When the American Express Company (NYSE:AXP) reported its 2018 third-quarter earnings last month, investors had plenty of reason to cheer. Its largest top-line contributor, discount revenue, grew to $6.18 billion, an 8% increase year over year. Its second- and third-highest revenue streams, net interest income and card fees, rose even faster, by 17% and 9%, respectively. That being said, the most encouraging sign for investors might be the immense progress American Express is making in its digital channels.
Consider: One year ago, Amex's mobile app offerings greatly lagged its rivals; it was the only major credit card without a partnership with PayPal Holdings Inc (NASDAQ:PYPL); and it was largely seen as losing the race in fintech. Fast-forward to today, and American Express has largely addressed all of these concerns. Amex's mobile app went from finishing sixth in J.D. Power's credit-card mobile app rankings in 2017, to first in 2018. And this year, American Express not only secured a partnership with PayPal, it also made two key acquisitions that should immensely bolster its mobile channels.
A renewed focus on the digital realm
In the company's third-quarter conference call, CEO Steve Squeri acknowledged in his opening remarks the importance of the efforts Amex was taking to increase its digital presence:
[T]oday I want to focus more on ... making American Express a more essential part of our customers' digital lives. Given the announcement we made earlier today about an expanded relationship with PayPal, I wanted to put the many things we are doing here in context. Over the past year, we've steadily gained traction on this critical imperative that cuts across every part of our integrated business model. Our progress on our digital efforts takes many forms; acquiring companies with great technology and AI capabilities like Mezi and Cake and working to integrate those capabilities into our app, creating partnerships with a range of innovative start-ups to stay on the leading edge of exploring new capabilities for our customers, steadily expanding our internal capabilities through new and innovative products ...
Let's take a closer look at the specific steps Squeri cited and how they have so quickly improved the company's digital fortunes.
A key partnership
The same day American Express reported its earnings, it also announced a major new partnership with PayPal, similar to the deal struck with PayPal last year by Discover Financial Services. The agreement lets AmEx card holders redeem reward points with merchants that accept PayPal and send money to friends and family via PayPal or Venmo directly from the American Express mobile app. They can also pay their card bills with their balances from their PayPal or Venmo accounts, and more easily add their American Express card to the PayPal digital wallet platform.
Squeri maintains, "... it always made sense for us to expand our relationship with them," and he seemed especially excited about the new avenue card members now have to redeem their reward points. He said that, while he could not yet put a number to it, he believes it will lead to an "uptick" in the points being used, which leads to increased cardholder and merchant satisfaction.
A company on the go
American Express is also rightly proud of the work it is putting into its mobile offerings. As mentioned above, it won J.D. Power's U.S. Credit Card App Satisfaction Survey this year after finishing sixth in 2017. In the company's second-quarter conference call, Squeri gave credit to the company's renewed focus "on engaging our customers in that app," including giving it chat-based capabilities so cardholders could engage with customer service.
The company also gives credit to two acquisitions it made in the last year to bolster its mobile offerings, Mezi and Cake. Mezi uses AI to power AskAmex, the company's travel-based concierge app. The platform allows users to message the app, asking for help to do things such as book flights and make restaurant reservations. In October 2017, American Express acquired Cake, a mobile payments solutions start-up, for $13 million. Cake is a platform designed to eliminate cash payments in restaurants and bars while also giving those types of businesses more data on their customers.
Just over a year ago, it was an open question whether American Express could capture the millennial consumer. While the company has largely shown that millennials can be attracted through the use of innovative and unique reward offerings, its enhanced digital offerings also go a long way toward answering this need. For the time being, shareholders can rest easy knowing that AmEx continues to grow its major revenue streams while vigorously pursuing new digital channels.