American Express Redefines Its Strategy




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Excerpts

GLOBAL PAYMENT CARD INDUSTRY

The global payment card industry was highly competitive and was dominated by a few big companies. The higher entry barriers of the industry in the form of high investments needed to build the network and time taken to build reliable brands prevented new players from entering and succeeding in the industry .

Despite the presence of a number of smaller players supported by local governments, the payment card industry was mostly concentrated in the USA. Two American companies, Visa and MasterCard, had a significant market share in terms of the total cards in circulation. However, in terms of the total value of transactions made by customers, American Express led the industry. Banks played a leading role in the global payment industry by issuing the credit cards to their customers, bearing the default risks, providing support to customers, etc.

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BUSINESS MODEL OF AMERICAN EXPRESS

Since the time it entered the card business, American Express had followed a very unique business model when compared with other credit card companies. It maintained its own closed-loop network that did not process the card transactions of other credit card companies (Refer to Exhibit-II for network models of different card companies). It directly issued its own cards to the customers and extended the required credit for the purchases made. Instead of focusing on transaction volumes, American Express always focused on the spend volumes of its customers. A few premium customers of the company gave it higher revenues than the large number of small customers for other credit card companies..........

NEW CHALLENGES

Since the mid-2000s, the major card companies in the world including American Express had been facing new competition from online payment processing companies like PayPal. Many Silicon Valley based technology companies too entered the payments business and introduced online, mobile, and cloud-based services that directly competed with the services provided by the conventional card companies. The difference between the conventional card issuing companies and online payment processing companies became blurred as these companies made it possible for payments to be made at physical merchant points of sale (POS) units through mobile phones.......

CHANGING BUSINESS STRATEGY

The changing payments business worldwide forced American Express to consider changing its business strategy. The prospect of losing its affluent customers could limit the future growth of the company. At the same time, there was no way for the company to introduce more premium products as it had already served the top end of the market with its premium and superpremium products like the American Express Platinum and Centurion Cards (Refer to Exhibit-V for the list of cards issued by American Express in USA). The explosive growth of e-commerce made it difficult for American Express to ignore the business of digital payments......

BANKING BUSINESS

In the year 2007, American Express sold its subsidiary company American Express Bank Ltd. to Standard Chartered PLC for a sum of US$ 1.1 billion. American Express Bank had been providing banking services to financial institutions and high net-worth customers around the world. The decision to exit the banking business was taken to enable the company to focus on its high-growth and high-return payments business. However, American Express continued to operate under restricted banking licenses in some countries like India which did not allow non-banking companies to offer financial services like issuing credit cards and travelers’ cheques......

IMPACT ON THE BRAND VALUE

With the introduction of new products, American Express was redefining itself as a reliable financial ‘service provider’ available to all kinds of customers rather than as an issuer of charge/credit cards. Rather than targeting every new product and new technology that was being introduced in the market, it wanted more customers to believe that American Express was the brand for their financial needs. The new products from American Express targeted at the mass market were well received in the market. Some analysts praised its efforts Express to reach the mass market......

OUTLOOK

American Express exited from some of its noncore businesses to concentrate on financial services. In the year 2014, it separated its business travel division and entered into a joint venture with an investor group led by Cetaras LP to run its travel business. American Express was to share the responsibility of managing the joint venture with its partner. The main objective of separating the business travel division was to free up funds for investing in other initiatives taken by the company......

Exhibit

Exhibit I:Select Financials of American Express (In US$ Millions)
Exhibit II: ‘3-Party Model’ of American Express and Models of Other Payment Companies
Exhibit III:Market Share of Major Card Companies (End of 2013)
Exhibit IV:Billed Business of American Express (In US$ Billions)
Exhibit V:Cards Issued by American Express