The AmEx Paradox: How American Express Thrives Without Dominating the Numbers Game

$52.9 billion—that’s the staggering revenue, net of interest expense, that American Express (Amex) raked in during 2022. But here’s the twist: despite these impressive earnings, Amex doesn’t rule the credit card industry in sheer numbers.

Its domestic payment volume lags behind Visa and MasterCard, and in terms of the number of cards in circulation, Amex even trails behind Discover. So, how does Amex pull off such massive profits without dominating the market? The answer lies in their unique approach: they’re not playing the volume game.

Instead, they’ve honed in on a specific market segment—frequent spenders who use their card often, spend big, and pay off their balances. By catering to these high-spending customers, Amex has carved out a lucrative niche with premium perks that keep their customers coming back for more.

The Power of Premium: Amex’s Winning Strategy

Amex isn’t just offering a credit card; they’re offering a lifestyle. The company has leaned into providing premium perks that go beyond mere financial transactions. Think access to airport lounges, a Walmart Plus membership, Uber cash, and other daily rewards that make sure Amex stays at the top of your wallet.

This strategy has paid off, with Amex seeing over a 32% increase in revenue since 2017. Even in a tumultuous market, Amex’s stock has shown resilience and growth, proving that their premium-focused strategy is a winning one.

A History of Evolution: From Freight to Finance

American Express has come a long way since its inception in 1850. Originally a freight forwarding company, Amex began its transformation into a payments company in the late 19th century, eventually expanding into financial products and travel services. The 1950s marked a significant turning point when Amex introduced its first charge card, setting the stage for the global financial powerhouse we know today.

The Closed-Loop Advantage: Amex’s Unique System

One of the key factors that set Amex apart from competitors like Visa and MasterCard is its closed-loop system. Unlike Visa and MasterCard, which operate in an open-loop system, serving as intermediaries between banks, merchants, and cardholders, Amex plays multiple roles in its network. Amex is the issuer, the acquirer, and the network all rolled into one.

This allows Amex to have direct relationships with both cardholders and merchants, offering unique insights and control over the entire transaction process.

This closed-loop system doesn’t just give Amex a competitive edge; it’s also a significant revenue driver. In 2022, Amex generated about $9.9 billion in net interest income.

But the real powerhouse of their revenue comes from discount revenues—fees charged to merchants for accepting Amex cards. These fees brought in more than $30 billion in 2022, accounting for over 58% of Amex’s total revenue.

Catering to Big Spenders: The Core of Amex’s Success

Amex’s business model is all about focusing on high spenders. Reports show that Amex cardholders spend, on average, three times as much annually as non-Amex cardholders. This spend-centric model allows Amex to offer robust rewards programs that justify the higher fees associated with their cards, particularly the Amex Platinum Card.

While the Platinum Card is marketed primarily as a travel card, Amex has smartly added everyday perks like a Walmart Plus membership, making it a go-to card for more than just travel. This focus on daily usability helps Amex maintain its premium brand status while driving higher spending on its cards.

Data-Driven Rewards: Customization at Its Best

Amex’s closed-loop system provides the company with a treasure trove of data on cardholder spending. Unlike Visa and MasterCard, which only see the total dollar amount of transactions, Amex knows exactly what its customers are buying.

This data enables Amex to create highly customized rewards programs that feel tailor-made for each customer, further strengthening loyalty and card usage.

For instance, Amex can offer specialized rewards at top hotels and restaurants, attracting affluent consumers to these establishments. This creates a mutually beneficial relationship between Amex, its cardholders, and the merchants that accept its cards.

Lower Credit Risk: A Strategic Advantage

Another significant benefit of targeting affluent customers is the reduced credit risk. Amex’s delinquency rates have consistently been lower than those of other major credit card issuers. This stability makes Amex an attractive option for investors, particularly during economic downturns.

As the economy fluctuates, Amex’s business model provides some insulation from the cyclical nature of credit losses. During recessions, credit losses typically rise in line with unemployment rates, but Amex, with its affluent customer base, tends to experience lower increases in credit losses compared to its peers.

Reaching the Next Generation: Millennials and Beyond

In recent years, Amex has focused on diversifying its customer base by attracting millennials and underbanked Americans. The company reports that around 60% of its new card acquisitions are from Gen Z and millennials. By offering experiences like exclusive concerts and dining events, Amex is successfully winning over a younger audience that will be tomorrow’s heavy spenders.

Amex has also made significant investments in technology to stay competitive in an increasingly digital world. The company was the first US-based credit card issuer to gain approval in China and continues to explore growth opportunities in regions like Europe, where credit card adoption is still relatively low.

Looking Ahead: Challenges and Opportunities

While Amex has demonstrated remarkable resilience and growth, it faces significant challenges from competitors like Visa and MasterCard. As technology advances, these open-loop card programs could potentially replicate some of the unique advantages of Amex’s closed-loop system, particularly in data analytics and tailored rewards.

Additionally, new payment models like “buy now, pay later” (BNPL) pose a threat to traditional credit card companies. However, Amex has been proactive in addressing these challenges.

The company was the first traditional credit card issuer to unveil its version of BNPL with the “Pay It Plan It” program, showcasing its ability to adapt to changing consumer preferences.

Final Thoughts: The Future of Amex

American Express may not be the largest credit card company, but it has carved out a powerful niche by focusing on premium customers who value the unique rewards and services it offers.

With a business model built on high spending, customized rewards, and lower credit risk, Amex continues to grow and evolve in a highly competitive industry. As the company looks to the future, its ability to adapt to new challenges and seize opportunities will be key to maintaining its position as one of the most respected and valuable brands in the world.