In 34 years at American Express Co., Ken Chenault has helped reinvent the credit-card company more than once. But his latest push into new frontiers is faltering behind the scenes.
The lender is dismantling its enterprise growth division, created to develop additional sources of revenue, lure new customers and help fend off Silicon Valley startups. Several top executives have left in recent months, including Neal Sample, its leader, and the unit plans to cut about 170 jobs in New York and Florida. The company canceled a product launch in Mexico, scaled back research efforts, folded parts of the business into other divisions and is closing its office on the edge of Manhattan's Tribeca neighborhood. The unit's centerpiece, debit cards for people unable to open bank accounts, remains.
"What is critical to the growth potential of American Express going forward is that they continue to do well with their core customer base," said Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods. "If there are projects that weren't paying the dividends they expected them to, and they don't anticipate a significant payoff in the future, it's best for them to just move on."
AmEx is pulling back from some of enterprise growth's projects, while standing by key products, such as the prepaid debit cards, according to the company.
"Within the enterprise growth business, there are some things that worked and some things that didn't," said Leah Gerstner, a company spokeswoman. "We've scaled back our experimental work and are focusing on our prepaid and alternative payments business."
Enterprise growth was created in 2010 after Chenault, AmEx's chairman and chief executive officer, made one of the biggest acquisitions in the company's 166-year history, buying payments startup Revolution Money from AOL Inc. co-founder Steve Case for $300 million. He renamed it Serve and used the underlying technology to build out a line of reloadable prepaid cards that function as a digital alternative to a checking account.
Chenault, 64, pulled out the stops to move the company beyond its legions of wealthy cardholders. He poured millions of dollars into development, recruiting rising stars from Silicon Valley to build new products. He housed the operation in the separate tech-friendly Tribeca office, where employees were free to dress casually. AmEx rolled out edgy promotions and sponsored a 40-minute documentary overseen by Academy Award-winning director Davis Guggenheim that profiled struggling families shunned by banks. Tyler Perry narrated.
At the beginning of last year, reloadable prepaid cards remained a profitless expense for AmEx, according to people with knowledge of the matter. Payments research firm Mercator Advisory Group estimates that the company has climbed no higher than sixth place among prepaid-card issuers. That's made the investment in future products harder to justify as AmEx struggles to overcome the loss of its biggest retail partner, Costco Wholesale Corp., and tries to end its steepest stock slump since the financial crisis. The share price has tumbled 28 percent in the past year.
AmEx is set to report fourth-quarter results Thursday. Analysts surveyed by Bloomberg estimate the company's full-year revenue will probably slip, the first decline this decade. The firm doesn't break out the performance of its reloadable cards, and Gerstner, the spokeswoman, declined to comment on the enterprise growth unit's profitability.
AmEx was a relatively late entrant into reloadable debit cards, took a big run at grabbing market share and has yet to see a significant return on the investment, according to payment-industry watchers. Margins are thinner than what AmEx generates on general-use cards, and new entrants must get big quickly to make the economics work -- a challenge when established players such as Green Dot Corp. and NetSpend have cards alongside cash registers at legions of retailers. There's not much wiggle room to boost those margins: The U.S. government has been scrutinizing fees and putting pressure on financial firms to shave costs of products for poor people.
"The margins are different from high-net-worth consumers," said John Thompson, senior vice president at the Center for Financial Services Innovation in Chicago, which does research on prepaid cards and services for underbanked consumers. "These things are especially difficult in large companies where profit has to be very, very big for it to be considered successful."
Green Dot CEO Steve Streit told analysts last month that AmEx's advertising spree no longer keeps him up at night like it used to, and that Green Dot continues to outsell AmEx at major retailers.
During Serve's early years, Chenault emphasized in public that AmEx viewed the business as a startup that might take years to produce a return. But within the firm, Serve and the broader enterprise growth unit were a source of excitement.
From 2010 until 2014, enterprise growth was overseen by Dan Schulman, who had run Priceline.com and Virgin Mobile USA before building Sprint Nextel's prepaid business. He and Ed Gilligan, who had climbed to president in a three-decade AmEx career, were seen by colleagues as the leading candidates to one day replace Chenault, and initiatives such as Serve were businesses AmEx executives touted as an integral part of the company's growth prospects, according to people familiar with the matter. Schulman jumped to PayPal Holdings Inc. in 2014 to become CEO. Gilligan died in May at 55.
Serve cards allow consumers, including those with weak credit, to load cash and spend it in stores or online. Users also can make payments to each other, giving AmEx a piece of the burgeoning peer-to-peer money-transfer business. That helps meet a growing demand: Almost 8 percent of U.S. households don't have a bank account and 20 percent are using financial services outside the traditional banking system, according to a 2013 study by the Federal Deposit Insurance Corp.
Still, investors were skeptical from the outset about AmEx's efforts to appeal to the masses. Going down-market risked diluting AmEx's brand among America's affluent, according to analysts including Jason Arnold at RBC Capital Markets. Such concerns were compounded as AmEx declined to break out the project's earnings and market share.
"If Serve had been successful, AmEx would have been out like a peacock bragging about it," Arnold said. "The fact they kept so quiet for so long is, in itself, an indication these products never caught on."
At the start of last year, Serve was meeting targets approved by Chenault, and seeing progress on measures such as how often customers recommended it to friends, according to people familiar with the project. And the effort helped introduce new types of customers to AmEx's brand, which can boost earnings for its other products. About 90 percent of Serve customers are new or returning to AmEx, according to the company.
AmEx isn't giving up on prepaid cards. In August, the company introduced a rewards program for Serve, letting customers earn 1 percent cash back on purchases, the first reloadable card to offer such benefits. It also announced new partnerships, such as a co-branded account with tax preparer Jackson Hewitt.
Nor is AmEx abandoning its broader push to expand digital offerings and attract different types of consumers. The lender has poured resources into new products such as its EveryDay credit cards, which rewards spending on necessities like groceries, and Plenti, a loyalty program that lets consumers amass points and reap rewards from merchants including Macy's Inc. and Exxon Mobil Corp.
Chenault is reshuffling managers and making organizational changes in other parts of the company as well, including the consumer business, to help reinforce earnings threatened by the pending loss of Costco. He's also creating a new consumer- lending business.
Chenault, who joined AmEx in 1981 and became CEO in 2001, emphasized the importance of innovating and broadening AmEx's hunt for customers at a financial technology conference in Las Vegas just over a year ago, where he discussed Serve's role in the company's future growth.
"What I want people to think about our company is that we are a company that is about reinvention," he said. "We are a company that understands that service is in fact a terrific mission and that we are a welcoming, inclusive brand."