Dark Clouds Loom for American Express

It’s business as usual for American Express Company according to its 10-k recently filed with the Securities and Exchange Commission in Washington.

American Express Amex

Some interesting facts about Amex according to its filing:

  1. Amex has called out the rapid growth of Alternative Payment Methods systems aggregators Paypal, Square and Amazon as a competitive threat
  2. Travel and Entertainment spend represents 25% of US billed business
  3. Co-branded cards like Delta represent 17% of billed business globally
  4. The Delta Airlines co-branding partnership represents 8% of billed business globally
  5. The Delta Airlines co-branding partnership represents 21% of members loans
  6. Card member loans grew to US$55bn by the end of 2018
  7. On average card member borrowers paid 10.7% interest in 2018

However there are dark clouds on the horizon. It’s merchant discount revenue grew by 8% in 2018 to US$24,721bn. This huge chunk of its revenue was 61% of total revenue in 2018 (US$40,338bn) is at risk.

According to extracts from the documents filed, Amex has identified under risk factors:
“Our business is subject to comprehensive government regulation and supervision, which could adversely affect our results of operations and financial condition” and “Ongoing legal proceedings regarding provisions in our merchant contracts could have a material adverse effect on our business and result in additional litigation and/or arbitrations, substantial monetary damages and damage to our reputation and brand”

In Europe Amex is continuing to dodge the regulators despite the ruling from the EU Court of Justice in 2018
“In addition, there is uncertainty as to when or how interchange fee caps and other provisions of the EU payments legislation might apply when we work with cobrand partners and agents in the EU. In a ruling issued on February 7, 2018, the EU Court of Justice confirmed the validity of the application of the fee caps and other provisions in circumstances where three-party networks issue cards with a cobrand partner or through an agent, although the ruling provided only limited guidance as to when or how the provisions might apply in such circumstances.”

The issue seems to boil down to the interpretation of interchange. Merchants (Business that accept card payments) are saying that Amex are ignoring the caps that should have been in place since December 2015.

Amex should be warned. The EU Commission has taken a hard line with Visa and Mastercard, recently fining Mastercard for violation of merchants rights to settle cross border transactions
and both have paid out large settlements to merchants for historical overcharging.

EU Regulations

In January 2019, the European Commission fined Mastercard €570 million ($648 million) for now-defunct rules that prevented retailers from shopping around for cheaper fees from acquirers in other EU countries, and experts say it could add to the avalanche of private damages retailers are already seeking following previous Commission actions on card fees.

The EU Commission has long been interested in various aspects of so-called interchange fees, which are paid by merchants when credit and debit card transactions are made.

To address the Commission’s competition concerns, Mastercard and Visa have, each separately, decided to offer the following commitments that would reduce the inter-regional Merchant Interchange Fees by at least 40%:

1. To reduce the current level of inter-regional interchange fees to or below the following binding caps, within six months of a Commission Decision making the commitments legally binding:

  • For card payments carried out by the cardholder in a shop (“Card Present Transactions”): 0.2%
    of the value of the transaction for debit cards; 0.3% of the value of the transaction for credit cards:
  • For online payments (“Card Not Present Transactions”): 1.15% of the value of the transaction for debit cards; 1.50% of the value of the transaction for credit cards.

2. To refrain from circumventing these caps by any measure equivalent in object or effect to interregional MIFs.

3. To publish all inter-regional interchange fees covered by the commitments in a clearly visible
manner on their respective websites. The commitments would apply for a period of five years and six months. A trustee would be in charge of monitoring the implementation of the commitments by the two companies.

This is all piling pressure on Amex particularly in Europe where repricing of Amex contracts and historical recovery claims are now inevitable.