American Express Porter’s 5 Five Forces: 2022 Detailed Overview

Written by nikolastsiri in Porter's Five Forces Analysis

Porter’s Five Forces Analysis of American Express

 

 

Key Facts

 

Name American Express
Industry Financial Services
Founded 1850
Headquarters New York, New York, USA
CEOs Stephen J. Squeri
Revenues USD 43.79 billion FY Ending Dec 31st 2021

USD 50.63 billion FY Ending Dec 31st 2022
Profit USD 8.06 billion FY Ending Dec 31st 2021

USD 7.51 billion FY Ending Dec 31st 2022
Competitors

MasterCard, Visa, PayPal

 

 

Company Overview

 

American Express is one of the largest multinational financial services company that engages in digital money i.e. cards. The main products of the company are credit cards, charge cards, and travelers check.The Company was founded by Henry Wells, William G. Fargo and John Butterfield.The Company generated a record revenue of US$ 50.63 billion  with Net Profits of US$ 7.51 billion in FY 2022.The Company has Net Assets of US$ 228.35 billion.

American Express is also known as the largest travelers check provider in the world.The company ranks 320th on Fortune Global 500 (2022) and 77th on Forbes Global 2000 (2022) lists.

 

Today we are going over Porter’s Five Forces of American Express

 

American Express Rivalry among Existing Competitors 

 

  • Business Revenues and Segmentation:

The Company has two major revenue streams Non-Interest Revenues including Discount Revenues ,Net Card Fees, Service Fees and Processed Revenues generated a record revenues of US$ 42.9 billion in FY 2022 while US$ 34.6 billion in FY 2021 and US$ 28.10 billion in FY 2020. The other major Revenue Segmentation is Interest Income which contributed US$ 12.65 billion in FY 2022, US$ 9.03 billion in FY 2021 and US$ 10.08 billion in FY 2020.

 

 (Note the Final Revenues are booked after deducting Interest Expense and Provision for Credit Losses)

 

 

  • Business Customer Base and Geographical Base

The American Express provide services to 70% to U.S. Clients and 30% to Outside U.S. as per geographical division. The Company’s Customer base is comprises of Global Consumers 50%, Global Commercial Consumers of 41% and Global Network Services comprises of 9% respectively in FY 2021.

 

The Company generated revenues from 36% from US Consumer Services, while 32% from Commercial Services, while 18% from International Card Services and 14% from Processed Volumes in FY 2022.

 

The American Express has 77,300 people employed in FY 2022.

 

  • Aggressive Competition

The Financial services sector is extremely competitive which many large players competing fiercely for the credit card market shares. These companies competes in terms of discounts offered, reduction in annual charges. Additionally, being a multinational financial services firm, the company operates in a highly regulatory environment.

 

  • VISA

Visa is the largest player in the world in credit card space which conducts electronic payment transfer business across the globe. People prefer Visa because of its convenience, global acceptability and security. The objective of Visa Cards (debt or credit cards) is to provide users with a hassle free transaction experience without the risk of theft or internet hacks so that they can spend on the go. Visa reported revenues of USD 24.1 billion, up 10% YoY in FY21 as the world moved towards normalcy after the pandemic. The company reported Net Income of USD 12.3 billion up 13% YoY.

 

The Visa Company generated US$ 29.31 billion while the Net Income US$ 14.95 billion in FY 2022 September 30th.The Company processed US$ 14.1 trillion including payments and cash transactions in FY 2022 while the company processed US$ 13.0 trillion in FY 2021.

 

The Visa Card processed US$ 4.1 billion in FY 2022 and 3.7 billion in FY 2021 (Ending 30th June).

 

The Visa Company present in more than 80 countries globally with 26,500 employees.

 

  • Mastercard

Mastercard is the second largest player in the electronic card business in the world. The company has a strong network of banking clientele who issue card (using Mastercard’s services) is the largest competitor to American Express and Visa.

 

MasterCard faced some issues due to the Russia-Ukraine conflict as America imposed sanctions on Russia which led Mastercard to withdraw its business in Russian territories which accounted for roughly 4% of the revenue in March 2022. According to CY22 earnings release, Mastercard reported revenues of USD 22.2 billion, with a net income of US$ 9.9 billion. While the FY 2021 ending on December 31st generated a revenue of US$ 18.8 billion with the net income of US$ 8.6 billion

 

American Express Threat of New Entrants 

 

  • HighStart-up cost and NWC needs

The Financial services business is extremely expensive to start as the Fin-tech business is already concentrated with a large number of players. Moreover, the regulatory environment is highly competitive and these companies have to obtain local and international licenses to operate in many countries. Additionally the most important clients – banks are also large multinationals which have their own set of laws which makes signing a contract with a client extremely time taking and painful.

 

  • High Research and Development Expenditures

These Financial services companies spend a large sum of money in updating its hardware and network as the clientele keeps ever increasing. The company also searches for innovative ways to reduce costs and compete with the best available offers. Moreover the company has to see the needs of end-users which are constantly changing.

 

  • Excessively Regulated

The Financial services business is intensely regulated with not just US laws but also international laws where the company business resides in. Additionally to these laws, these companies have to make themselves aware of the laws of their clients – banks. The cost of compliance with these regulations is substantial. The latest trend among governments is to improve overall monitoring by risk management framework, corporate governance structures. American Express has also been subject to many regulatory actions (which is extremely common in financial services business) like governmental inquiries, enforcement proceedings, penalties and fines on non-compliance with the laws.

 

People after the pandemic spent more on credit which led to higher bills by 25% to USD 1.09 trillion. The company also expanded merchant network over 7 million outside US by increasing virtual acceptability.

 

American Express Bargaining Power of Suppliers 

 

  • B2B Suppliers and Company Portfolio Ventures – Support to Scale Business

The company is highly dependent on its large B2B suppliers and business partners and any impact on their business is directly affects American Express’s business. One of the major suppliers is OptBlue partners which helps the company in conducting reliant, fast online services and then present a simple statement for the merchants andmore and more merchants are now accepting OptBlue.

 

The American Express has a wide portfolio companies with Consumer Companies including (Warby Parker, Albert, better),B2B including (Stripe, Plaid, melio etc) and Enterprise Capabilities (codat, Trulioo, Persado etc)

 

The Company is investing since 2011 having currently 90+ investments with 38 existing companies.

 

  • Travel Suppliers

One major source of American Express revenues is Global Business Travel (GBT) segment which supports travel payments and travelers check. The company has to negotiate their terms and conditions (including remuneration) with travel suppliers. The company also bargains with many hotels and resorts to maintain lowest cost and still remain competitive and profitable.

 

  • Advent of Pandemic, Russia Ukraine and Soaring Commodity prices-Recovery Support by AMEX

American Express, Visa, Mastercard and other financial giants conducted business with Russia which was impacted greatly after the invasion of Russia in Ukraine and the US government imposing sanctions. This caused great supply chain issues and led to increasing energy prices (as Russia is a large exporter of crude). This in turn led to soaring inflation for which the world was not ready post pandemic and central banks resorted to some of the cruelest rate hikes in the past decades which created a global recession sort of situation. These issues are still expected to persist until the world accepts this new orders and the chaos stops.

 

The American Express announced US$ 200 million for support small merchants from COVID-19 business recovery with a name of “Largest Ever Global Shop Small Campaign” .The company also announce additional US$ 10 million for the recovery of U.S. Black-owned small businesses.

 

American Express Bargaining Power of Buyers 

 

  • Buyer 1 – Merchants

The merchants who work with American Express are also its clients as they pay American Express a certain cut of the margin on the product sold. In this respect, the bargaining power of the merchants is Moderate because they can bargain, though considering the giant size of American Express, they have less power.

  • Buyer 2 – End users

The end users are people who use American Express cards for their transaction needs and pay some kind of Annual charges for this service. American Express because of the intense competition competes on charging lower prices (because of psychological pricing and low switching cost) in order to remain competitive, however, the end users has no pricing control and are price takers.

  • Branding and Marketing

American Express invests fiercely in developing the best marketing strategies to increase the card subscriber base. The company enhance US Platinum Card service in CY21 along with the Business Platinum Card. The company has regained value mostly from younger clients who likes to spend more along with Millennial and Gen Z’s which represent around 60% of the client base.

  • Price pass on impact

Although the company has the pressure to keep the prices in check because of low substitution cost for clients but still has the power to increase prices because of increasing inflationary pressures as all of the competitors mostly increase price together.

  • Customer Satisfaction

The American Express scored 75% in a survey conducted by Statista for customer satisfaction related to use of cards while Discover scored 71% and HSBC scored 65% respectively as of April 2010.The American Express also ranked # 1 in Survey conducted by J.D Power 2022 U.S. Credit Card Satisfaction Study.

 

American Express Threat of Substitute Products or Services

 

  • Low Switching Cost

The switching cost for card subscribers or merchants is none because all of the financial card providers charge similar margin, the difference is mostly on the basis of service quality and brand perceptions. This makes the threat of substitute products high. The company competes with not just other card companies but also banks (clearing houses) and other Fin-tech products. The payment industry is ever evolving with new technologies coming almost every month.

 

  • Fintech and Alternate Solutions Crypto Acceptability

The Global Digital Payment Industry is projected to reach US$ 9.64 trillion in 2023 including the Digital Commerce, Digital Remittances and Mobile POS Payments. The Fintech Industry, alternate solutions like Crypto acceptability are some of the existing or prospective threats of substitution. The percentage of US merchants (digital platforms globally) who accepts American Express as payment solution is 14.42 % while for Australian merchants it is 16.32 % respectively.

 

 

 

References

 

  1. Annual Reports Year 2021 and Year 2022, Company Website [Online], Available at: American Express
  2. Fortune, (2023), Topic: American Express [Online], Available at: Fortune
  3. Forbes, (2022), American Express [online], Available at: Forbes
  4. The Wall Street Journal, Topic: American Express [online], Available at: Wall Street Journal
  5. Ramsey Qubein, (2023), Expanded American Express Centurion Lounge Opens At Seattle-Tacoma Airport [Online], Available at: Forbes
  6. Jeff Green, (2022), After game-changing NYC law on salary transparency, American Express will post salary ranges for job listings across the U.S. [Online], Available at: Fortune
  7. Tom Groenfeldt, (2023), American Express Launches Financial Management Tools For Small Businesses [Online], Available at: Forbes
  8. Christiaan Hetzner, (2022), PayPal tells users it will fine them $2,500 for misinformation, then backtracks immediately [Online], Available at: Fortune
  9. Trefis Team, (2023), American Express Stock To Post Mixed Results In Q4? [Online], Available at: Forbes
  10. Rachel King, (2022), American Express and Delta are launching a limited-edition credit card made from airplane metal [Online], Available at: Fortune
  11. Visa Card Revenues
  12. Experience the powerful backing of Amex Ventures. Available at Amex
  13. Amex Midyear Update
  14. Statista (March 31st ,2010) Comparison of U.S. customer satisfaction with web sites of selected credit card companies in 2010 (in percent).Available at Statista
  15. Customers rate American Express No.1 in the J.D. Power 2022 U.S. Credit Card Satisfaction Study of National Issuers, August 18 2022.Avaialable at American Express
  16. Statista ,Digital Payment –Worldwide
  17. Statista (October 18,2022) Merchants who accept AmEx for online payments in 178 countries worldwide 2022.Available at Statista

 

 

 

 

 

 

 

 

 

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