AMEX's Performance - Strategy of the Company That Safely Transports Customers Assets - Research Paper Example

American Express (AMEX), world’s largest issuer of charge and credit card, caters to the affluent segment and possesses expertise in evaluating the credit risk of individual customers. As of 2008, they had 41 million card members and command a 24% share of US credit card payments. The situation is somewhat challenging with the US economy in recession. This warrants that innovative products be offered to the customers but taking into consideration the risk factors associated with the current market situation. 1. Situation analysis 1.1 Firm analysis Mission The mission of Amex is to handle and transport the customers’ assets with security and trust. Root marketing strategy Amex segments and targets the customers that are affluent and is currently using the internet as the main channel for customer relationship, payments and entertaining applications. They use catchy slogans to attract the niche clients. They sell a relationship and not just a card. Organizational objectives As the company carries a premium brand positioning, the company wants to cater to the niche, discerning customers after understanding their needs. Having narrowed down their interests, they now focus on payments and travel businesses. They would like to offer innovative, value-added products that would attract the customers and be suitable for the current economy. They do not compromise on credit standards just to gain new card holders. Description of marketing mix Amex offers several products under the heads of charge and credit cards and have partnered with different airlines and hotels. In addition they have two products for the corporate clients and several products and services for the small businesses. They also have prepaid, stored value-products such as travelers cheques and gift cards. As far as promotional element is concerned they decreased spending on direct mail and television advertising while increasing on event/experiential marketing and internet. Amex is registered with millions of merchants all over the United States. They place applications in restaurants and other retail establishments apart from receiving plenty of membership requests through the internet. Internet has become the most economical and advantageous channel for Amex. They do not charge any annual fee on their cards, allow easy payment schedules and reward points on charge cards. Incentives are offered on their other products to Corporates and small businesses. Segmentation strategy Amex caters to both the personal and the business segments. They offer travel and entertainment for the business sector and retail and others sectors for the personal segment although by 2008, the retail sector accounts for almost two-thirds of the card billings. They cater to the affluent segment as 25% of the cash/cheques segment represents high-value transaction like car purchases, tuition fees, and rent/mortgage payments. Targeting strategy Since Amex is not a bank and hence do not have a debit card, they have to focus on making their credit card the card of choice for all transactions. American consumers use different cards for different purposes – and they use the Amex only for travel and entertainment. They targeting strategy was to tap the ‘high-wallet consumers’ which means those who spend more than $30,000 annually using cards. This figure represents 10% of the card users but accounts for half of US charge/credit card consumer spending. Amex targets consumers that like to travel, like to be different and like special access to exclusive experiences. Accordingly they target the global consumer group and the Global business-to-business group. Positioning strategy Amex is a powerful world-wide brand, well positioned, and has been able to withstand turbulence in the economy. The company has not compromised credit standards just to gain new cardholders and this has added to their brand image thereby enjoying premium positioning in the market. They have superior risk management and credit controls in place. 1.2 SWOT analysis Macro-environmental factors – opportunities and threats Opportunities – for redemption of rewards program they should offer variety and unique reward programs. They can think in terms of catering to the student segment that is about to emerge from the universities and enter the work field. Consumers are shifting from paper-based payments to cards and electronic methods and capturing even a small portion of this market represents a big opportunity for Amex. Due to the current situation, Amex faces a threat of defaults and low spending. Debit card transactions are expected to take over the credit card usage by 2011 and Amex would be at a disadvantage as it does not have debit card whereas both Visa and MasterCard offer debit cards. Emergence of new payment networks is another threat to Amex. PayPal and Google Checkout are non-traditional, technology-based where even the plastic card is not required to be presented to the merchant. Through this buyers have a fast, safer and faster buying experience. Micro-environmental factors – strengths and weaknesses Amex uses the spend-centric business model focusing on generating revenues by driving spending on its cards. They also focus on finance charges and fees which allows them to grow market share in the payments industry. Amex has superior risk management and credit controls which helps them to sustain past-due loans and write offs. Their cards are accepted at millions of merchants in the United States covering more than 90% of the card members’ general purpose charge and credit card spending. Data-based marketing is also strength at Amex as it allows them to analyse the card member purchases and then develop offers to boost spending with particular merchants. In the industry both open-loop and closed-loop payment networks are available and while Visa and MasterCard employ the open-loop payment network, Amex uses the closed-loop network. This has certain advantages as payment processing becomes easier. In the same network the merchant and the cardholder can be serviced. Based on the credit score, Amex has the lowest exposure to subprime card holders and hence the exposure to risk is minimized. However since Amex is not a bank they do not offer debit cards and debit card transaction are expected to exceed credit card transactions by 2011. Amex does not cater to the mass market but to a selected high-value segment. 1.3 Industry analysis Demand and competition The payment in the United States is divided into three categories – paper-based, card-based and electronic-based. The card-based payment is either through credit or debit card in addition to the electronics transfer benefit. As of now credit card transactions exceed debit card payments but by 2011 debit card payments are expected to overtake the credit card transactions even though the average purchase per credit card transaction is expected to remain higher. Competitors include card networks like Visa and MasterCard that process transaction, primary banks that issue cards and organizations that both issue cards and process transactions like Amex and Discover Financial Services. Banks issue credit and debit cards under the Visa and MasterCard brands and these banks are responsible for the pricing, positioning and marketing for their co-branded cards. There is intense competition that results in cross-selling, offering premium cards with enhanced services and lowering interest rates. Strengths and weaknesses of competitors Payments network operate under two business models – open-loop or closed-loop network. Visa and MasterCard use the open-loop network. Being in the open-loop payment network, they have to connect to two financial institutions – the card issuer and the acquirer or the merchant. Amex and Discover use the closed-loop network which has advantages over the open-loop network. Both MasterCard and Visa have gone public and since 2008, Visa’s focus has shifted from delivering benefits to partner banks to maximizing shareholder value. Both generate their revenue from service and processing fee. Both Visa and MasterCard own a merchant network and they issue majority of their cards through banks or other partners. Actual competitors Actual competitors to Amex are Discover Financial Services. They have a wholly-owned network operation that includes both debit and credit card capability. Their range of product includes personal and student loans, certificates of deposit, and money market accounts. Their primary revenue comes from interest income earned on revolving card member balances. Other sources of revenue are late payment, over-the-time and merchant discount fees. Similar to Amex they too offer a rewards program to card holders. Amex and Discover are the only ones that do not include third-party business. Market share analysis/data As of 2007, Visa enjoyed the highest market share of credit card purchases (42.2%) with Discover being the lowest at 5.3%. MasterCard had the second position at 28.7% and Amex’s market share was 23.8 percent. Eighty-two percent of Visa’s revenues come from service and processing fees while MasterCard gets 76% of its revenues from transaction fees. Discover generates its revenue from interest on the revolving balances while Amex’s primary source of income came from the revenue earned from fees charged to the merchants. This is known as the discount revenue and this revenue along with the card fees accounted for 70% of the Amex’s income net of expenses. Amex is able to draw a premium discount rate from the merchants because they are able to draw the higher-spending segment. However, the weighted average of the fees paid by US merchants was the highest to Amex. The main source of revenue for Visa and MasterCard is service and processing fees but this does not imply that the card users use the card extensively for purchases. Many card holders may even hold the card to be used for emergencies of for specific purposes but they are not regular users. Hence while Visa and MasterCard may have higher number of registered card holders, the number of users or the number of transactions may be higher on the Amex cards. Discover generates revenue on interest which too suggests that card holders are in the habit of delaying payments which increases the chances of default during phases like the current recession. Ames, however, generates revenue through the merchants and this appears to be the most viable form of revenue generation. This is all the more important because Amex has customers whose credit-worthiness has been tested and they are usually the high spenders. As the merchants gain much moiré from the Amex cardholders they share larger revenue with Amex. Market position Amex is the market leader because of its unique marketing strategy. They sell a relationship and not just a card. They provide enhanced experience for their card members; they ensure privacy of information and fairness in billing. The internet has also helped them build a brand presence and prestige. They focus on relationship and lifestyle over transactions. They are registered with million of merchants in the US covering over 90% of the general purpose needs of the card holders, thereby ensuring that customers can extensively use the cards at any outlet. Growth trends within the industry Debit cards transactions are expected to takeover the credit card usage and since Amex does not have a debit card, it is at a disadvantage. Secondly, because of the downturn in economy, card issuers have become wary of issuing fresh cards. In fact some are withdrawing facility extended to card holders fearing defaults due to unemployment. 2. Identification of problem or opportunity The current credit crunch poses a problem and an opportunity. There has been a slowdown in consumer spending. During the housing pricing bubble there had been past-due loans and write-offs. At the same time, loans would not be easily forthcoming. So Amex could use the current economic situation as an opportunity to sustain and also foster growth in the industry. To recover the dues from card holders that are unable to pay, Thius could result in huge losses but Amex can use this opportunity to recover or minimize losses. 3. Development of alternatives – cite two feasible courses of action The affluent consumers of Amex represent only 10% of its members but they account for half of charge/credit card spending. So the strategy should be based with these consumers in focus as these would be least risky. The recession has increased unemployment which is expected to rise even higher. Under the circumstances, people would be keen to start their own ventures but funds would again be the constraint. Banks would not be too keen to lend them. Hence, Amex could consider offering loans to such start-ups as it could help entrepreneurs establish themselves. This could be done after careful investigation of the risk mechanism and ascertaining the creditworthiness of the person concerned. Credit cards can offer an immediate access to short-term capital needs even for the existing small businesses. Hence Amex could target this segment offering small EMIs as pay back option. They could draw upon the database of the existing affluent, high-spending consumers as they the safest bet considering the recession and expected defaults. Since electronic payments are fast catching up like PayPal and Google Checkout, Amex could use this time and opportunity to explore this form of payments under the Amex brand. They could issue paperless codes to consumers and when the consumers wish to make electronic payments, real-time verification would ensure that the consumer is not a defaulter. They could thus create a new segment like the housewives that seldom move out of home. It could also include the youth that do not wish to carry the cards on their wallet or tend to forget their wallets. 4. Evaluation of alternatives. During recession banks would not be keen to offer loans to start new businesses while this is one way that could ease the economy and reduce unemployment. If Amex capitalizes on this opportunity, they would be serving the society while also enhancing their services. It is likely that even among their affluent customers, many would like to start their own business. For every new business that starts at least 5 new employees would be engaged. Since this loan would be granted only to the affluent, high-spending customers, the employees of these customers could be granted Amex cards with minimal annual fee. Since these are the affluent customers the risk would be minimal and payments assured. The risk of course remains to invest on start-ups. The loans should be granted only against verified credit information of the consumer and the feasibility of the start-up project. The amount of loan would depend upon the nature of the business, the credit rating of the customer and the duration for which the interest is sought. As far as paperless cards are concerned, this would be a great opportunity. Usage through the internet is hassle-free as real-time verification is possible through the close-loop network. When the cards need to be presented physically at the merchants’, instead of swiping, technology could provide a facility which would enable the card member to input the three-digit code personally. This would also ensure security against misuse of the card. Such customers should be given a small credit limit which could be enhanced against payment performance. This would also reduce the costs of Amex in issuing and dispatching the plastic card. The application too could be processed online after obtaining credit information from their bankers. 5. Selection and implementation To implement these two strategies, Amex needs to advertise through their website about the offer. They would need to have a strong credit department to verify the credit rating of the customer, a technical department to understand the project that is required to be set up, to study the feasibility of the project. Since these would be granted to the existing customers no physical verification is necessary but credit rating should be adhered to strict standards. such loans can be granted only when all dues have been cleared. For the paperless cards, email offers would need to be sent to the potential customers to avail of the offer. The first few hundreds could be offered free of annual charges. Technology would have to be upgraded at the merchants’ end so that no physical plastic cards are needed to be swiped. A palmtop instrument should be able to make payments online. Even the mobile phone of the customer should be able to make payments against a security code. It is expected that many would opt for the loan to start their own businesses if the offer is lucrative. The process to verify an application may take 2-3 working days but there would be takers. For the paperless cards, many may want to switch over from the plastic cards to the paperless cards. Such customers maybe offered a small incentive to clear their previous dues and then switch over, thereby helping Amex to recover their dues. Thus, considering the current recession and slowdown of the economy, Amex should slightly alter its strategy and target a different untapped segment. It has a premium brand positioning and hence by targeting the small businesses it could also recover its dues. Electronic payments would also help it to minimize costs while recovering dues. Read More