Why American Express and Citigroup Inc. Should Be Worried About This 1 Company

American Express (NYSE: AXP  ) and Citigroup (NYSE: C  ) face countless competitors in the credit card industry. But it turns out Discover Financial Services  (NYSE: DFS  ) may be poised to take them down.

The stunning truth
Many people know American Express and Discover are major players in the credit card world. While Discover has some operations outside of the credit card space -- it has a full-fledged banking arm -- the two are undoubtedly linked and known for their massive dependence on income from the credit cards they issue.

Source: Flickr / S_E_Santana.

Citigroup is less known for its credit card presence, but it too has a massive reliance on credit cards. Across the globe it has a staggering 140 million accounts open, compared to 108 million for American Express. 

In the first quarter alone Citigroup drew in $4.6 billion worth of net interest revenue from its credit cards outstanding, representing more than 40% of its total revenue earned from the interest charged on loans across the bank.

And while Discover may be the smallest of the firms, it turns out it has the biggest reason to be optimistic about its future.

The big win
Each year Satmetrix releases its net promoter score, which calculates the likelihood of a customer to recommend a product or service they've used to someone else. It's based off a survey of more than 23,000 people across the U.S. and their opinions not just on brands and products in financial services, but technology, retail and much more.

It's calculated relatively simply, as it takes the percent of customers who would deemed promoters (who rank the brand as a 9 or 10 on the ten point recommendation scale) minus those who are detractors, with a score of six or below.

And some of the biggest news this year came from previously mentioned credit card industry, as American Express gave up its six year reign as the company with the highest NPS with a score of 45.

And who beat it?

Discover, as it's score rose from 44, narrowly trailing American Express in 2013, to now stand at 52.

So how'd Citigroup do? It certainly wasn't third place. And it wasn't even close, as even despite the 12 point increase versus 2013, it was "the industry laggard with an NPS of 18 points."

Why it matters to investors
The natural question becomes, how does all of this matter to investors? A data scientist at Satmetrix, Brendan Rocks, noted:

The Net Promoter leaders in their respective industries have positioned themselves to outpace their competitors in the areas of increased customer retention and acquisition.

In the case of Discover and American Express, evidence of the strong NPS scores provides one more reason to have confidence in their long-term potential as investments, since having strong customer loyalty is essential for success in the credit card industry.

However for Citigroup, knowing it's the "industry laggard" in a business it really depends on is troubling. Although it's added nearly 7 million new accounts over the last year, it saw its total fall by 2 million during the first three months of the year. And while its accounts were up by 5% over the year, the number of purchase sales rose by less than 2%.

American Express and Discover each offer compelling investment considerations, but with each day Discover provides more and more evidence that it is poised to do great things in the years to come.

On the other hand, investors must keep an eye on this one rarely discussed, but essential part of Citigroup that seems to be in trouble, as its success is critical to the business as a whole.

Your credit card may soon be completely worthless
Discover and American Express are reliant on one thing, but they are incredibly nervous about the changes coming. You see, the plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 09, 2014, at 11:08 AM, autarkis wrote:

    Im surprised that Patrick would try to create an expectation with the overall tone of this article to lead anyone to believe that Citi should have brand recognition when it doesnt issue for its own network. AmEx and Discover have their own merchant networks and Citi only issues Visa and Mastercard. Diners club was sold a few years ago and Citi is out of the merchant network business.

    NPS is a good metric for marketing managers to argue for bonuses, but I would caution anyone to use it for long term investment choices. Perhaps there is some (slightly hidden) BofA bias? Either way, not the quality of article I expect from MF.


  • Report this Comment On June 09, 2014, at 12:46 PM, TMFMorris wrote:

    This score has nothing to do with merchants and everything to do with consumers and their opinions of the companies. While it operates on the V & MA networks to ensure payments are processed, it is still the issuer, exactly as AXP and DFS are. When a customer with a card from Citigroup makes a payment or pays interest on their bill, it in no way goes to MA or V, but entirely to Citigroup.

    I would suggest you explore "Everything You Need to Know About Digital Payments" to see how the credit card industry operates.

  • Report this Comment On June 09, 2014, at 8:18 PM, autarkis wrote:

    Patrick, I worked in all aspects of the credit card industry over the last twenty years, and have a pretty good understanding of what makes it work and what metrics to look at.

    Im sure you know that Citi and other issuers pay V and MC for every card they issue and they get paid for every transaction on their network. You are correct that the networks dont get paid from customer payments, but thats not the point of the article.

    If you wanted to compare brand awareness at the consumer level it clouds the picture. On the credit card side it would be more interesting to compare Chase and Citi which are both competitors in the private label business (Home Depot or Amazon card), or compare Discover to Diners Card; which wouldnt be an equal comparison given their different target markets, but it would be closer than Discover and Citigroup.

    The key takeaway from my comment should have been that comparing an issuer bank to a bank that handles its own network is not really apples-to-apples, and perhaps spend more time explaining why you think NPS is a good proxy for long-term investment decisions.


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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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