US consumer services
American Express’s (AXP) US Card Services segment’s total revenues, net of interest expenses, fell 3% to $3.2 billion in 2Q16. These revenues formed 39% of the company’s total revenue, compared to $3.3 billion in 2Q15. The decline was mainly due to the reduction in Costco-related revenues from last year as well as an increase in cash rebate rewards.
The division’s net income also changed 74% to $1.1 billion compared to $613 million in the prior year’s corresponding quarter. The net included a one-time gain on the sale of the Costco portfolio. The provision for losses decreased by 2% to $237 million from $243 million a year ago. The decline was due to accounting for certain co-brand loans as “held for sale.” That impact was partially offset by higher loan balances, excluding the “held for sale” loans in both periods.
American Express achieved total revenues of $32.8 billion in the last fiscal year. Here’s how some of the company’s peers in the payment processing industry fared with their revenues that year.
- Mastercard (MA): $9.5 billion
- Visa (V): $12.7 billion
- Discover Financial Services (DFS): $7.6 billion
Together, these companies account for 2.3% of the Technology Select Sector SPDR ETF (XLK).
Investment spending continues
The US Card Services’ total expenses declined 40% to $1.3 billion compared to a year ago. The decrease reflected a portion of the gain from the loan portfolio sale, which was reported as an expense reduction. That gain was offset in part by higher levels of investment spending on growth initiatives and a portion of the previously mentioned restructuring charge.
American Express’s co-branding and merchant acceptance agreements with Costco weren’t renewed in February 2015. A co-branded credit card is jointly sponsored by a bank and a retail merchant. This type of card can generally be issued more cheaply than private label retail cards. The US Costco co-branded accounts generated ~8% of the company’s worldwide billed business in the year ended December 31, 2014. These co-branded accounts were responsible for ~20% of American Express’s worldwide card loans.
American Express has increased spending in order to initiate new partnerships. The company was successful in forming partnerships with Charles Schwab (SCHW), one of biggest brokers in the United States, and Sam’s Club, the eighth-largest retailer in the United States. The company’s expenses also increased due to spending on technology development, marketing and promotion, and higher service costs due to new partnerships.
In the next part of this series, we’ll see how a strong dollar led to growth in American Express’s international business.