American Express Company (AXP) Earnings Call Transcript & Summary

Okay. That's helpful. So sticking on the lending topic here, I have a question from the audience. How does the Kabbage acquisition serve Amex' overall strategic development? Longer term, will Amex become more lender than payments company?

No. I think -- look, I think longer term, our strategy is to stick where we are, I think even outgrowing the market as we were outgrowing the -- and we'll probably continue to outgrowing the market when the market gets stable again. I don't expect us -- we're going to be in that range of between 20% to 30% of lending. That's the highest we would ever go. I mean sometimes you're up at 22%, 23%, 24%, 25%, wherever it might be. But we're not turning into a lending company. We're turning -- we are a payments company that meets the needs of our customers. And our customers do borrow. And so you're not going to see this whole thing flip on its side. Our model is a very simple model. We have a large fee-paying card base, and that fee allows you to spend on the card and have all the experiences that we have, and then what you do is you may choose to lend. When you look at small business, and I'll go back to when I took over, I said we wanted to be working capital providers to small businesses. And what Kabbage really does for us is it gives us the platform to have an integrated story for those small businesses because -- let's look at what Kabbage does today. What Kabbage will have for us is our small business lending card or small business charge card. What Kabbage also has is working capital loans, it has term loans as merchant financing loans. We have all those things previously. But we didn't have all those things in a consolidated way. What Kabbage brings us is also a transaction banking account as well. And so what we have with Kabbage is an overall platform to manage working capital for all our small businesses. And within that context, we can help them manage their cash flows and when they should think about putting it on a charge card, when they should think about putting it on a small business lending card, when they should maybe take out a 60-day working capital loan, when they should maybe collateralize their receivables for a 2-year period or take a term loan for 6 months. And we can have a 360 view of the small business base and really make even better credit decisions as opposed to one-off credit decisions. And by having a transaction banking account, we can see the inflows and the outflows. So that's the goal with Kabbage. We just relaunched Kabbage. I mean, obviously, it's now part of American Express, different regulatory environment, true bank holding company. And so as we got Kabbage, we made it more fit for purpose, if you will, and you really just relaunch that. But that's where Kabbage is. We're looking at Kabbage as the platform for us to interact with our small businesses. It is not a change in strategy overall to the point where we're going to flip to become lending. And I think Jeff has talked about this in a lot of our meetings. If we would continue to sort of outsize the market in lending for like the next 10 years, we'd still be between 25% and 30% and probably even closer to the 25% of what our profile would look like from a revenue perspective. So just think about that concept, next 10 years, double the market from where we are, from where our book of business is. So our profile is really not going to change because of Kabbage. But our profile to be able to serve our customers from an optical perspective will change because it will be one-stop shopping.

Yes. Let me -- I want to ask you about a topic that Amex is in a unique position to take a high-level view on because you're not a bank in the traditional terms. So you don't have the same worries a bank might have. What's your thoughts on the trend toward embedded finance? Companies like Shopify or Lightspeed offering financial solutions directly to merchants because they're at the contact point, merchants have almost daily.

Yes. Look, I think whether it's Shopify, whether it's Affirm, Klarna, whoever it may be, I think there's a market for that. But where I look at that is, to me, that's sort of the fintech evolution of store cards. And I mean, just think about how many times any of us have gone into a store and someone says, do you want to pay -- whether it's furniture or what have you, do you want to pay out over 12 months? Do you want to open a store card and so forth. And so I think there is a market for that. I think we sort of play in that market on the back end with our Pay It Plan It functionality. So there is a market for installment paying. There has been a market for installment paying for years and years, and it really is store cards, right? I mean -- and so my only view on this is that regulate it the same way that you regulate bank holding companies. As you point out, we're not a bank. Maybe you want to tell that to the Fed and the OCC. But we get regulated the same way as the bank gets regulated. We just don't do as much lending activity, obviously, as a bank would do. And one of the things, I think, that was really surprising to people during this sort of downturn here is our balance sheet didn't increase, right? We have a self-liquidating balance sheet because what drives our balance sheet balances is the spending. So as spending came down, our overall balance -- our balance sheet came down. So I would say, look, I think there's a market for this. I think -- and we've attacked this market from sort of with our existing customers from a back-end perspective. I think you've seen a lot of these players get even more publicity and more play right now during the pandemic with high savings rates. So we'll see how it all plays out in the end here. Is this a growth opportunity for them? What does it do to store cards? And what does the credit profile look like over time of people that are doing sort of buy now, pay later? What I like about our model is it's our customers, customers that we know, customers that we have a relationship with and customers that we know what their credit profile looks like. A lot of these other models is, "Look, I'm going to make you a loan point-of-sale. I have no relationship with you." And we'll see how that all plays out when we get into a more normal sort of credit environment.

Yes. Amex has always stayed out of the private label discussion. I remember Ken talk, getting questions about that for years on end. And now do you think the private label market might see some contraction? Because with these buy now, pay later models and the ability that we're seeing them to offer an actual physical credential or an Apple Pay-like credential, I mean, consumers can plan for these purchases in advance in a way they couldn't before.

Yes. I mean, look, store cards, I mean, you've gone through quite a journey over the years, right? I mean we -- look, I mean, Ken -- we looked at store cards. I've been here 35 years. I mean we looked at sort of private label cards years and years ago. And if you look at this market, how it has changed over the years, I mean, people -- you had retailers that had their own book of business, and then a lot of that was then sold off to GE and Alliance Data and with Synchrony now, obviously, and Alliance Data. And in some cases -- yes, look, furniture stores were making more money off their revolving book than when they're out selling furniture. But the market has consolidated. There are fewer players in that market. And I think that -- just look at what Alliance Data did. Alliance Data went out and [indiscernible] Bread, right? I mean Bread is sort of that point of purchase, "Let me give you that loan at the point of purchase from a private label perspective." So I think that it will be interesting to see how they continue to innovate to be able to compete with the Affirms of the world and everybody else because that's where those buy now, pay later come in. This is the classic store card customer. Now the other reason we stayed at it, Craig, is because the credit profile wasn't really good. I mean this is a customer base that you normally don't associate with American Express, and it's also a customer base that has really high interest rates. And you have these big swings in profitability. But look, Synchrony, Alliance Data and anybody else in this is run by really good people, smart people and they know what they're doing. And their shareholders know what they're doing, and their Board knows what they're doing, and that's the business that they've chosen. And that's what they do, and they do a really good job at it. But that's where I think sort of where Max is headed. And with Affirm and a number of these other buy now, pay laters and embedded finance, it really is attacking that onetime purchase. We came out with Pay It Plan It before any of this was really that big because we saw a need for our customer base that say, "Look, I want to pay for all this. But I want to know, when I buy that couch or I buy that [indiscernible] whatever I'm buying, that I can pay it off in 6 installments, 12 installments, whatever it's going to be, and I know what the cost is going to be." And so we think that relationship with our customer is really important. And look, I mean, even if you look at what Affirm has done, and I think the world of Max, and I think he's as smart as they come, right? But when you look at what they've done is they went out and really, I think, killed it with sort of their Peloton deal and what have you. But as he looks to continue to grow, he announced a number of months ago that he's going to do a debit card and -- because there's only so much you can do at that point of sale that you need to sort of do it on the back end and relationships matter, right? And so I think that's where, when I think about Amex and our ability to play in this space, it's to play in a space with our customer base that we know, that has high credit quality and give them the option to do it and earn the rewards that they want to earn as well.

That's good answer. Getting my eye back on the ball of what we're seeing now, how has -- have you seen any material shift in consumer behavior as the U.S. has progressed rapidly through reopening? I mean we saw a massive shift toward debit. We saw a massive shift toward e-comm and even at the point of sale to contactless. So are any of those trends reversing?

No. Look, I think that what we saw to be -- prior to the pandemic, you saw more and more sort of digital and card-not-present transactions. And prior to the pandemic, we're probably about 60% card-not-present. Digital, we're probably 70%. So I think that accelerated it. You're seeing a lot more digitization with B2B, and you saw that happen. I think the other thing for us is that during the pandemic, we pivoted pretty quickly with a lot of value injection, right? We did a lot of value injection for our customers where we made wireless and we made streaming offers. And I think we have about 70 -- I'll get this wrong. So it's probably like 78% of our Platinum cardholders that took advantage of those offers. But what was really interesting is that 17% of our Platinum Card -- of that 78% that took advantage had never put wireless on, and 10% had never put streaming on. And we're holding 95% and 85%, respectively, of those customers' spend in those categories, and that benefit has gone for about 6 months. And so we were able to sort of pivot a little bit and be able to take a travel value proposition and put other value on those cards. So I think that's worked out, I think, pretty well for us. And the other thing that I would say is that we were on a journey in our consumer business to really think through more than just sort of travel benefits. And so I mean this is only -- said that our strategy was, I think, sort of 100% right. And with small business, more automation of B2B spending and that -- the whole Kabbage acquisition for us in the middle of the pandemic was really good because it accelerated what our road map was internally. And that's -- we always get asked, what about acquisitions? Well, this was one that -- because remember, we did not buy the loan book. The loan book, the PPP loans, all of that stayed with K Servicing, which is a separate entity, which we have nothing to do with. But the platform accelerated our vision of what we wanted to do in small business by a couple of years.

That's helpful. Pivoting topics because you said something on your earnings call that I have never heard uttered from Amex before, which was debit card. And you had also made that comment in relation to China, but made the point that, that could have some application outside of China. So maybe you can touch on those 2 topics independently, China first, the opportunity, how that's evolving and then thoughts around debit cards.

Did I say that? So look, China, as you know, we're the first network to get a license to operate. We operate in a JV manner. And we truly operate as a network. We are not the Express Company, which American Express owns 50% of. We are not acquiring card members ourselves. We are not acquiring merchants ourselves. We are working through partners. And so we've got 16 banks in China that are acquiring card members for us right now for themselves with the network, which represents probably about 90% of the installed base of cards right now. We've got 17 merchant acquirers. And we've got 14 million merchants on -- in China right now. And we're going to report all that stuff we talked about now. If you remember in our earnings call, we talked about -- or end of year, we talked about process volumes, we'll report that separately, and locations in force and things like that, we're calling out -- we're going to call out China a little bit differently. But that is starting to scale up. And the reality is, if you're going to be a network in China, you need to offer all types of products. You need to offer debit products, credit and charge products. And so that's what we've done. And those cards need to be able to be used outside of China because there's a lot of people, obviously, not during the pandemic, but the pandemic will be over at some point. They will travel outside the country. And so we will basically allow those cards to be used, the countries, at merchants all around the world. What a lot of people don't realize is that in a lot of our TNS relationships or some of our TNS relationships, we do issue debit cards. A lot of those are -- most of those cards are used within countries, but we do have, within various countries, debit card applications right now. So now that the network can process debit and now that the merchants will be able to accept debit, the question for us is how do we think about a debit product, if and when it makes sense, in the United States, in -- wherever it may make sense. And so that's what we're just thinking about. But the important part is we have the capability. The question is, what does the value proposition look like? And, when and if, do we actually think about launching a debit product?

Yes. I mean you've always been extremely conscious as a brand to make sure that your products are commensurate with the value the brand is supposed to project. And so how do the cards you're already issuing on debit differentiate from maybe the standard, whatever card it is in that territory?

Yes. Well, I mean, it's -- look, I think much like when Visa would go or Mastercard goes in and does a deal with the bank, they do a deal for both credit and debit. And that's just the way it sort of works. And so it's a little bit different when you take a full network perspective, you can't be a full-fledged network in China without offering credit and debt. And so I think when you think about the brand in that context, the value propositions are delivered via the individual banks. Much like Visa and Mastercard, here's the criteria that you want to have for the various types of cards that you issue. So I think when you think about China, you've got to think about it in that respect, is that -- put yourself in sort of the shoes of how you look at Visa and Mastercard. And that's how we differentiate the brand. I mean if you want to have a Platinum Card, it will be this kind of spending, these kind of benefits, so forth and so on, and you wind up going down a path. In the United States, for example, we have a whole host of products, whether it's Centurion, Platinum, Gold, Green, co-brand and so forth. And each one has its own unique set of benefits, but they all have the service that stands behind American Express. So -- and you have to think about how you would then layer in the debit product, what it would stand for within that brand set. And the other thing is what the need is. I mean -- and I'll take you back to our Serve -- when we had Serve and we had Bluebird. It was sort of an attempt to expand the customer base, but it really didn't work for us, right? It was not our -- the unbanked was really not our customer, and the prepaid market was really not our customer. And we learned that over a period of time. And so we learned that completely at that level of the market, it's not where we are, but is there something in between our -- either our everyday credit card and sort of the prepaid card and that potentially could be a debit card. But that all needs to be worked out. And we are very conscious about the brand. We're very conscious about what it stands. And what we try and do is invest in those things that support and enhance the brand and are not obviously value disruptive.

Okay. So I want to get back to questions we have in the queue with a few minutes we have left. So 2021 was a transitional year, navigating the pandemic, keeping the franchise intact and healthy. How would you describe the level of investment in '22 versus the level in 2021 or 2019?

Yes. Well, look, 2021 will be probably one of the higher investment years that we have. And part of that is because you're going through a transition. You're going through a transition of -- we did value injection in the first 6 months. And then you've seen us, we're starting to ramp up our acquisition and our card member engagement and so forth. So when you look at our marketing spend, I think 2021 will be the highest marketing spend that we've had. When we think about 20 -- which is higher than 2019. When we think about 2022, and we've talked about this. I think we've answered this on the earnings call. But when we think about 2022, we see value injection falling off, but we probably see more money and potentially even more money into acquisition. And remember, and Jeff talked about this a lot when we do earnings call and he does investor calls, we talk about the interplay between our cost of card member services, rewards and marketing. And sometimes we put a little bit more marketing, a little bit less than card member services, which you saw during the pandemic and you'll probably see this year. And so we'll play with those. But I would say that a working position would be probably slightly less than where we are overall marketing spend. I think we derive this from, can we effectively deploy the marketing and can we effectively acquire at the right return levels more and more customers. And what we're finding, and you're seeing this in our numbers, we are consistently acquiring more card members per quarter now. Obviously, we took a real dip in the second quarter of last year. I think we had 2.1 million card members that we acquired in the first quarter of this year. And our intention is to continue to ramp that up. We think there is a good base of card members to go after at this particular point in time.

Okay. I'm going to combine these 2 questions into one last question. You've talked about the advantage of having a closed-loop network. How have you -- to what extent has that been realized at Amex? And then with that, what do you -- how do you see Amex evolving over the next 10 years? Because the network is clearly the centerpiece of Amex, always has been. So I thought these 2 questions would go well together.

Yes. I think, look, you're seeing us utilize the network, "Here is a great way to get into China." I don't know how we would have got in to China without the network, I think, trying to do underwriting in China ourselves, trying to acquire merchants ourselves. I think having the network allowed us to get into the largest payments market in the world. I think when you look at the network and the information it gives us, I think last year alone, we had a 5x increase in the amount of offers that our card members utilize. So I think, especially if you get more and more digital, the ability to connect our merchant base and the ability to connect our card members together. If you look at a lot of our value propositions, look at how much of our value propositions depend upon sort of value that is sourced, and sometimes it's go funded, sometimes it's funded by the merchant, sometimes it's funded by us. But if you look at us, our ability to really drive business to those merchants and for them -- and collectively for us to drive value to our card members, this is an important piece of that value proposition because you got both sides of the equation. The other thing is, obviously, the data and the information from a credit and fraud perspective is our fraud members have always been less than our competitors because you get to see what's going on all the time. That's important. Our ability to craft offers is becoming even more and more important and, I would argue, a little bit easier because of the digitization of everything in the marketplace. So I think the network over time will become more and more important. And I think we're -- and which is one of the reasons we continue to invest in it. And look, we just put -- we just made it so that you have another payment rail opportunity, potentially with debit, because we continue to upgrade it. I mean people think about the network from a philosophical perspective and also from a physical perspective. So from a physical perspective, we continue to upgrade it. And philosophically, it's what you want to do to connect the various constituents on it. And I think we're just -- we're scratching the surface in those areas. And I think that over time, it's going to become even more and more important for us.

Okay. Steve, we're out of time. I really appreciate you joining us. It's great seeing you even in this 2D fashion. Hopefully, 3D comes next. And thanks to our audience. A replay will be available about an hour. Have a great afternoon and a great weekend.

Thanks for having me on.

Thanks, Steve. Always appreciate it. Take care.