AXP American Express Company

New CEO will have to deal with increasing competition from banks, fintech firms

By AnnaMaria Andriotis 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 21, 2017).

Entrepreneur Christopher Burch has been a loyal user of American Express Co. cards since 1979. This year, he switched almost all his spending to J.P. Morgan Chase & Co.'s Sapphire Reserve card.

Regaining customers like Mr. Burch, who made the Forbes list of wealthiest Americans in 2014, is one of the big challenges for incoming AmEx Chairman and Chief Executive Stephen Squeri. Named successor to longtime chief Kenneth Chenault on Wednesday, Mr. Squeri takes over as the card giant stresses it is building momentum after a recent rough stretch.

The reality is more complicated. AmEx is still dealing with rising competition from banks and nimble fintech firms like PayPal Holdings Inc., the Silicon Valley payments company whose market value recently eclipsed AmEx's. Investors aren't clear, meanwhile, on where long-term revenue growth will come from, or how AmEx will deal with potential disruption to traditional payments channels from new, mobile approaches.

When asked about competition at a shareholder lunch at Aretsky's Patroon restaurant in Manhattan last year, Mr. Chenault put the situation in a historical context, according to a person at the meeting. But, Mr. Chenault added, the firm was under attack.

AmEx issues cards to consumers and businesses, both credit cards and ones that must be paid off monthly. It runs its own card network and also makes loans to people and companies.

The firm has spent recent years fending off rivals on several fronts, which has worried some investors. Mr. Chenault's departure is "good timing from a stock perspective but...there are still challenges ahead," said Don Fandetti, a Wells Fargo & Co. analyst.

Top of the to-do list for Mr. Squeri: regain the cachet of the AmEx brand, both for millennials who don't view it the same way as their parents and for established customers who have been wooed by banks offering better services and more perks.

Mr. Burch, whose businesses include hospitality, technology and retail investments, recalls that AmEx's concierge service in recent years was unable to get him tables at several high-end NYC restaurants; hotel upgrades became "bland."

Shortly after, employees of Mr. Burch suggested he try the popular Sapphire Reserve card. He started using it.

In June, Mr. Burch emailed Mr. Chenault to share his disappointment. A few weeks later, Mr. Burch said, he received an email from a "customer relations representative of the executive office" that read like a form letter.

As competitive pressures have mounted, AmEx has lost market share to banks and to card networks such as Visa Inc. AmEx's market share of total U.S. credit-card purchase volume fell to 22.9% last year, according to Nomura Instinet, from 25.4% in 2015. It was about 26% as recently as 2014.

The slip has in large part been the result of several co-branded cards that AmEx has lost since 2015, including Costco Wholesale Corp. and JetBlue Airways Corp.

Costco was viewed as a huge loss for AmEx by many shareholders, but the company's earnings are starting to rebound from that. "It turned out the decision on Costco was 100% the right decision," Warren Buffett, whose Berkshire Hathaway Inc. is the largest AmEx shareholder, told the Journal in an interview. "Everybody thought it was a mistake at the time, " but he said that since then, "the progress is just terrific."

Mr. Chenault also defended his tenure, noting how he overcame numerous challenges. "I've managed through three crises [including] 9/11 and the financial crisis," he said in an interview. "The repositioning of what we did with co-brands was very impressive."

Asked about the Sapphire Reserve card, Mr. Chenault said AmEx has been "very focused on innovating" its Platinum card and that the card is having "the best time ever."

To dig out of the company's slump and boost revenue, Mr. Chenault leaned more on lending. That was a reversal from the years after the financial crisis when he was wary of this business.

In the wake of the meltdown, Mr. Chenault opted to make the company less bank-like and stay focused on revenue generated from fees merchants pay it when customers use AmEx cards.

The company also put roughly $1 billion into a division that focused mostly on the prepaid card market, according to a former executive. But the effort failed to take off.

It wasn't until late 2014 when Mr. Chenault recognized the disadvantage AmEx faced when competing with big lenders, according to the person. Negotiations were underway for the Costco credit card, and the deal appeared to be on the ropes.

Each time AmEx sweetened its bid, Costco told the company it needed to do more. AmEx was ultimately outbid by an estimated $1 billion, the person said. Citigroup Inc. won the business.

The jolt changed Mr. Chenault's thinking on lending. At one 2015 meeting, he asked division heads how much revenue and profit they could deliver in the next two to three years to fill the void left by Costco. One executive said the firm could build U.S. loan balances by 12%.

Mr. Chenault's response, according to a person familiar with the meeting: "What would it take to make it even bigger?"

The company's lending push helped improve earnings this year, but shareholders are becoming worried about future credit losses. The firm's total provisions for losses jumped 53% in the third quarter from a year prior. Competing in premium cards can be costly, too; the company continued to increase expenses in the third quarter.

"Their strategy has shifted to one that relies a bit more on lending and it remains to be seen what the full effects of that will be in the next downturn," said David Hochstim, a director and senior research analyst at ClearBridge Investments, an AmEx shareholder.

Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com

(END) Dow Jones Newswires

October 21, 2017 02:47 ET (06:47 GMT)

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