In its Q1 2017 earnings call, American Express posted results showing that it’s beginning to find ways to overcome the losses it suffered following last summer’s sale of its Costco co-brand portfolio, which represented over 8% of the firm’s 2015 billed business.
In addition to topping analyst expectations across the board, Amex’s year-over-year (YoY) billed business remained flat — a cause for celebration after two consecutive quarters of declines. Even more, excluding the Costco portfolio, billed business grew 8% annually, indicating that Amex is finding new ways to leverage its existing customers in a means to grow.
This is in line with Amex’s strategy. Since the loss of Costco, when the firm began a robust cost-cutting program as a means of softening the blow, Amex has doubled down on both engaging existing customers and acquiring new ones. By most accounts, this strategy is working. The firm is adding customers steadily — in Q1, Amex added 1.7 million US cards, higher than Q4 2016. And those customers, as well as existing users, are spending more, which is critical — BI Intelligence has previously noted that sluggishness in the firm’s co-brand partnerships indicates that proprietary spend is the issuer’s major pathway to growth moving forward. Rising billed business excluding Costco points to improvements in that realm, and in the firm’s earnings call, Amex noted that engagement is up as well. As the firm continues to execute on this strategy, it’s positioned to ultimately overcome the losses it faced from Costco.
The firm could use two critical tools to help it bounce back:
- Rewards: Consumer appetite for credit is at an all-time high, and credit card networks and issuers across the board are ramping up their rewards spending as a means to attract customers and encourage spending. Amex is no exception — rewards spending rose in Q1, and the firm upped offers on some of its cards to more effectively compete with players like JPMorgan Chase in the premium space. The firm noted that it’s too early to see the true impact of these changes, but if it can keep offers compelling without letting rising costs eat into profits, the strategy will likely pay off.
- Digital: Amex has been doubling down on digital initiatives as a means of better attracting millennial customers. Thus far, that’s been a successful acquisition tool for the firm, which acquired over 60% of consumer cards worldwide via digital channels in Q1. Now, it’s likely the firm is looking online as a means of engaging customers — earlier this week, Amex expanded its Facebook Messenger chatbot offerings — and better drawing in millennials looking for credit options that meet their needs.
Credit card rewards have become so popular in the US that issuers capture headlines just by launching a new rewards card. And with consumers now caring more about the type of rewards being offered than any other card feature, competition to offer the most lucrative and attractive rewards has intensified dramatically.
For consumers, the emphasis card issuers place on these cards has resulted in rewards becoming much more worthwhile and widespread, ranging from big sign-on bonuses to free travel. And with offers continuing to get better, consumers will continue seeking out the best rewards cards.
The value added from these cards is undeniable for issuers — in addition to increasing adoption of credit card products, the opportunity to earn rewards encourages cardholders to spend more money. This not only helps to drive up revenue, but also provides issuers an opportunity to mitigate any losses they may be feeling from the Durbin Amendment, which reduced how much fees issuers could charge on debt card transactions starting in 2011.
But it’s also important to note that offering such high-valued rewards comes at a price — Chase’s Sapphire Reserve card ended up reducing the bank’s profits by $200 million to $300 million in Q4 2016, according to Bloomberg. And as costs continue to rise, issuers will have to adjust to this new landscape by leveraging technology and partnerships to keep consumers engaged without sacrificing profits.
Ayoub Aouad, research analyst for BI Intelligence, Business Insider’s premium research service, has compiled a detailed credit card rewards explainer that walks through the new credit card rewards landscape, which now includes rising consumer demand for rewards, increased opportunity for issuers to drive up usage of their credit card products, and increasing costs. After discussing the evolution that has led to this current landscape, the report analyzes how issuers will have to adjust in order to continue reaping the benefits of offering rewards without sacrificing significant profits.
Here are some key takeaways from the report:
- Consumers put tremendous value on credit card rewards, which makes these them a major user acquisition channel for card issuers — almost 60% of consumers rank rewards as a major reason for adopting a credit card
- By offering high-valued and attractive rewards, card issuers are able to drive up card adoption and usage — JPMorgan Chase reported a 35% increase in new card accounts in Q3 2016, after launching the Sapphire Reserve card.
- Offering high-valued credit card rewards does come at a high cost to card issuers — the costs associated with offering credit card rewards have more than doubled since 2010 for the six largest card issuers in the US
- However, major players in the space are already beginning to find ways to cut costs, including rolling back rewards on their most premium products and partnering with well-known brands to develop less expensive, more creative rewards offerings.
In full, the report:
- Identifies the costs associated with offering rewards for issuers and how they have increased over time.
- Details why credit card issuers continue offering high-valued rewards.
- Analyzes how the industry has evolved since 2011
- Explores how credit card issuers will advance in order to continue reaping the benefits of offering rewards without assuming increased costs.
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