Hedge-fund manager
Whitney Tilson used his American Express card for three decades to buy
groceries, trips to Europe and just about everything else. A few months ago, he
switched.
“I
charge a lot of money on my credit card,” said Tilson, 48, who manages more
than $83 million at Kase Capital Management in New York. He
said the Barclaycard Arrival Plus World MasterCard gives him more cash perks
while rewarding him for the money he spends on travel. “The difference between
getting 1 percent and 2 percent cash back is thousands of dollars and for that
amount of money, Barclaycard has a better offer,” he said.
American
Express Co., long the envy of the industry for its wealthy clientele, is
fighting to retain its grip on affluent cardholders like Tilson. Rivals
including Barclays Plc and JPMorgan Chase & Co. are courting them with
enhanced perks, lower fees and more incentives. And as AmEx seeks to diversify
by pursuing tech-savvy millennials and underbanked Americans, the risk of
eroding its brand—and its biggest source of revenue—is rising.
“AmEx’s
cachet with the affluent is not what it used to be,” said Jason Arnold, an RBC
Capital Markets analyst. “AmEx has always enjoyed king-of-the-hill status, but
that’s changed. They’ve seen more competition in the upper-end, and they
recognize that they have to go elsewhere to fill that gap.”
Spending Slowdown
AmEx
remains the most widely held card among high-net-worth households, or those
with $1 million or more of investable assets, though its edge is narrowing,
according to data from wealth-research firm Phoenix Marketing International.
Fifty-nine
percent of wealthy households had a card issued by AmEx last year, unchanged
from 2012, while those holding a Chase-issued card rose to 58 percent from 52
percent, the data show. Among households making at least $125,000 annually,
Chase surpassed AmEx two years ago, the data show.
The
competition is increasing as New York-based AmEx struggles to boost sales amid
a slowdown in customer-spending growth. Revenue rose 6.6 percent in the fourth
quarter, falling short of its 8 percent goal, while customer card spending increased
6 percent to $268.5 billion, compared with 9 percent in the preceding
three-month period. Expenses climbed to $6.3 billion as the company said it
planned to cut as many as 4,000 jobs this year to improve efficiency.
Preferred Card
AmEx,
whose largest shareholder is Warren Buffett’s Berkshire Hathaway Inc., fell 7.7
percent this year through Feb. 10, the third-worst performance in the
30-company Dow Jones Industrial Average. The shares climbed in each of the
previous six years.
Since
the financial crisis, banks have relied more on fee-generating businesses such
as credit cards to counter tepid loan demand and volatile trading. As
less-affluent consumers cut spending during the recession and a 2009 law known
as the CARD Act limited lenders’ ability to raise interest rates and charge
late fees, banks revved up their pursuit of customers with top credit scores
who pay their bills on time. Credit-card write-offs slid to less than 3 percent
last year, the lowest in
almost three decades, according to the Federal Reserve.
Most
Americans carry at least three cards in their wallets and competition is fierce
to supply the one that customers use for the majority of purchases, said Matt
Schulz, a senior analyst at Creditcards.com.
Private Jets
Banks
are wooing customers with lavish perks like exclusive dinner reservations, wine
tastings and tennis lessons. Lenders including Barclays and Citigroup Inc. have
struck partnerships with airlines and
hotels, offering customers discounts on plane tickets and lodging, as well as
cash rewards.
Tilson
said he prefers his Barclaycard because it gives him as much as 2.2 percent
cash back on travel purchases and no fees on foreign transactions, unlike some
AmEx cards. JPMorgan’s Palladium card, available only to clients of its private
bank, offers complimentary airline tickets for travel companions and free time
on a private jet.
“The
customers that we service tend to look at Chase for all of their banking
needs,” said Jennifer Roberts, president of New York-based JPMorgan’s affluent
and high-net-worth card business. “It was something they were asking us for.”
The
average annual fee on U.S. card offers increased to $140 last year from $101 in
2012 and $69 in 2007, as banks added more benefits, according to data from
marketing-research firm Mintel Group Ltd. The most popular offer was $95, the
company said.
Airport Lounges
AmEx
has had to trim or alter perks as competitors struck deals with merchants. AmEx
cardholders lost free access to American Airlines and U.S. Airways airport
lounges last year, and United Airlines also cut off access to AmEx customers in
favor of those with cards from its own partner, JPMorgan, following its merger
with Continental Airlines. American Express has since built its own airport
lounges in cities including New York, San Francisco and Las Vegas.
Still,
for some affluent consumers, the loss of such rewards is reason enough to shop
around for a new card.
“American
Express used to make me feel special,” said Darius Gilvydis, a radiologist from
outside Chicago who switched last year from AmEx to the Ritz Carlton Visa card,
issued by JPMorgan. “What the heck do I get from them now? It’s just not worth
the money,” he said, referring to the $450 annual fee for the AmEx Platinum
card, which is $55 more than the Ritz Carlton card.
‘Growth Prospects’
While
the battle for affluent clients is intense, AmEx products are “unmatched,” said
Josh Silverman, its president of U.S. consumer services. The number of Platinum
card holders increased 8 percent last year from 2013, and the company’s
customer service and rewards programs remain the industry standard, he said.
“For
all the talk from our competitors about the inroads they are making, we have
not seen that reflected in our numbers, not in customer retention or the
ability to acquire new cardmembers,” Silverman said in a phone interview. “We
have great growth prospects with the affluent.”
As
banks chase the rich, competition for partnerships is also intensifying. Costco
Wholesale Corp. dropped AmEx as its
card issuer in Canada last year and and will end the larger U.S. agreement on
March 31, 2016. JetBlue Airways Corp. is also in talks to replace AmEx,
other people have said.
Broadening Appeal
Under
pressure to retain such partnerships, AmEx in December announced it would extend its
arrangement with Delta Air Lines Inc. in a deal with an upfront cost of $109
million. Last month, it did the same with Starwood Hotels & Resorts
Worldwide Inc.
American
Express started a program last year
designed to make it easier and cheaper for small businesses to use its network
as its cards aren’t as widely accepted as those of rival banks that use
networks run by Visa Inc. and MasterCard Inc.
Chief
Executive Officer Ken Chenault, 63, has introduced new products aimed at
younger and less-affluent customers as AmEx seeks to broaden its appeal. The
lender is working with companies including Uber Technologies Inc. and Apple
Inc. to expand mobile payments, and courted Americans who lack access to
traditional banks with products like its Bluebird prepaid card, offered at
Wal-Mart Stores Inc.
Such
efforts risk diluting AmEx’s brand, said William Ryan, a Portales Partners LLC
analyst. “American Express has always charged merchants a higher rate because
of their affluent base,” Ryan said. “What happens when they look like everybody
else?”
‘More Battles’
AmEx
executives have said repeatedly that becoming more inclusive hasn’t hurt their
label and remains a priority. Still, Chief Financial Officer Jeff Campbell has
said that efforts to broaden the lender’s appeal are putting pressure on
revenue.
The
fees AmEx collects from merchants for processing transactions, known as
discount revenue, increased last year at a slower rate than the pace of
spending on the company’s network, according to data compiled by Bloomberg.
That’s a sign that AmEx’s profitability is under pressure and the company is
spending more money on rewards programs to retain customers, according to
analysts including Moshe Orenbuch of Credit Suisse Group AG.
AmEx is
awaiting a decision on whether its rules barring merchants from steering
customers to use other brands is stifling competition. The U.S. and 17 states
are suing AmEx in an antitrust case in federal court in New York. Chenault has
said the rules are needed to protect the
company’s brand.
“The
days when AmEx could solely rely on higher-end customers are long gone,” said
Ron Shevlin, an analyst at payments-research firm Aite Group LLC. “AmEx is facing
more battles on more fronts.”
