American Express has spent years developing new marketing alliances and acquiring programs to shed its reputation as a card for the elite. But its success still hinges on premium cardholders.

Setbacks in Europe and Australia along with competitive card network pressures have meant its Global Network Services business — which relies on other banks to issue its cards — saw its total billed business decline in the second quarter by 3% from a year earlier. So despite the company’s efforts for well over a decade in the U.S. to get banks to issue its cards and heavy foreign cobrand marketing plus portfolio sales in some countries, the GNS business amounts to only 15% of the company’s Q2 billed business.

But Amex has not abandoned the roots of what made it successful.

American Express Platinum card
Bloomberg News

In the second quarter, the company added 2.9 million new cardholders, of which 60% were on fee-paying cards. Net card fees were up by 9% in the second quarter from a year earlier, driven by increases in Platinum and Delta Airlines card acquisitions.

That said, there is still some trepidation in Amex's messaging. The company was careful not to define its premium cardholders as affluent or wealthy. Rather, it loosely termed the target audience as consumers who desire premium services and premium access. “Around half our acquisitions on U.S. Platinum come from millennials,” said Jeffrey Campbell, Amex's CFO, on the company's earnings call.

Two additional items were discussed during the presentation that could have meaningful impact on the company’s future success: partners and parity.

Amex announced key partnership milestones with Amazon, Marriott and Wells Fargo during the quarter, enabling it to reach new premium and small-business customers. It will be launching a new small-business card for Amazon this year.

The company plans to achieve acceptance parity with Visa and Mastercard by the end of 2019, which can only mean continued downward pressure on its average discount rate. Stephen Squeri, chairman and CEO of Ames, urged that emphasis not be placed on the rate itself since the company’s focus is on driving total discount revenue growth, which is achieved through higher spend from more cards and more accepting merchants.

That said, the OptBlue program — which provides pricing flexibility for smaller merchants — is considered a key tool for growing the Amex acceptance network among categories such as clothing stores, restaurants, construction supply stores, salons/spas, medical supply companies and dry cleaners.

The company reported second-quarter net income of $1.6 billion, up 21% from $1.3 billion a year ago. Total revenues for the quarter, net of interest expense were $10.0 billion, up 9% from $9.2 billion a year ago.

While growth in total loans for the quarter were up 16% from a year earlier, the provision for losses along the same time period was up 38% and charge-offs grew by 20%, thereby demonstrating that lending is not the company’s main focus or strongest suit.

Amex is making heavy investments in rewards, card member services and marketing. A key aspect of card member services includes exclusive partnerships for events such as Wimbledon and the proliferation of its Centurion airport lounges. Squeri announced that the company has plans to expand its Centurion lounges to airports in Los Angeles and Denver and will be soon adding a second lounge in New York at John F. Kennedy International Airport.

When it comes to spending money on expenses for non-cardholder benefits or acquisitions, the company is extremely tightfisted as operating expenses shrank 2% for the second quarter from a year earlier. Meanwhile, spending to attract and retain cardholders grew by double digits across the board. Marketing for acquisition grew by 14%, reward spend was up 11% and card member services (e.g., airport lounges) was up 22%.

Key elements in attracting and retaining premium cardholders in the U.S. and overseas included upgrading or refreshing its cards. Amex upgraded its Platinum card in the U.S. in 2017 by adding benefits such as $200 in annual credits from Uber. It also announced a new merchant funded benefit ($100 credit) from Saks 5th Avenue for Platinum cardholders to shop with the merchant. Squeri announced that the company had completed Platinum card refreshes in Hong Kong and Mexico, along with a Gold card refresh in the U.K.

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