Amex has to find a way to reach the 99 Percent

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

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,

Quoted “The reality is, 4 billion human beings are going to have cheaper energy.” Blackrock Chief Executive Officer Laurence Fink, at the World Economic Forum in Davos, commenting on the crash in oil markets “If Serve had been successful, Amex would have been out like a peacock bragging about it. The fact they kept so quiet for so long is in itself an indication these products never caught on.” —— Jason Arnold, RBC Capital Markets

including those with weak credit, to load cash and spend it in stores or online. Users also can make payments to each other, giving Amex a piece of the burgeoning peer-to-peer money transfer business. The effort has helped introduce to the Amex brand new types of customers, which can boost earnings for other products down the line.

Still, going down-market risks diluting Amex’s brand among America’s affluent, says Jason Arnold, an analyst at RBC Capital Markets. Such concerns have been compounded by Amex’s refusal to break out the project’s earnings and market share for investors. (Amex was set to report fourth-quarter results on Jan. 21.) “If Serve had been successful, Amex would have been out like a peacock bragging about it,” says Arnold. “The fact they kept so quiet for so long is in itself an indication these products never caught on.”

During Serve’s early years, Chenault emphasized in public that Amex viewed it as a startup that might take years to produce a return. But within the company, Serve and the broader enterprise growth unit were a source of excitement, seen as integral to future growth. At the start of 2015, Serve was meeting targets approved by Chenault and making progress on measures such as how often customers recommended it to friends, according to people familiar with the project.

Amex isn’t giving up on the prepaid business. In August the company announced a new cash-back rewards program for Serve, making it the first reloadable card to offer such benefits. It has also announced new partnerships, such as a co-branded account with tax preparer Jackson Hewitt.

“We are a company that understands service is a terrific mission and that we are a welcoming, inclusive brand,” Chenault said at a financial technology conference just over a year ago. The hard part has been making inclusion profitable.

The bottom line The new kinds of customers Chenault has seen as important to Amex’s growth have proved difficult to reach.

Edited by Pat Regnier Bloomberg.com