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April 29
American Express Co. is investing heavily in new products, and it has hired a MasterCard Inc. veteran to help it expand its customer base beyond the elite cardholders it has traditionally pursued.
This strategy has been fueled by recent acquisitions, though analysts say that American Express is spending too much of its cash reserves and that as a result it may not be able to fully recover from the downturn.
Amex said Thursday that it had hired Laura Kelly as its senior vice president in charge of developing and marketing new prepaid products. Kelly, who starts May 16, was MasterCard's executive vice president of global prepaid product solutions.
Amex said Kelly's hiring complements its 2009 purchase of Revolution Money, which it renamed Serve, though she will not be working on the Serve product.
In addition to buying Serve, for $300 million, Amex bought the security technology provider Accertify Inc. for roughly $150 million in November 2010.
Amex relaunched Serve in March as a digital wallet for the masses. Any card brand or bank account can be used to fund Serve transactions, and it works automatically with any merchant that already accepts Amex cards.
Dan Henry, an executive vice president at American Express and its chief financial officer, said during an April 13 conference call with analysts that these initiatives are meant to increase the company's fee revenue.
"The investments that we're making in terms of fee businesses, businesses that will generate fee revenues, I think we're making good progress there," Henry said.
Amex's net income in the first quarter rose 35.6%, to $1.2 billion, from the same period a year earlier. Revenue net of interest expense rose 6.1%, to $7 billion.
The company has been saving cash for acquisitions since the beginning of the downturn as part of a plan to fund future growth, industry watchers said. Spending that money now is a move to spur growth as cardholders begin to move toward digital payments.
Though these moves are part of a strategy that was years in the making, some industry watchers were skeptical about Serve.
They said during the conference call that the product, a prepaid account that generates less interchange revenue than Amex's credit cards, would be a drag on earnings.
Henry insisted that the consumer audience for Serve does not substantially overlap that of the main Amex card line.
"These are two separate products," he said. "Our current product set … [includes] charge cards and lending products. And we have a certain set of economics attached to those. I think many of the customers that the Serve product will attract are people who today use cash or debit or prepaid."
Because of these differences, Serve "transactions will attract a different discount rate," Henry said.
"But those are very different products, meeting different customer needs," he said. "And I think merchants will view them as different."
One analyst said Amex's expenses were inflated by a one-time accounting rule that makes its income statement look more distressed than it actually is.
"Very simply, American Express' expense base had some noise in it," said John Stilmar, who follows credit card issuers for SunTrust Robinson Humphrey in Atlanta. "I'm confident that American Express can get back to operating margins consistent with prerecession levels."
