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American Express Case What explains the American Express cards success over the past fifty years?

? As with any major corporation, American Express has found success through sticking to its core competencies, which are risk management, attracting and retaining an affluent client base, service leadership through earning and maintaining trust, and (more recently) data mining to create relevant and impactful promotions. The American Express cards success in risk management can be explained through the following statement: They maintained a best-in-class credit quality, reflecting in part the traditional focus on the affluent segment. Their commitment to maintaining strict controls on eligibility for card membership has been a boon for the company. Since they offer primarily charge cards as opposed to credit cards, risk management is much more important. As a charge card service provider, American Express makes money off of the interchange fees they charge to merchants, whereas credit card providers also make a significant amount of money when cardholders carry a balance and have to pay interest on the card. This commitment to risk management was evident between 2008-2009. In the midst of the worst financial crisis since the Great Depression, American Express severely tightened credit restrictions evidenced by a 25% drop in Net Loans.1 Surprisingly enough, one way that American Express was able to reduce its risk was to give more back to their cardmembers. Their Membership Rewards program, which started in 1991, is now used by over 70% of cardmembers. Simply by giving points on purchases that can be used for travel, entertainment experiences, etc. American Express created a community of cardmembers that is significantly less risky and more profitable. Spending on these cards is on average four times as high as on their other cards, which has helped American Express have its members spend on average $8,360 per card while the next closest competitor saw its cardholders spend on average $2,470. Coming out of a history of providing travelers checks, American Express had a hard time putting to rest its unquestioned links to travel (see 1966-1974 For People Who Travel campaign and 1984 cruise line campaign3). When Kenneth I. Chenault was named CEO, one of his first goals was to increase the amount spent on everyday purchases and move the brand away from being seen only for travel. In 2001, 64% of spend on American Express was travel-related, but today it is only 31%. Secondly, American Express has built a reputation as an affluent brand through a number of activities aimed at building brand equity. Initially, the American Express card was targeted at businessmen on expense accounts, offering them a convenient method of payment rather than a means of financing purchases. American Express has positioned its products to try and attract people who spend $30K+ on their credit or charge cards annually. This market segment encompasses 10% of card users, but accounts for over 50% of the total card spend. In order to attract this market segment, American Express started to introduce different levels of charge cards. They introduced a number of cards between 1966 and 1999, which escalated in annual fees and member experiences. The Gold Card (introduced 1966) was the first of the cards, and the Black Card (introduced 1999) is the most exclusive. The Black Card allows membership to only the highest spending clients and is by invitation only. The Platinum Card (introduced 1984) is the middle ground between the two and offers the best mix of availability and member privileges. The Platinum Card has its own magazine called Departures, which launched in 1985 to target members who traveled extensively. Additionally, the Platinum Card has the First Collection program where partners such as Tiffanys and Lamborghini allow for

cardmembers to be the first to view and purchase new products. Like the Black Card, the Platinum Card allows membership by invitation only, but extends that to a much wider range of people. Next, American Expresss CEO Harvey Golub highlighted the brands goals when he said he aimed for it to become the worlds most respected service brand through managing, marketing and promoting their core attributes trust, security, integrity, quality and customer service. They did so through educating their employees, incorporations their values into their products and marketing materials. Since American Express started as a package delivery company in 1850, they had focused on building and maintaining client trust by offering unmatched security since their inception. When they started in the travel business, they became known for their integrity and customer service. When American Express eventually made the hotly contested switch from travelers checks to charge cards, the quality of the cardmember experience came to the forefront. Furthermore, the guiding principles the company used to maintain their status as a premium brand in a modern world were to provide superior customer service, to achieve best-in-class economics, and finally to direct all activities to support the brand. Runaway success in this arena led Fortune magazine to rank American Express as the most admired megabank/credit card company in 2008. Another way American Express indentified opportunity to become a better brand was to become more flexible in its card offerings. In years past, American Express had been fearful of partnering with other brands because they felt they had an unmatched position in the market for affluence and did not want to devalue themselves or risk their brand equity by creating a partnership with a lesser brand. They eventually overcame this fear and began partnering with other strong brands such as Delta, Hilton, Costco, Starwood and JetBlue. They needed to make the brand available more broadly while ensuring that it retained its premium status. This not only increased card membership, but the average spend on these kinds of cards was and continues to be very high. Finally, a recent development at American Express has been its ability to data mine for important purchase information on its cardmembers. Since American Express operates a closedloop network, which basically means that they own the relationship with both the cardholder and the merchant, they have unencumbered access to this type of data and have become experts at appending this information to members accounts to provide the most relevant promotions in the industry. They studied consumers purchases, identified their needs and provided rewards based on these studies. Analytics not only helped to determine whom to reach and with what offer, but also how rewards influenced loyalty. These studies also helped them forecast the demand and be able to negotiate with their suppliers. It also helped predict the spending behavior of their consumers through various life stages. For example, after studying data from millions of cardmembers over a span of years, American Express identified a trend that nonaffluent cardmembers who purchased one affluent thing were three times more likely to become affluent later. This information allowed for a 50% increase in the effectiveness of upselling cardmembers from one American Express card to another. The first thing I thought about after reading the case (Andrea) was that if you focus on the wealthy consumers and are able to attract them, you will most likely always have a customer no matter the economy. The wealthy will always have the money to spend. They might cut down but the bottom line is that they have it so they spend it. Also, with the affluent consumers, they are used to a certain lifestyle so when all the sudden they are not doing well, they are more likely to use their credit cards to keep up their image and lifestyle.

What challenges faced the American Express card in 2008 American Express faced the same challenge as all of the organizations in the United States in 2008, economic recession. It was and continues to be the greatest financial crisis the country has seen since the Great Depression. As a company that provides (albeit for a very short term), American Express was in a dangerous position as soon as the massive layoffs started. As a company that specializes in an affluent client base, which spends on average almost three and a half times as much per card as its next closest competitor, even a relatively small percentage of its clients defaulting could have had a major impact on the companys bottom line. Since American Express had a core competency of risk management, they had already vetted the majority of prospective cardmembers who would have otherwise defaulted. This competitive advantage likely saved the company billions of dollars of loss in only a couple of years. Also, in response to the recession, the company tightened restrictions even further after having learned its lesson after the Optima card (the only card in which members were allowed to carry a balance) posted massive losses in the wake of the recession in 1991. Again, this is evidenced by a 25% drop in Net Loans.1 Jud Linville, CEO of Consumer Services at American Express believed that because of the economic recession, the company would need to, deepen consumer understanding to provide innovative, value-added products that would attract and retain cardmembers. Through data mining, and appending the information to cardmember accounts, American Express was able to provide relevant and personalized promotions that not only increased cardmember spend and retention, but provided a better overall customer experience because they were not bombarded with information that was of no use to them. In 2005 when Visa and MasterCard started to get into the lifestyle business, American Express began to have to deal with increased competition on a number of fronts. First, Visa and MasterCards new focus on offering premium products to affluent customers directly challenged American Expresss stranglehold on the market segment. Visa and MasterCard leveraged their massive client bases and brought immediate volume to these cards by offering similar rewards structures and different experiential benefits than American Express. In many cases, this started bidding wars among the companies for backstage passes to concerts, unique travel experiences, etc. Another threat that this posed is that since Visa and MasterCard started to be able to bring merchants higher value customers, the higher interchange fees that American Express was charging started to be viewed as a burden rather than a benefit. As a small business owner, I (Zach) do not accept American Express for this very reason. In eight years, it has cost my company maybe five clients. My point-of-view is that if someone has an American Express card, they likely also have a Visa or MasterCard, so why would I pay the average 2.41% on each purchase when I could pay 2.19%. Another more future-oriented challenge that American Express had to face in 2008 was the proliferation of new methods of payment. This has proved to be both an opportunity and a threat to the company. As a closed-loop company that is not by definition a financial institution, American Express does not offer debit cards. While the interchange fees they would earn are significantly lower than what they are currently charging, growth in debit card payments has far outpaced that of credit card payments (expected to be a greater number of purchases in 2011, but at half the average ticket). Additionally, online card use has increased almost exponentially, which have dramatically lowered costs, By 2008, 38% of American Express applications, payments, and reward redemptions had migrated to the Web at cost rates 53%, 84%, and 86% lower, respectively, than offline. If American Express is able to keep charge the same amount while

seeing its costs in these areas reduced by about 50% (a guess since the 38% of activity being online is four years out of date), they would experience incredible profitability in the coming years. While this vision of online purchasing is certainly rosy, there are two major underlying threats to overall company revenues: PayPal and Google Wallet. These two methods are free to consumers and provide seamless purchasing experiences with partner websites and stores. PayPals link with EBay has made the company almost ubiquitous with consumers who do a majority of their shopping online, while Google Wallet is just starting to become a more widely used method of payment with newer smart phones being embedded with near field communication technology. Both of these, along with similar alternatives will be the greatest challenges American Express has to overcome to increase its share of wallet in the future. How did American Express retain its premium positioning while penetrating nonpremium segments of the market? This is a problem that was quickly identified as an issue when Jud Linville was tabbed as the CEO of Consumer Services. He said it was his goal to make the American Express brand available more broadly while ensuring that it retained its premium status. American Express was first able to penetrate non-premium market segments by partnering with equally strong brands in terms of prestige, but that occupied a slightly less affluent position in the market. The best example of this is their partnership with Costco. Costco is a very well respected company that is synonymous with excellent value and superior member service. In becoming the exclusive charge or credit card that can be used as a method of payment in Costco, American Express was able to increase its client base to cover consumers that would have otherwise been declined for their charge cards, while still maintaining a premium market position. The other major step that American Express took was to offer a wider range of charge cards that would fill niches for less affluent customers. A brief look at the American Express website shows what they call the ZYNC card. This card allows consumers to pick their own perks for the card, such as cash back for travel, entertainment, or even purchases at environmentally friendly stores.2 The final step in penetrating a less affluent market segment without losing brand equity was to offer pre-paid gift cards. As a business move, this was brilliant because it allowed for American Express to become more ubiquitous as a method of payment without losing much in terms of prestige. There is some level of loss because of the types of people that would be purchasing this card, but American Express cardmembers would know that they the gift card users were not true cardmembers, but rather simply the recipient of a gift. Delineate the various growth options open to the American Express card and then rank them in terms of business potential. Increase merchant participation American Express has had the enviable market position as the affluent charge card since its inception. This can be a benefit as much as it is a curse. As highlighted by the Boston Fee Party in 1991, merchants have long questioned why they should pay American Expresss high interchange fees when there are significantly cheaper options out there. When Visa and MasterCard started to try and appeal to more affluent cardholders in 2005, this difference in the discount rate became even more of an issue. For American Express to fully capture its full market segment, it is imperative that offers merchants an incentive to accept their cards as a method of payment. It seems like they have understood that this is an

issue from the start and have recently attempted to solve the problem by offering its cardmembers increased rewards during a promotional period for purchases with new merchants. Further develop data-based marketing Since American Express is a closed-loop network, they have access to much more purchase information than Visa and MasterCard and therefore this is already a significant competitive advantage. There is nothing wrong with what they are currently doing, but investing heavily in this type of field will yield terrific results, as they are already experiencing. Whenever I (Zach) think about databased marketing, I remember a story I read about Targets incredible statistics department and the unbelievable amount of information they are able to gain. Through purchase behavior, Target was able to determine that one of its customers was likely pregnant so they sent a direct mail piece to her covered with images of babies, diapers, etc. The only problem with the piece was that the girl was seventeen and her father did not know she was pregnant. While this is an extreme example and borders on creepy for many people, it shows the awesome power that purchase information has. Expand Global Network Services division The Global Network Services division, which allows for third-party institutions to market and sell American Express cards, has been a driver of growth since its inception in 1997. By targeting the most affluent customers that somehow slip through the cracks of the American Express marketing division, GNS increases card membership without cannibalizing sales. Adjust marketing spend The first thing that jumped out to me (Zach) when the graph of marketing spend was shown in the case is that while American Express has moved in the right direction, I still do not believe that they have made enough adjustments to compensate for how much the world has changed. Spending well over half of their marketing budget on television, while focusing under 20% of its spend on the internet is not a recipe for success. Television advertising is all about building awareness and brand value, but American Express is very relevant to U.S. consumers and has excellent brand equity already. By focusing more its spend on SEO and SEM, American Express would be able to have a search presence unmatched in its industry. Furthermore, as the only charge or credit card company that tries to build a true relationship with cardmembers, increased Social Media activity (especially Pinterest given American Expresss history in travel) would likely be very successful in creating brand loyalty. Increase use of internet for all card-related inquiries and payments While this practice has increased dramatically, its cost savings is so large that American Express really has to focus on driving more leads to their website even if doing so forces them to spend a good deal of money. Again, this goes back to the SEO and SEM efforts mentioned in the previous option. If American Express is to grow the number of applications, payments, and reward redemptions online, they need to educate their cardmembers on how this benefits them, which might also mean emails or direct mail pieces to their cardmembers. Near Field Communication technology

If American Express were able to create an application that takes advantage of NFC, they would provide convenience to their cardmembers who would only have to waive their cell phone in front of a reader to pay for things with their American Express cards. I expect that this industry is just in its infancy and we will begin to see it become more prevalent as more merchants start to offer this as a method of payment. Financing for affluent business (Mercedes, Lamborghini, Tiffany) While American Express has in the past tried to become a powerhouse in the financial services industry, but found this to be a distraction to their company, I (Zach) believe there is a place for a small number of financing partners that would create revenue for the company by leveraging its core competency of risk management, while further developing partnerships with prestigious brands such as the ones named in the option header. More exclusive partnerships with smaller brands (online & retail locations) Just like it has enjoyed an influx of membership and profit through its exclusive partnership with Costco, American Express can attempt to create other similar partnerships with smaller brands. It would be impossible to get a large retail location to suddenly stop accepting other forms of payment, but if American Express is able to identify a smaller and equally prestigious (at least locally) chain of stores or a website that specializes in selling affluent brands, they might be able to catch lightening in a bottle and increase membership this way.

Discuss the balance between pull marketing efforts targeting consumers and push marketing targeting bank intermediaries. American Express is in an interesting position in that it has to market both towards consumers to try and increase card membership, but also towards bank intermediaries who would sell their product for them. Obviously, there are benefits and drawbacks to both of these options, and in this case they revolve around the kind of risk the company is taking. The benefit of marketing towards consumers is that they are able to monitor the message from start to finish and can quickly change messages if something from their data mining suggests a potential cardmember might respond better to a different advertisement or promotion. The drawback in this option is that if American Express miscalculates a cardmembers credit worthiness or there is another financial crisis, they are forced to swallow that loss. Meanwhile, since the bank owns the risk when they act as an intermediary, there is no risk for American Express in this way. There is, however, significant risk in the marketing activities and behavior of the bank. If the bank markets American Express in an inconsistent or undesirable way, American Express has little recourse (unless there is a provision in the contract stating something else). Also, if the bank were to do something unethical American Expresss reputation would take a serious hit. Since one of their brand values is integrity and the banks have not been known for particularly ethical behavior recently, this is a very real risk. Finally, if a bank were to fail, there would be burden on American Express to either assume the risk from the cards the bank had issued, or suffer a PR nightmare as their cardmembers would suddenly find out that their cards have been revoked and all balances are due immediately. To compensate for this risk, American Express has found a way to increase their revenue from these cards. Not only do they continue to collect the interchange fees from merchants, but they also collect fees from the issuing institution.

There are two schools of thought within American Express and both certainly have their advantages, but given the different kinds of risk involved in the two marketing avenues, it would be beneficial for the company to find a balance between marketing directly to consumers and to bank intermediaries. Clearly, there are very different ways to market to these different groups as the consumer market is B2C and focuses on the customer services and benefits a cardmember can have, while the bank intermediary market is B2B and focuses on generating large profits for the issuing bank. Outside Sources 2008 & 2009 American Express Balance Sheet https://www304.americanexpress.com/credit-card/compare/28000?linknav=usCCSG-ProspectNav-ViewAllCardsFilter