The reason for this overall loss for American Express is pretty simple. AmEx is more expensive for merchants to process. Visa and MasterCard came into the credit card game and lowered the cost for merchants and became widely accepted in most retail stores. While this problem seems pretty basic, American Express has yet to really address it.
AmEx once meant something to consumers. The name “American Express” came with a sense of quality. It also came with low chargebacks. If you had an American Express card, you were a part of a different level of society. You probably earned a bit of money and spent it on credit and paid your bill on time every month. Most people used it for their leisure.
Because American Express was held in such high esteem and merchants knew it came with people who were spending more money, AmEx got away with charging more. They have been charging merchants 5 percent on purchases while Visa and MasterCard only charge about 2.5 percent.
Then, Visa and MasterCard began to offer specific deals to merchants and large retail chains that made AmEx completely obsolete for those companies. Other creditors were offering credit first and offering custom deals with significant discounts either matching or offering lower discounts than AmEx.
Over time, the audience for AmEx has simply been washed away, making accepting the card less valuable for merchants. Retailers and merchants also discovered that they can ignore AmEx and its fees by simply focusing on the two larger companies: Visa and MasterCard.
If you follow American Express stock, you can see all of these things are evident in the company’s stock prices. Although the problem seems to be clear (the high price of using AmEx), the company has yet to change a thing about the way it does business. Through most of the decade, shareholders were generally unaware of the problems AmEx was having because of significant deals within the company. For instance, the company launched BlueBirds cards through Wal-Mart which is focused on cash deposits. This helped the company for a short time with low-income customers. AmEx had also been able to hold onto Costco for a long time, which significantly helped its business.
However, now the deal with Costco is over and the BlueBirds cards have been revealed as being susceptible to fraud, so what will come of AmEx now?
The statistics show that AmEx may be headed down the path to its end. Since Costco announced the end of its 19-year deal with AmEx, the credit card company lost 25 percent of its value. It has been steadily decreasing since then. However, American Express CEO Ken Chennault still sits at a pretty $22 million a year.
The company seemingly comforts itself with the involvement of Warren Buffet within its stock but, in reality, Buffet isn’t making a huge difference. American Express simply is not the mainstream way of paying for anything anymore. If it does not find a way to compensate for its shortcomings within the credit card industry, it will likely fall down the tubes.
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Photo: Flickr: AIR FORCE ONE