http://www.economist.com/news/finance-and-economics/21645258-problems-american-express-are-sign-broader-blight-slowing-charge
The Economist
Credit
cards in America
Slowing
charge
Problems
at American Express are a sign of a broader blight
Feb 28th 2015 | NEW YORK | From the print
edition
[1] THERE have been few better
opportunities for financial firms in America over the past half-century than
providing credit cards. For customers, they offer a convenient way to pay and
easy access to credit; for merchants, they simplify the mechanics of collecting
money, which once required vast billing and collection departments; for third
parties, they create clever channels for marketing. No wonder that the
companies that provided the plumbing and the banks that offered the credit
experienced years of profitable growth, with only the occasional lull when the
economy was in recession.
[2] The good times have not entirely
disappeared. E-commerce has created a big new market; cheaper processing
options are allowing small merchants to accept cards for purchases previously
made with cash—a cup of coffee, say. An oddity in the Dodd-Frank act
overhauling America’s financial regulations, the so-called Durbin Amendment,
boosted credit cards by penalising the main alternative, debit cards.
Nonetheless, there are signs that the go-go years are gone: growth is tapering
off, the margins received on lending are declining, and the cost of attracting
customers is rising—even though America’s economy is on the up.
[3] The credit-card network that is most
obviously struggling is American Express (Amex). Only a decade ago, Amex was
widely thought to be able to expand profits and revenues annually at
double-digit rates. It sets itself a target of 8%, but slower growth is now
more likely, says Vincent Caintic of Macquarie, an investment bank.
[4] Some of Amex’s problems are specific to
it. For instance, it skims off a bigger slice of the sales it facilitates than
most card networks, and had tried to ban merchants that accept its cards from
encouraging their customers to use cheaper ones instead. A court has now ruled
that illegal.
[5] Other woes are a function of broader
forces within the industry. Americans are not as willing to carry a balance on
their credit cards as they were before the crisis: the economy is now growing
much faster than revolving credit, a category composed chiefly of credit-card
debt. That may be partly because banks are still leery of lending to poorer
Americans; instead they are competing to offer cards to the rich.
[6] As a result, card issuers are providing
bigger rebates on purchases, more frequent-flyer miles as a sign-up bonus and
longer interest-free periods for those who transfer balances from other cards
(see chart). Mercator Advisory Group, a consultancy, estimates that the amount
of revenue from each transaction passed back to the customer has been growing
for years. In 2012 it put it at 47% for three of the biggest issuers, up from
39% in 2010.
[7] At the same time, the airlines that
have survived the many recent rounds of consolidation and the handful of
retailers with which card issuers would want to partner have woken up to their
own value and are demanding better deals, says Ken Paterson of Mercator. Amex,
which issues cards as well as running the Amex network, had seemed to have a
lock on the most acquisitive shoppers and travellers, and so was the preferred
partner of any airline, retailer or restaurant that wanted to reach them. Yet
both Costco, a discount retailer with high-spending customers, and JetBlue, a
big airline, recently stopped using it for “co-branded” credit cards.
[8] If there is an exception to the
downturn in the industry’s fortunes, it appears to be Capital One, a
card-issuing bank. Its revenues (and share price) have risen sharply even as it
has bucked the conventional wisdom by focusing on riskier borrowers. Before the
financial crisis, this was a crowded field. Now it is all but deserted.
From the print edition: Finance and
economics