American Express: The Card That’s More Than Just Plastic

Founded in 1850 as a freight forwarding company, American Express (Amex) has evolved into one of the world’s leading financial institutions, particularly known for its credit card services. What sets Amex apart from competitors like Visa and Mastercard is its integrated business model and its premium brand image, catering primarily to high-net-worth individuals and businesses. This study unpacks how Amex has managed to generate billions in revenue, maintain profitability, and solidify its place in the financial landscape.

 The Closed-Loop System

American Express operates a closed-loop business model, meaning it controls the full transaction cycle—issuing the card, handling the payments, and settling with merchants—unlike Visa and Mastercard, which only act as intermediaries. This model enables Amex to generate revenue from both cardholders and merchants, allowing it to provide more control over customer experience and leverage insights from both sides.

Key Sources:

• Cardholder Revenue: American Express earns revenue from annual membership fees, interest on balances, foreign transaction fees, and conversion fees. Premium cards like the Platinum Card charge high fees (up to $695 annually) and offer exclusive benefits, while the Centurion Card costs $5,000 per year, with a $10,000 initiation fee.

• Merchant Revenue: The largest share of Amex’s revenue comes from merchant discount fees (known as discount revenue), which are fees merchants pay every time an Amex card is used. These fees are typically higher than Visa or Mastercard, at around 2.3% to 3%, but Amex cardholders tend to be high spenders, making it worthwhile for merchants to accept the card.

Financial Data (2023):

• Revenue: $60.5 billion
• Net Income: $8.4 billion
• Market Capitalization (May 2024): $166 billion
• Global Transaction Volume (2024): $1.46 trillion

This closed-loop system enables Amex to extract value from both cardholders and merchants, driving robust revenue growth while maintaining high levels of customer service and loyalty.

Strategies: How Amex Built a Global Financial Legacy

American Express has consistently focused on strategies that differentiate it from competitors like Visa and Mastercard. Its ability to create a premium experience, expand its network, and embrace digital transformation has contributed to its growth and success.

A. Premium Market Focus

American Express has positioned itself as the card for affluent individuals and high-net-worth customers by offering high-value benefits such as airport lounge access, hotel upgrades, and concierge services. This focus on premium services has allowed Amex to charge higher annual fees while maintaining strong customer loyalty.

• Platinum and Centurion Cards: The Platinum Card, with its $695 annual fee, offers extensive travel perks, while the invitation-only Centurion Card (also known as the “Black Card”) costs $5,000 per year with an additional $10,000 initiation fee, symbolizing ultimate luxury and exclusivity.
• Commercial Services: Through its Global Commercial Services (GCS) division, Amex provides business expense management solutions to corporations, driving additional revenue from its business clients.

B. Spend-Centric Model

Amex uses a spend-centric strategy to increase the overall number of transactions made on its cards. The company focuses on growing transaction volumes rather than on accumulating balances, offering generous rewards programs that encourage frequent card usage.

• Membership Rewards: Amex's loyalty program allows cardholders to earn points on purchases, which can be redeemed for travel, cashback, or merchandise, further incentivizing customer spending.
• Loyalty and Customer Retention: By prioritizing customer satisfaction through premium benefits and rewards, Amex ensures high customer retention rates, driving recurring revenue.

C. Expanding Merchant Network

Historically, American Express has struggled with merchant acceptance, particularly due to its high merchant fees. However, the company has made strides in increasing acceptance by lowering fees in 2018, which marked its largest fee reduction in 20 years.

• Domestic Acceptance: By 2024, Amex cards were accepted by 99% of U.S. merchants who accept credit cards, making it easier for cardholders to use their Amex cards nationwide.
• International Challenges: While Amex has made progress in the U.S., its higher merchant fees still pose a barrier to global acceptance, particularly in markets where merchants are less willing to absorb the higher cost of transactions.

D. Digital Transformation

Amex has been proactive in adopting digital payment solutions to meet the evolving needs of modern consumers. This includes launching mobile wallets, contactless payments, and enhanced security features to protect customer data and prevent fraud.

• Mobile Wallet Integration: With Apple Pay, Google Pay, and other mobile platforms, Amex has increased its appeal to younger, tech-savvy consumers who prefer digital payment options.
• Data Analytics and Personalization: The closed-loop system allows Amex to collect data on both cardholders and merchants, enabling the company to provide tailored offers and personalized services that enhance the customer experience.

 Global Symbol of Prestige:

Over the decades, Amex has built a brand synonymous with luxury, trust, and reliability. Its focus on high-spending consumers has cemented its position as a prestigious financial institution.

A. Brand Prestige

Amex’s brand is deeply tied to exclusivity and premium services, making it a status symbol. Products like the Centurion Card have been key in establishing this brand image, attracting celebrities, executives, and high-net-worth individuals.

• The Black Card Myth: The Centurion Card has contributed significantly to Amex’s legacy, with many seeing it as the ultimate symbol of wealth and success. Though the card is invitation-only, its existence enhances the allure of all Amex cards.

B. Travel and Lifestyle Focus

Amex's integration with travel and lifestyle services—including partnerships with luxury hotels, airlines, and airport lounges—has created a seamless experience for frequent travellers, reinforcing the card’s premium status.

• Airport Lounges and Hotel Perks: Amex cardholders enjoy access to exclusive airport lounges worldwide and benefit from hotel upgrades and other travel-related perks, further enhancing the brand’s appeal.

C. Commitment to Innovation

Despite its long history, Amex has consistently remained at the forefront of financial innovation. By embracing digital services and pioneering secure payment solutions, the company has ensured its relevance in an ever-evolving financial ecosystem.

 Competing in a Changing Financial Landscape:

Although American Express has successfully carved out a niche in the premium market, it faces several challenges, including competition from Visa, Mastercard, and the rise of fintech.

A. Global Acceptance Issues

One of Amex’s biggest hurdles is its limited global acceptance. While Amex has made strides in expanding its U.S. merchant network, the company still lags behind Visa and Mastercard internationally. Many merchants abroad resist accepting Amex due to its higher merchant fees.

• Merchant Pushback: International merchants are less inclined to absorb Amex’s higher fees, which restricts the card’s acceptance in many countries, particularly in Asia and Europe.

B. Competition from Fintech

The rise of fintech companies and digital payment solutions such as PayPal, Stripe, and Square has introduced cheaper alternatives for both consumers and merchants. Fintechs offer lower transaction fees and simplified payment solutions, posing a direct threat to Amex’s traditional card model.

• Mobile Payment Disruption: The growing popularity of mobile wallets and peer-to-peer payment systems challenges Amex’s reliance on traditional credit cards, forcing the company to continually innovate its offerings.

C. High Merchant Fees

Amex’s merchant fees, while necessary for maintaining its premium service, are still higher than those of competitors. This creates resistance, especially in emerging markets where businesses operate on thin margins.

Future:

To address its challenges and ensure future growth, American Express has focused on innovation and strategic initiatives. Its future plans are centred on expanding its digital footprint, enhancing its global merchant network, and maintaining its premium focus.

A. Reducing Merchant Fees

In 2018, Amex reduced merchant fees to increase acceptance rates. This marked a significant shift in the company’s strategy, allowing more merchants to accept Amex cards, particularly in the U.S.

• Expanding Global Acceptance: Amex has made it clear that expanding its global merchant network remains a priority. Efforts to lower fees or partner with regional payment processors could help the company gain ground internationally.

B. Digital and Mobile Innovations

Amex continues to invest in digital transformation by offering new products and services that cater to tech-savvy consumers. From mobile payment solutions to fraud detection, the company remains committed to innovation.

• Partnerships with Fintech: Amex has also partnered with fintech companies to offer innovative products like Buy Now, Pay Later (BNPL) services, allowing consumers to make purchases more flexibly while helping merchants drive sales.

C. Sustainability and Corporate Responsibility

In recent years, Amex has emphasized sustainability and corporate responsibility initiatives, which resonate with modern consumers and investors. This focus could further strengthen the company’s brand and attract a younger demographic concerned about social and environmental impact.

American Express has solidified its position as a global leader in the financial services sector through its unique closed-loop system, which generates revenue from both cardholders and merchants. By focusing on premium products, offering exceptional customer benefits, and fostering a prestigious brand identity, Amex has catered to high-net-worth individuals and businesses. While it faces challenges such as limited global merchant acceptance, competition from fintech companies, and high merchant fees, its ability to innovate digitally, expand its network, and prioritize customer loyalty will ensure its continued success. As Amex adapts to market changes and invests in technology, it remains well-positioned to maintain its legacy as a dominant player in the financial industry.