AmEx Strug­gles to Reach Be­yond the Rich

The credit card gi­ant finds it hard to profit from pre­paid plas­tic “The mar­gins are dif­fer­ent from high-net-worth con­sumers”

Bloomberg Businessweek (Europe) - - MARKETS / FINANCE -

In his 34 years at Amer­i­can Ex­press, Chief Ex­ec­u­tive Of­fi­cer Ken Chenault has helped rein­vent the credit card com­pany more than once. But his lat­est push into new fron­tiers is fal­ter­ing.

The com­pany is dis­man­tling its en­ter­prise growth divi­sion, which had been home to an ef­fort to fend off Sil­i­con Val­ley star­tups and draw in new cus­tomers, in­clud­ing low­er­in­come and younger peo­ple who aren’t well served by tra­di­tional banks. Sev­eral top ex­ec­u­tives have left in re­cent months, in­clud­ing Neal Sam­ple, the unit’s leader. The com­pany plans to cut about 170 jobs in New York and Florida and is clos­ing the divi­sion’s of­fice near Man­hat­tan’s Tribeca neigh­bor­hood.

AmEx has al­ready can­celed a prod­uct launch in Mex­ico, scaled back re­search ef­forts, and folded some ini­tia­tives into other parts of the com­pany. The key prod­uct for ex­tend­ing AmEx’s reach is a reload­able pre­paid card that can serve as an al­ter­na­tive to a check­ing ac­count. The com­pany is stand­ing by that busi­ness, says Leah Ger­st­ner, an AmEx spokes­woman.

As of early 2015, how­ever, pre­paid cards weren’t a prof­itable busi­ness for AmEx, ac­cord­ing to peo­ple with knowl­edge of the mat­ter.

“What is crit­i­cal to the growth po­ten­tial of Amer­i­can Ex­press go­ing for­ward is that they con­tinue to do well with their core cus­tomer base,” says San­jay Sakhrani, an an­a­lyst at Keefe, Bruyette & Woods.

The en­ter­prise growth divi­sion was cre­ated in 2010 af­ter Chenault made one of the big­gest ac­qui­si­tions in the com­pany’s his­tory, buy­ing pay­ments startup Rev­o­lu­tion Money from AOL co-founder Steve Case for $300 mil­lion. Chenault re­named it Serve and used the un­der­ly­ing tech­nol­ogy for the pre­paid cards.

The com­pany poured mil­lions of dol­lars into de­vel­op­ment, re­cruit­ing ris­ing stars from Sil­i­con Val­ley. Em­ploy­ees in the op­er­a­tion were free to dress ca­su­ally. AmEx spon­sored a 40-minute doc­u­men­tary, over­seen by Academy Award-win­ning di­rec­tor Davis Guggenheim, that pro­filed strug­gling fam­i­lies shunned by banks. Tyler Perry nar­rated.

For all that, pay­ments re­search firm Mer­ca­tor Ad­vi­sory Group es­ti­mates that the com­pany has climbed no higher than sixth place among pre­paid card is­suers. That has made in­vest­ment in fu­ture prod­ucts tougher to jus­tify as AmEx strug­gles to over­come the loss of its big­gest retail part­ner, Costco Whole­sale, and tries to end its steep­est stock slump since the fi­nan­cial cri­sis.

“Within the en­ter­prise growth busi­ness, there are some things that worked and some things that didn’t,” says Ger­st­ner, who de­clined to com­ment on the unit’s prof­itabil­ity. “We’ve scaled back our ex­per­i­men­tal work and are fo­cus­ing on our pre­paid and al­ter­na­tive pay­ments busi­ness.”

Ac­cord­ing to a 2013 sur­vey by the Fed­eral De­posit In­sur­ance Corp., 20 per­cent of house­holds used non­bank ser­vices such as check cash­ing stores and pay­day loans. Al­most 8 per­cent had no bank ac­count at all. Al­though that’s a large po­ten­tial cus­tomer base, “the mar­gins are dif­fer­ent from high-net-worth con­sumers,” says John Thomp­son, se­nior vice pres­i­dent at the Cen­ter for Fi­nan­cial Ser­vices In­no­va­tion in Chicago, which does re­search on ser­vices for un­der­banked con­sumers. “Th­ese things are es­pe­cially dif­fi­cult in large com­pa­nies where profit has to be very, very big for it to be con­sid­ered suc­cess­ful.”

AmEx was a rel­a­tively late en­trant into reload­able debit cards. Mar­gins are thin­ner than what AmEx gen­er­ates on gen­eral-use cards, and new en­trants must grow quickly to make the eco­nom­ics work—a chal­lenge when es­tab­lished play­ers such as Green Dot and NetSpend have cards along­side cash reg­is­ters at le­gions of re­tail­ers. There’s not much wig­gle room to boost those mar­gins: The U.S. govern­ment has been putting pres­sure on fi­nan­cial com­pa­nies to shave the costs of prod­ucts for the poor. Green Dot CEO Steve Streit told an­a­lysts last month that AmEx’s ad­ver­tis­ing spree no longer keeps him up at night and that Green Dot cards still out­sell AmEx at ma­jor re­tail­ers.

Cards from Serve al­low con­sumers,

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