.


You know things are bad when the CEO himself starts an earnings call by confirming the analysts’ worst fears: that the short-term view is pretty bleak.

“Let me acknowledge that the performance we’re discussing today is not what we or you are accustomed to from American Express, and that we are taking significant actions to change the trajectory of our business going forward. During our remarks, we’ll address three main questions. Why has our view of 2016 and 2017 changed? What are we doing about it? Why are we confident in our ability to grow over the moderate to long-term?

That’s Ken Chenault last week at the start of Amex’s Q4 2015 earnings call.

And a far cry from the way that earnings calls had gone for him and investors for the better part of the last two decades. 

Amex hasn’t been the biggest card network of the four for a long, long time, but it’s the oldest (established in 1850; its card network was started in 1958, almost a decade before MasterCard and Visa), and it is an iconic global brand that has captured the minds and wallet share of the most affluent consumers in the world. It all but owns the corporate travel market, and is regarded as the gold standard for rewards – rewards funded by its often-contested merchant discount fees and informed by its unique position as a three-party network which gives it the data needed to devise rich and relevant offers to its cardholders.

But, when the markets closed on Friday, Amex’s market cap was $54.7 billion, or nearly half of what it was a year ago. 

The loss of the Costco relationship was the start of the 2015 downward spiral, offering some insight into Amex’s challenging economics as a card brand. That was followed by the loss of other important co-branded relationships like Jet Blue.

For sure, Amex had a number of problems that were brewing before the downward slide. But perhaps most revealing over the course of last year was the recognition that for all of its many brand assets, Amex had whiffed on some of the biggest trends in payments and commerce.   

Take mobile, for example. While everyone else was busy devising strategies for digital devices and a world in which consumers were transacting online, Amex seemed unconcerned, happy enough watching the revenue line, fueled by its rich merchant discount fees, swell.

Amex’s mobile strategy is largely nowhere. 

Then, while debit cards exploded in the U.S., Amex was pretty much stuck with its credit and charge cards, making it overall a lot smaller than its rival networks, Visa and MasterCard. Serve, its GPR product, which I’ll get to later, was clearly not going to make up that lost ground or appeal to a mainstream debit consumer.

Amex also had trouble getting banks to issue its card products. It has been slogging along since the mid-1990s outside the U.S. and since the early 2000s in the U.S. to do that after it got the Justice Department to force MasterCard and Visa to end their bank exclusives. The reality is that it hasn’t made much progress, anywhere, and one of the few relationships it did strike (Fidelity through Bank of America) went to Visa earlier this month.

Then there was its big loss to the Justice Department.

A judge ruled that it was OK for merchants that signed contracts to accept Amex cards to encourage consumers to then go use another (aka cheaper) method of payment. That could give the merchants more power to demand Amex cut their fees, possibly taking a big chunk of volume for Amex, since most people actually carry multiple cards in their wallets – especially the well-heeled customer base that is Amex’s bread and butter. (Personally, I think the judge’s decision is wrong and hope the 2nd Circuit Court of Appeals reverses the judge, which they just may.)

In the category of missed opportunities, Amex also failed to put enough emphasis on what could have been one of its biggest areas of opportunity: B2B payments. It failed to do what Discover did with SAP/AribaPay and leverage its network to enable payments between businesses, especially the small businesses that Amex has openly courted through its OPEN program. Chenault, himself, said on the earnings call that of the $4.8 trillion spend by SMBs in 2014, only 10 percent was spent using plastic cards, at the same time calling out Amex as the “market leader” in small business. 

Not even a swing and a miss – just a big miss.

So, Amex said last week that it would spend the better part of 2016 more or less shrinking its way to greatness, slashing $1 billion in costs and shuttering the things that don’t work. One of those things is its enterprise growth group – once thought to be the forward-looking lab focused on the digital products that would define the future of the brand. An Amex spokeswoman said last week that “within the enterprise growth business, there are some things that worked and some things that didn’t,” while emphasizing that its focus on prepaid remains intact.

Begging the question why.

That focus is wrapped up in the company’s flagship product, Serve, which analysts say is a profitless product struggling to find its footing in the GPR market serving a client base that is largely unprofitable. GPR is a product that, as a category, has largely struggled to find a profitable path to growth anywhere. It’s also one that’s at serious risk of being pummeled into oblivion depending on how the CFPB’s much-awaited ruling on prepaid nets out.

The icing on the cake, though, was the report late Friday that ValueAct has exited its position in Amex. ValueAct is the activist investor that took a $1 billion/1.2 percent interest in Amex last year. Those with knowledge of the matter say its exit is because Jeff Ubben, ValueAct’s CEO, and Warren Buffett, Amex and Chenault’s staunchest advocate and large investor, butted heads on what’s needed to move the company forward, which ValueAct reportedly said included the exiting of Chenault and possible break-up of the company. (A strategy that I advocated last year when it was announced ValueAct had taken an investment in the company.) Buffett obviously disagrees, despite the drag that Amex had to have created on his portfolio last year.

Yet, Amex is a company that’s reinvented itself plenty over its 166-year history.

Its first hundred years saw its transformation from express mail business to travelers cheque company to charge card for the well-heeled — three reinventions in more than 150 years is pretty amazing. It’s also hit the ropes a number of times, always to bounce back. Back in the mid-1970s, when Visa and MasterCard started honing in on its territory with credit – not charge – products, Lou Gerstner reinvigorated the brand by revving up marketing, expanding acceptance, enriching its rewards programs and adding to its card portfolio to include its Gold and Platinum brands. Gerstner was the brains behind the branding and the commercials everyone knows well: American Express – the exclusive club. Membership has its Privileges. Don’t Leave Home Without It. That helped Gerstner grow card membership by nearly 4x in the 11 years he ran the place.   

A positioning and a strategy that’s changed very little since then. 

A little more than two and a half decades later, Amex needs another turnaround act — and quite possibly a turnaround artist to execute it.

Maybe it should look to Apple, one of the world’s most powerful tech brands (which has also had its fair share of turnarounds), for inspiration and guidance.

Then again, maybe not, because Apple might be in need of its own turnaround act.


“There are some awfully good people there and there is tremendous brand loyalty to that company — I think the way out is not to slash and burn, it’s to innovate.”

The year was 1996 and the person speaking those words was Steve Jobs.

Apple Computer, as it was known at the time, was collapsing. Its price per share was half what it was seven years earlier and its market cap was on a steep downward spiral. Jobs, who was forced out of the company he founded in 1985, rejoined the company in 1996 as a result of Apple’s purchase of the NeXT computer franchise Jobs founded in 1985 when he left.

We all know the rest of the story.

Jobs’ comeback was anchored in a vision that has been the company’s North Star ever since: people would carry computers in their pockets instead of being tethered to them at their desks. And those devices would offer access to content that would create a dependency on those devices, devices that  would be beautifully designed and simple to use.

The introduction of the iPod in 2001 was the first glimpse that the world would see of the execution of that vision.

And it was game-changing.

It brought music stores right into the hands (and the ears) of iPod users. The tough deal-driving that went along with it would define Apple’s position with content producers and partners, too. For the better part of the next decade, if you wanted to play ball with Apple, you did business their way. And given their power and the consumer love affair with the brand, everyone did.

The introduction of the iPhone in 2007 and the iPad in 2010 further reinforced the wisdom of Jobs’ vision, Apple’s stance as tough negotiator and, ultimately, Apple’s enviable spot at the intersection of tech, mobility and content. That business model — elegantly designed products that consumers want, are willing to pay handsomely for and use to access apps — has sustained Apple’s massive sales numbers and market valuation over the last 15 years. iPhone sales drive 63 percent of Apple’s revenue.

When Jobs took over in 1996, Apple’s market cap was $3 billion. In February 2015, it was $740 billion, And the chatter then was that Apple was likely to be the world’s first $1 trillion market cap company. 

Yet ahead of this week’s much-anticipated Apple’s earnings, now two decades later, the chatter is focused on whether Apple’s greatest days are behind them.

Apple’s market cap on Friday was $565 billion – off $175 billion from where it was one year ago. iPhone sales are down, overall, despite a healthy holiday sales season. And analysts have raised further concerns that the sales of Apple’s shining star, the iPhone, have not only declined, but will continue to slump through March of 2017.

iPad sales have slowed too, for reasons that aren’t entirely clear; some attribute it to the increase in sales of the iPhone 6 Plus and consumers who feel they no longer need a tablet. Still, questions remain.

Also in the question mark category is the Apple Watch. Apple uncharacteristically discounted Apple Watches, presumably in an effort to juice sales. But despite vague references that Tim Cook reasons as “keeping his competitors in the dark,” no one really knows how sales have gone. One analyst, who has kept track of analyst forecasts since its launch concludes that sales are off 37 percent from initial estimates.

Apple TV has been put on pause, owing to its lack of success in negotiating content deals with programmers. Apple’s iTunes download business has been collapsing as consumer preferences for music (and video) consumption move to streaming. That resulted in it buying Beats for a massive amount of money and launching a Spotify killer. Maybe there’s hope here. Apple Music is said to be up to 10 million paid subscribers, which means it is catching up to Spotify.  But then again the fact that Apple’s dominance in digital was put on the ropes by a startup from Sweden is kind of amazing.

It was also reported on Friday that 16-year company veteran and Apple’s driver of electric car project was leaving for “personal reasons.” Apple’s car project, Titan, had a “ship date” of 2019 which could now be in question. Speaking of cars, car manufacturers appear to be closing ranks around their own connected car software platforms that don’t include Apple (or Google for that matter) out of fear of turning their cars over to Apple.

And then, of course, there’s Apple Pay.

Despite Apple’s public statements about being pleased with where they are with its mobile wallet, Apple Pay has to be a huge disappointment for Apple. It was the centerpiece of the iPhone 6 launch and was clearly expected to be the killer app that would drive sales of the phone.

It didn’t.

Our quarterly study on the adoption and usage of Apple Pay shows that only 3 percent of iPhone 6/6S users bought their phone to have access to the digital wallet. Usage is anemic at roughly 5 percent of all iPhone 6/6S users who are in a store that is equipped to accept it. When you break all that down, that means, that Apple Pay – now some 15 months into its highly acclaimed launch — drives something like .002 percent of retail sales.

Hardly enough to get merchants excited to jump through hoops to accept it.

For those of you who’ve read any of my writings on this, you know that Apple’s Apple Pay predicament is the result of its lack of understanding about how to ignite a platform in a complicated business like payments. Its business model – sell more phones — imposed constraints on the consumer side by forcing usage from a new device that people had to go out and buy. To work, those phones required merchant hardware that most didn’t have. And, in true Apple style, Apple forced issuers into contracts that required a fee to be paid on each transaction, and marketing commitments to popularize it, it was rumored, in the millions of dollars.

There hasn’t been much of a return on those issue investments.

It’s been reported that Apple Pay’s focus now is on expanding the utility of an app that isn’t used much for paying for items in a physical store, and acquiring new users. And, it’s seeking partnerships with banks to enable P2P to do that — partnerships that I’ve written banks would be crazy to entertain, given Apple’s history of playing nice before they don’t. Just ask AT&T how that has gone for them – and not exactly delivering on their initial Apple Pay expectations.

But what’s clear is that, at least from where I sit today, in January of 2016, Apple needs partners across all dimensions of its business more than those partners may, in fact, need it.

Ironically, one of the partnerships that may not entirely fit that definition is Amex – a partnership that Apple has struck in its ambition to make Apple Pay a global brand. Apple Pay’s transaction revenue tax has turned off most issuers who don’t want to pay the tariff, and in countries where interchange is regulated, would require giving away what little profit they have on those transactions. Amex as a three-party system, is exempt from those regulations. Yet, even with that, the Apple Pay/Amex combo doesn’t seem all that promising since Amex has a small share of card use outside of the U.S., isn’t widely accepted, and, well, as I’ve just laid out, is struggling itself.

But like Amex, it’s the vision and strategy put in place more than a decade ago by Steve Jobs that has carried Apple thus far, while perhaps masking some the larger and more endemic issues that are now starting to surface for the company.

Apple is as dependent on the success of the iPhone to drive its future, as Amex is on merchant discount fees.

Dependencies that now put both players at risk. 

One of the reasons that Apple’s iPhone sales are slumping is that consumers aren’t upgrading their phones as often as they once did. There’s nothing “wow” enough about the device to get consumers – outside of its hardcore fan boys – to make the upgrade worthwhile. That’s part of the reason it’s looking to the enterprise and a partnership with IBM, of all players – to drive new hardware sales and stimulate the development of apps to satisfy the corporate user.

They also lack no real killer app to drive demand for those phones.

So, in the meantime, Apple is banking on iPhone users sticking with it because the pain that would be caused by losing access to its app store is a cost too high for consumers to pay to make the switch.

But that’s what Blackberry thought too.

Its dominance as a mobile computer with an amazingly easy to use keyboard, in the end, wasn’t enough to keep users in the Blackberry boat once they saw what life was like with a device that offered them access to apps and an app store. Blackberry didn’t realize it had missed that boat until its own was sinking.

The risk to Apple is, ironically, what it introduced the world to: apps.

Phones are nothing more than access devices to apps – apps that are increasingly becoming available across platforms and even embedded inside of other apps that provide contextual access independent of a specific device or operating system. Uber can now be accessed across most operating systems, and increasingly inside other apps – e.g. Facebook Messenger and OpenTable. Amazon takes it one step further and can enable ordering and payment inside of any device linked to the ever expanding voice-activated Alexa ecosystem.

The more apps proliferate across the many connected devices that enable access to the Internet, the more vulnerable Apple and its dependency on the iPhone becomes.

Now, it helps to put things in perspective. Apple is an incredibly valuable company. It has the most successful mobile app platform and accounts for much for of the app revenue and app use than Android or anyone else. And with more than a half a trillion dollar market cap, it’s not like these guys are on death’s door.

But, like Amex, Apple might have gotten a little too comfortable living in the draft of a vision put in place many years before by a man whose “one more thing” was an entirely new way for how the world would access and consume content.

And by a business model that more or less minted money so long as that vision was relevant and distinctive.

Apple needs to go beyond product line extensions and channel its inner Steve Jobs to keep from becoming the Amex of the tech world in 10 years’ time: a powerful global brand in free fall, struggling to find its next act. 

As for Amex, I think it’s got a much tougher path forward to avoid being the financial industry’s Westinghouse: a valuable brand with a deep history that couldn’t anticipate the future and execute on that vision. Its assets are amazingly valuable, but it will take both “slashing and burning” and “innovation” to turn it around. The big question will be whether it has the stomach to do that on its own.


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