American Express Co. is looking at potential acquisitions that would strengthen its competitive position in alternative payments as credit conditions continue to improve and competition heats up for high-end consumers.
The credit card issuer and payments network already has taken steps to build a stronger technology base with the purchase of the person-to-person payments startup Revolution Money this year and the July 21 announcement of two hires with extensive tech experience.
"We are certainly open to acquisitions that will enable us to further our strategies, certainly in the area of new fee revenues or alternative payments," Daniel Henry, an executive vice president and chief financial officer at AmEx, said in an earnings conference call with analysts on July 22.
Henry gave few specifics about whether the company is contemplating specific deals and what those might be, but he cited the Revolution Money acquisition as an example.
An analyst asked Henry whether Amex is more interested in issuing prepaid cards because of favorable treatment such cards received under a provision in the Dodd-Frank financial reform law that gives the Federal Reserve the ability to regulate interchange rates for debit card transactions.
While prepaid makes up a "relatively small" portion of its business, it is an area AmEx has experienced "pretty substantial growth in," Henry said. "It's an area that we'll continue to focus on in terms of investment."
AmEx has shown a desire to expand in the prepaid and alternative payments space with the January purchase of Revolution Money for $305 million. Revolution runs an online person-to-person funds- transfer service and offers prepaid cards linked to customers' accounts.
"They want to stay in front of the changing landscape in terms of payment methods," said Scott Valentin, an analyst who follows card issuers for FBR Capital Markets in Arlington, Va. "Given the fast-changing pace of payments, the iPhone and a lot of the smartphone technology now allowing for point of sale [transactions] … there are a lot of different avenues from which they can seek to improve upon."
Valentin cited Amex's referral partnership with Concur Technologies Inc., a Redmond, Wash., expense management software developer in which it has a minority stake, as an example of the sort of deal it could do to boost fee income. "I think Concur would be the type of company that would fit within America Express' mandate for M&A," he said.
Like other major credit card issuers, AmEx reported further improvements in delinquency and charge-off rates. The company, analysts said, has performed better than its peers thanks to its focus on wealthier customers, which rebounded from the recession more quickly than other consumers.
Net charge-offs in its U.S. card services business fell to 6.2% in the second quarter from 10% a year earlier. The 30-day-plus delinquency rate also fell to 2.7% from 4.4% in the same period.
The improvements led to a 56% year-over-year decline in Amex's provision for U.S. card losses, to $519 million.
"Their credit performance has been nothing short of superb," said John Stilmar, an analyst who follows issuers for SunTrust Robinson Humphrey in Atlanta.
AmEx posted net income of $1.02 billion for the quarter, or 84 cents per share, up from $337 million, or 9 cents per share, in the year-earlier period.
AmEx said cardholder spending has slowed slightly in July, which Stilmar said he attributes to "choppiness" in the equities markets.
Not only do the credit improvements put AmEx in a position to consider new technology investments, according to Henry, they also are helping it to more aggressively market to well-to-do consumers, which is important because all issuers are vying for higher-credit-quality customers.
Amex's marketing and promotion expenses were $802 million, a 128% year-over-year increase. Rewards expenses were down slightly from the previous quarter, but rose 16% from a year earlier, to $1.2 billion, a sign that cardholder spending also is improving.
"That high-end, high-spend customer is the golden goose of postrecession lending," Stilmar said.
Henry told analysts that some of the company's marketing has shifted from activities that stimulate account growth in the near term to efforts to promote long-term growth. "We'll continue to use benefits from credit to invest in the business, although I think over the long haul we'll probably return to levels more similar to what you saw back in the '07 time frame," Henry said.
Competition for the consumer segments AmEx targets has heightened in recent years, Henry said, adding that it is "very focused on continuing to improve the value proposition to our customers in terms of the rewards" and "service that we provide."