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How American Express Company Makes Most of Its Money

By Matthew Frankel, CFP® - Updated Jul 25, 2017 at 8:08AM

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More than half of American Express' revenue comes from fees it charges merchants who accept its cards.

Credit card giant American Express Company (AXP -2.14%) is unique in the sense that it makes money from both the credit card side of the business, which includes things like interest income and annual card fees, as well as from the payment processing side. Here's a breakdown of where American Express' revenue comes from.

American Express' revenue sources

All of American Express' revenue can be broken down into two main categories -- interest income and non-interest income. Interest income basically includes the APR charged to credit card customers on balances they carry on American Express cards, while non-interest income includes things like payment processing (swipe) fees and annual fees charged to cardholders, as well as other fees and commissions.

Woman paying for purchases with credit card.

Image source: Getty Images. (Note: Image does not necessarily depict an American Express product.)

For the full-year 2016, here's a look at Amex's revenue sources:

Revenue Source

Amount

% of Total

Discount revenue

$18,680

55%

Net card fees

$2,886

9%

Other fees and commissions

$2,753

8%

Other non-interest revenue

$2,029

6%

Interest on loans

$7,205

21%

Interest and dividends on investment securities

$131

>1%

Bank deposits and other interest income

$139

>1%

Total revenue

$33,823

100%

Data source: American Express 2016 Annual Report. All dollar figures are in millions. Percentages and dollar amounts may not add up perfectly because of rounding.

As you can see, American Express' largest revenue source is "discount revenue," which is a term for the fees Amex charges merchants for processing transactions, also known as swipe fees. This is Amex's bread and butter. Because of its desirable, affluent cardholder base, which spends more than holders of other credit cards, on average, Amex famously gets away with charging higher swipe fees than rivals.

The second-largest revenue source for Amex is the interest it collects on its loans. It's important to point out that many Amex cards are charge cards, not credit cards, and therefore do not charge customers interest -- one reason why this category might seem disproportionately low. However, keep in mind that it wasn't that long ago that all Amex cards were charge cards.

Amex credit cards have a wide range of annual fees. The company offers no-annual-fee cards but specializes in premium credit cards with perks like airline miles, travel expense reimbursement, and more, such as the recently enhanced American Express Platinum charge card, which has a $550 annual fee. And don't forget the famous Centurion card, better known as the "black card," which has a $2,500 annual membership fee. These fees generated nearly $3 billion for Amex last year.

Amex's profitability

From its nearly $34 billion in revenue, American Express produced a profit of about $5.4 billion. A long list of expenses is deducted from this revenue. Here are some of the largest:

  • $2 billion in provisions for losses, such as when a cardholder defaults on their debt.
  • $3.7 billion for marketing and promotions, which was 17% greater than the previous year.
  • $6.8 billion for card member rewards.
  • $5.3 billion for salaries and employee benefits.
  • $2.7 billion for income taxes. Based on its pre-tax income of $8.1 billion, this gives Amex an effective tax rate of about 33%.

A unique business model

The mix of income sources makes American Express unique, as it isn't as dependent on interest income and/or card fees as, say, Capital One's credit card business or Synchrony Financial. It also has less dependence on its payment processing revenue than Visa, for example. With an affluent card membership base, controlling both sides of the transaction has proven to be a winning combination for American Express.

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