There is a different feel to the troubles American Express faces today, mainly because its lost Costco relationship represented what might be one of the last of its kind — a deal in which a large retailer gives exclusivity to a certain card brand and tells customers how to pay.
Even though American Express executives had warned about the need to restructure and cut costs in the wake of losing the Costco portfolio, the reality didn't strike home until it began disclosing the nature of these changes this week.
An overhaul in some management positions and the message that more difficult cuts were yet to come to the tune of $1 billion illustrates that American Express is going to endure another tough period, something the card brand has dealt with in the past.
The exclusive Costco deal came to an end at a time when it is hardest to replace. Consumers are increasingly demanding more payment options in more channels, and tech companies are flocking to this opportunity.
"It's not likely American Express can land a similar portfolio," said Gil Luria, analyst with Los Angeles-based Wedbush Securities. "Costco is very unique, not only because of how big they are, but because they were willing to give that exclusivity to American Express for a very long time."
Such a scenario helped drive transaction volume and customer acquisition for American Express, benefiting off the fact that loyal Costco customers were willing to play along in exchange for the deals they got for buying in bulk at Costco stores.
"Most other retailers' customers would not tolerate having to pay with just one type of payment method," Luria said.
Exclusivity remains a sweet science for card brands, moving Citigroup/Visa to outbid American Express for Costco in the U.S., and Capital One/Mastercard to do the same in Canada. If Amex also benefited from its image as a card for the elite, that too will change. The card network has been trying for years to reach a broader audience, largely through products built on its Serve platform for digital and prepaid payments.
American Express, which also lost its JetBlue relationship, insists future co-brand partnerships will unfold and its other successful programs, over time, will help the brand right its financial ship.
"We are always focused on all of the different avenues we have for growth," said American Express spokesperson Amelia Woltering. "The co-brand part of our business is one we continue to find attractive with the right partners, where we are both collectively focused on how we drive more value for each other."
American Express has seen "some good signposts" in the past year, such as acquiring 7.7 million new cards, Woltering said. "As in the past, we will be focused on turning those new accounts into additional volumes."
Newer entrants have had a harder time holding onto exclusivity with retailers. The Merchant Customer Exchange required exclusivity of its earliest partners, even though it hadn't released a product of its own. This led some retailers to block rival products such as Apple Pay, but attitudes have started to change and even the MCX's biggest backers, such as Walmart, are rolling out their own digital wallets.
In his organizational announcement this week, Amex CEO Kenneth Chenault said his company is working to stay in front of the overall changes taking place in the payments industry.
"I know we have the assets, plans and the determination to win in this evolving landscape," Chenault said.
There is a history and a rock solid reputation that backs up that statement, said Brian Riley, principal executive advisor with CEB TowerGroup.
"American Express had a major restructuring in the mid 1980s, so they have overcome troubles before," Riley said. "They have done some really aggressive things to get into the digital platform and you can't blame them for trying."
The company had to overcome the loss of Costco, which represented about 7% of its revolving credit, and then lost a senior manager when company president Ed Gilligan unexpectedly passed away on a plane flight in late May.
It's also not particularly easy to rebound quickly when one of its key digital technology gurus, a Dan Schulman, left to take the top spot at PayPal in late 2014.
The recent recession delivered another difficult lesson to American Express, demonstrating that clients with FICO scores above 720 can be vulnerable as well.
"The important takeaway is that you never want to put too much in one basket, as Amex did with Costco; the other key is American Express is certainly a premium brand in the card space," Riley said. "They have been in the business for 35-plus years and sometimes it goes well and sometimes it doesn't. But they have been very good at adapting to changes."
American Express will finalize its split with Costco in the U.S. in the coming months, though the sale of that portfolio to Citigroup is not completed. It is not expected to be a long delay, though the recent dip in the global economy may have changed the value of a consumer credit portfolio considerably, Wedbush's Luria said.
Deutsche Bank had speculated last year that the U.S. Costco portfolio sale could result in a $2.2 billion gain for American Express.
American Express says the delay in the portfolio sale is not causing the company to accelerate its cost-cutting measures. During the company's earnings call last month, chief financial officer Jeff Campbell said American Express is acting "with a strong sense of urgency and confidence" in executing its plan. Woltering echoed that approach, saying the company has to continue "top quality service to our mutual customers" at Costco.
American Express views its restructure as a multi-year plan, Woltering said. "We want to be careful not to make cuts that would impair our ability to build the business going forward."
Late last year, Amex put the wheels in motion by combining some U.S. and international units in merchant services, loyalty business and global small business initiatives.
Whatever unfolds for American Express in the coming year, the card brand has key strengths that have always worked in its favor, Riley said.
"They have the infrastructure, great credit controls, and consistently excellent customer service," Riley said. "This will be a painful period for them, but they understand the economy and payments worlds are not static."