American Express Co. is investing heavily in new products and has hired a MasterCard Worldwide veteran to help expand beyond the elite cardholders it has traditionally pursued.
Recent acquisitions have fueled this strategy, though AmEx now is facing criticism from analysts that say it is spending too much of its cash reserves, leading some to express concern that it will not be able to fully recover from the downturn.
AmEx announced April 21 that it hired Laura Kelly as its senior vice president in charge of launching and marketing new prepaid products. Kelly, who starts May 16, previously was MasterCard executive vice president of global prepaid product solutions.
Kelly’s hiring complements its 2009 purchase of Revolution Money, which it has since renamed Serve, though she will not be working on the Serve product, AmEx said. Besides the $300 million Serve acquisition, AmEx bought the security technology provider Accertify Inc. for roughly $150 million in November.
AmEx relaunched Serve last month as a digital wallet for the masses (
Dan Henry, AmEx executive vice president and chief financial officer, said during an April 20 conference call with analysts to discuss first quarter earnings, that these initiatives are designed to drive 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 first quarter net income rose 35.6%, to $1.2 billion, from the same period a year earlier. Its total 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 say. Spending that money now is a move to spur future growth as cardholders begin to move toward digital payments.
But despite these moves being part of a strategy that was in the works for years, some industry watchers expressed worries about Serve. They argued during the conference call that the product–a prepaid account that generates less interchange revenue than AmEx’s credit cards–would hurt future 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. 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, a director 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 pre-recession levels.”
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