American express could be affected by declining credit card distribution
American Express is one of the leading financial services company that offer charge card and credit card products. American Express offers travel related services through its cards to customers and businesses across the globe. It is also the 3rd largest credit card issuer. A major part of the revenue of American Express is from credit cards and charge cards which customers swipe for transactions thereby helping AmEx to get commission from merchants. In fact the execution fees and card transaction fees comprise 75% of the income for the company. Another major source of income for AmEx is the interest earned on the outstanding credit card balances of customers.
A major part of the AmEx business depends on how many credit cards are in use at a given point of time. This could increase the number of transactions and the overall size of transactions too earning commissions for the card issuer. The average outstanding credit card debt is also affected by some of the existing macroeconomic conditions, which includes inflation rates and employment levels. Interestingly, statistics reveal that the number of credit cards in use currently has dropped from 70 million to around 62 million over the last one year. Given that the card issuing companies had already written off bad debts, this drop in the number of card issuers could not likely be due to card cancellations.
Also AmEx, which is known for the lowest charge off rates in the credit card industry doesn’t have to worry as much about the write-offs because a major part of its client base is from the affluent section of society and also the card issuer is known for the conservatism when it comes to issuing credit cards. However, analysts feel that even a voluntary decision on the part of the credit card customers could lead to loss of revenue for American Express. There is also a forecast which shows that the number of card holders would increase from 30 million to 34 million in the next 2 years. It is expected to increase to as high as 44 million by 2017 end.
A short term decline in credit card usage is on the cards with 9.8% unemployment rate and a slow pace of economic recovery in the country. Customers are also showing caution at using their credit cards. There could be 13% decline in the stock in the next couple of years if the number of cards dropped to 25million.
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