Jitender Miglani
jitender@revenuesandprofits.com
Abstract
This report discusses
Key elements of
American Express
business model
How American Express
operating model is
different from Visa or
MasterCard
American Express 2014 Key Elements of American Express Business Model
revenues by business
segments, geographic
segments & revenue type
American Express 2014 including consumers, small businesses, mid-sized companies,
revenues, profits, and
profit margins
Dow Companies 101
This report is a part of a
series on how U.S. Dow
Jones Industrial Average
(DJIA) Index companies
make money. The
complete series include
reports on the business
fundamentals of the
following companies:
3M, American Express,
Apple, Boeing, Caterpillar,
Chevron, Cisco Systems,
Coca-Cola, E.I. DuPont de
Nemours, ExxonMobil,
General Electric (GE),
Goldman Sachs, Home
Depot, Intel, IBM,
JPMorgan Chase, Johnson
& Johnson (J&J),
McDonald's, Merck,
Microsoft, NIKE, Pfizer,
Procter & Gamble (P&G),
Travelers, United
Technologies, UnitedHealth
Group, Verizon
Communications, Visa,
Wal-Mart, Walt Disney
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R&P Research
How American Express Makes Money?
2014 Update
American Express is a leading global payments and travel
company. The company offers charge and credit payment card
products and travel-related services to consumers and businesses
worldwide. The company was founded in 1850.
American Express serves a diverse set of customer groups,
and large corporations. American Express serves a two-sided
market and enables the interactions between two distinct types of
customers, with the card members on one side and the merchants
on the other side.
To consumers and small businesses, the company offers a variety
of charge and credit card products, cobrand cards, stored value/
prepaid cards, and travel-related services.
Charge cards represent cards that generally carry no pre-set
spending limits and are primarily designed as a method of
payment and not as a means of financing purchases. Charge
card members generally must pay the full amount billed each
month.
Credit cards represent cards that have a range of revolving
payment terms, grace periods, and rate and fee structures.
Cobrand cards, issued under cobrand agreements with
selected commercial firms, help card members earn rewards
provided by the partners respective loyalty programs, such as
frequent flyer miles, hotel loyalty points, and cash back.
Prepaid cards represent payment cards that are pre-loaded
with value that can be used at a later time.
Travel services include premium leisure travel and lifestyle-
related services that are provided through the companys
proprietary network of travel and lifestyle consultants, consumer
travel websites, and travel representative network.
The company sells these products and services through various
channels, including direct mail, online applications, in-house and
third-party sales forces and direct response advertising.
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Jitender Miglani
jitender@revenuesandprofits.com R&P Research
The company generates revenues from consumers and small
businesses primarily through net card fees and travel
commissions. Net card fees represent the revenue earned from
annual card membership fees. Travel commissions and fees are
earned by charging a transaction or management fee to both
customers and suppliers for travel-related transactions. The
company also earns interest income on outstanding loans.

To merchants, the company offers point-of-sale, marketing and

information products and services, servicing and settlement, fraud
prevention services, and merchant financing. The company
generates discount revenue from merchants. It represents the
fees charged to merchants when the card members use their
cards to purchase the goods and services from them. The
discount fee is generally deducted from the payment to the
merchant.

American Express also serves companies and organizations

worldwide through its global corporate payments and global
business travel (GBT) businesses. The company offers a wide
range of expense management services including:

A comprehensive offering of Corporate Card Programs such as

corporate cards, corporate meeting cards, and business travel
accounts (BTAs).
A suite of Business-to-Business (B2B) Payment Solutions
including corporate purchasing card, vPayment, Buyer-initiated
payments (BIP).

Through the GBT JV, the company also offers a variety of

business travel-related services to its corporate clients, including:
full-service online and offline travel booking and reservation
services and support; travel program management services;
consulting services; and meetings and events management
services.

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Jitender Miglani
jitender@revenuesandprofits.com R&P Research
The following diagram shows the key elements of American
Express business model. It shows how the money flows-in from
the different customer segments and the key cost elements where
the money flows-out to.

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Jitender Miglani
jitender@revenuesandprofits.com R&P Research
American Express Revenues FY 2014 By Revenue Type

Of the total revenues of $34.3 billion in FY14 (fiscal year ending

December 2014), American Express generated

$19.5 billion revenues, 56.8% of the total, from the discount

fees.
$2.7 billion revenues, 7.9% of the total, from net card fees.
$1.1 billion revenues, 3.3% of the total, from travel commissions
and fees.
$2.5 billion revenues, 7.3% of the total, from other commissions
and fees. These include revenue from foreign exchange
conversions, card-related fees and assessments, loyalty partner
related fees, and other service fees
$3.0 billion revenues, 8.7% of the total, from other.
$5.5 billion revenues, 16.0% of the total, as net interest income.

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Jitender Miglani
jitender@revenuesandprofits.com R&P Research
How Is American Express Operating Model Different
From VISA Or MasterCard?

American Express operating model is different from that of VISA or

MasterCard. American Express has a three-party, closed-loop,
spend-centric operating model. VISA and MasterCard have a four-
party, open-loop, transaction-centric operating model. The
different models are described as follows.

Three-party vs Four-party model

In a four-party model, there are four entities: Cardholder,

Merchant, Issuer, and Acquirer. An Issuer is a financial institution
that issues a card to a cardholder. An Acquirer is a financial
institution that maintains the relationship with a merchant. The
payment network sets the rules and manages the information flow
between the issuer and the acquirer. VISA and MasterCard
operate through a four-party model. They do not issue cards to
consumers directly. Instead, they act as intermediary between
issuers and acquirers.

In a three-party model, issuer and acquirer are the same entity.

American Express issues cards to the consumers and processes
the payments from the merchants as well. So, American Express
operates through a three-party model. For past several years,
American Express has also been partnering with other issuers and
acquirers to boost their card circulation and acceptance. But,
majority of their revenues continue to come from their proprietary
card-issuing and merchant-acquiring business.

Closed-loop vs Open-loop Network

American Express operates a closed-loop payment network,

whereas VISA and MasterCard operate an open-loop payment
network. In a closed-loop network, payment services are provided
directly to the cardholders and merchants by the owner of the
network, without involving third party financial institutions
intermediaries. On the other hand, open-loop networks are multi-
party and operate through a system that connects issuers and
acquirers. The network owner manages the information and flow
of value between them.

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Jitender Miglani
jitender@revenuesandprofits.com R&P Research
The closed-loop allows American Express to analyze information
on card member spending and build algorithms and other
analytical tools that enable them to provide targeted marketing
and other information services for merchants and special offers
and services to card members.

Spend-centric vs Transaction-centric model

American Express follows a spend-centric operating model.

It focuses on generating revenues primarily by driving spending on
its cards through attractive reward programs for card members.
This helps them earn discount revenue from merchants. With this
model, American Express targets the affluent customers who are
likely to spend more. This model focuses on the total amount
spent by the customer, rather than the volume of transactions
processed.

On the other hand, VISA and MasterCard earn revenue primarily

on the volume of transactions carried out through their cards. They
follow a transaction-centric operating model.

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Jitender Miglani
jitender@revenuesandprofits.com R&P Research
American Express Business Segments

American Express has four reportable operating segments:

U.S. Card Services (USCS), International Card Services (ICS),
Global Commercial Services (GCS), and Global Network &
Merchant Services (GNMS). A brief description of these
segments is as follows:

USCS issues a wide range of card products and services to

consumers and small businesses in the U.S., and provides
consumer travel services to card Members and other
consumers.
ICS issues proprietary consumer and small business cards
outside the U.S. and operates coalition loyalty business in
various countries. Coalition loyalty programs enable consumers
to collect rewards points from a variety of participating
merchants through just one program.
GCS offers global corporate payment services and global
business travel services to large and mid-sized companies. The
Companys business travel operations, which had been
included in GCS, were deconsolidated effective June 30, 2014
in connection with the Global Business Travel Joint Venture
(GBT JV) transaction.
GNMS operates a global payments network that processes and
settles proprietary and non-proprietary card transactions.
Global Network Services (GNS) focuses on partnering with
select third-party banks and other institutions to issue Cards
accepted on American Express global network and/or acquire
merchants on its network. GNS arrangements fall into the
following three main categories: Independent Operator
Arrangements, Network Card License Arrangements and Joint
Venture Arrangements.
- Independent Operator (IO) Arrangements. The company
pursues these arrangements to expand its presence in
countries where they do not offer a proprietary local
currency card. The company licenses IO partners to issue
local currency cards in their countries. IO partners own the
customer relationships and credit risk for the cards they
issue. They also serve as the merchant acquirer and
processor for local merchants.
- Network Card License (NCL) Arrangements. In a NCL
arrangement, the company grants the third-party institution

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Jitender Miglani
jitender@revenuesandprofits.com R&P Research
a license to issue American Express branded cards. The
NCL issuer owns the customer relationships for all cards it
issues, provides customer service to its card members,
authorizes transactions, manages billing and credit, is
responsible for marketing the cards, and designs card
product features. American Express (or an IO partner)
operate the merchant network, route and process card
transactions from the merchants point of sale through
submission to the issuer, and settle with issuers.
- Joint Venture (JV) Arrangements. In a JV arrangement,
the JV is responsible for the card member credit risk and
bears the operating and marketing costs.
Global Merchant Services (GMS) business builds and
maintains relationships with merchants and merchant
acquirers and processors, processes card transactions and
settles with merchants that choose to accept cards for card
purchases.

Corporate functions and certain other businesses, including its

Enterprise Growth Group and other operations, are included in
Corporate & Other.

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Jitender Miglani
jitender@revenuesandprofits.com R&P Research
American Express Business Segments Revenues and
Revenue Share FY 2014

Of the total revenues of $34.3 billion in FY14, American Express

generated

$17.9 billion revenues, 52.2% of the total, from the USCS

segment.
$5.5 billion revenues, 16.0% of the total, from the ICS segment.
$4.9 billion revenues, 14.4% of the total, from the GCS
segment.
$5.7 billion revenues, 16.8% of the total, from the GNMS
segment.
$0.2 billion revenues, 0.6% of the total, from the Corporate and
Other segment.

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Jitender Miglani
jitender@revenuesandprofits.com R&P Research
American Express Geographic Segments Revenues and
Revenue Share FY 2014

Of the total revenues of $34.3 billion in FY14, American Express

generated

$24.9 billion revenues, 71.8% of the total, from the U.S.

$3.8 billion revenues, 10.9% of the total, from the EMEA
segment. EMEA represents Europe, the Middle East, and
Africa.
$2.9 billion revenues, 8.5% of the total, from the JAPA segment.
JAPA represents Japan, Asia/Pacific, and Australia.
$2.9 billion revenues, 9.3% of the total, from the LACC
segment. LACC represents Latin America, Canada, and the
Caribbean.

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Jitender Miglani
jitender@revenuesandprofits.com R&P Research
American Express Profits and Profit Margins FY 2014

Of the $34.3 billion of American Express total revenues in FY'14,

$28.8 billion were the non-interest revenues and $5.5 billion was
the net interest income. The share of net interest income in the
total revenues was 16.0%. American Express total operating
expenses and provisions for losses were $25.3 billion. This
resulted in $9.0 billion of operating profit and an operating margin
of 26.2%. After income taxes and other, American Express had a
net profit of $5.9 billion and a net margin of 17.2%.

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