INTRO: If you’ve ever used a
card to pay for something, you’re definitely familiar with the names American Express,
Visa, and Mastercard. These three have dominated the card processing industry for decades,
but most people don’t know the difference between them. And frankly, there’s very little difference
between them from the consumer side if you’re not keen on maximizing credit card points and rewards.
However, from the business side, American Express is radically different from the other two.
American Express is not the most common card by any means; in fact, Visa and Mastercard
destroy Amex in terms of issued cards. For example, Visa has 343 million credit cards in
circulation within the US and 798 million credit cards in circulation outside the US. Similarly,
Mastercard has 249 million credit cards in the US and 725 million credit cards outside the US.
This means that Visa has a total of 1.14 billion credit cards in circulation and
Mastercard has 974 million cards. Meanwhile, Amex only has 53.8 credit cards in the US
and 58.2 million cards outside the US, or just 112 million cards in total.
This means that Visa and Mastercard have issued 20 times as many cards as Amex. At first, this looks
really bad for Amex until you take a look at their revenue numbers. In the last 12 month period, Visa
pulled in $24.1 billion in revenue and Mastercard pulled in $17.8 billion in revenue. Together,
this adds up to $41.9 billion. Meanwhile, Amex pulled in $41 billion in revenue by themselves.
Now, this isn’t an exact science or anything, but if we divide each of their revenues by the
number of cards in circulation, we’ll see that each Amex customer is worth $366 in revenue.
Meanwhile, each Visa customer is only worth $21 and each Mastercard customer is only worth $18.
Now, this already paints a terrible picture for Visa and Mastercard, but we haven’t even
considered the elephant in the room. Here’s the thing, Amex doesn’t really deal with debit cards,
so the vast majority of their revenue truly comes from just credit cards. The same, however, cannot
be said about the other two. Visa and Mastercard are heavily involved in the debit card game.
Visa has a total of 2.4 billion debit cards in circulation and Mastercard has 1.4 billion debit
cards in circulation. So, really, each issued card is worth less than $10 in annual revenue
for Visa and Mastercard meaning that each Amex customer is 36 times as valuable. So, here’s how
Amex became the king of credit cards and why high spenders far prefer Amex over Visa and Mastercard.
HUMBLE ROOTS: Taking a look back, Amex wasn’t
always the high ticket closer that they are today. In fact, they weren’t even a financial business,
they were originally a shipping business. It all started on March 18, 1850, when three
men named Henry Wells, William Fargo, and John Butterfield decided to join forces. Together,
these guys owned three shipping businesses that they had been running for a few years.
The first company was called Livingston, Fargo, & Co and was founded in 1845 by Henry and William.
The second company was called Wells & Co and was founded in 1846 by Henry. And finally, the third
company was called Butterfield & Wassan and was founded in 1849 by John Butterfield and James
Wassan. At the time, railroads were a rather new invention, and the demand for sending shipments
was growing rapidly. Instead of competing against each other and seeing who came out on top though,
the trio decided to combine their efforts and form a small monopoly within New York called
American Express. The company mainly focused on shipping goods between New York City and Buffalo,
but they also had some destinations throughout the midwest. This proved to be an extremely profitable
regional business, but neither Henry nor William were satisfied with just this market. You see,
these two wanted to build a national business, so they wanted to expand to California and capitalize
on the gold rush. However, the other board members would not approve this expansion effort.
Henry and William weren’t willing to give up this opportunity though, so they would start
a new express and financial services business in California in 1852. I think it’s safe to say that
Amex missed out pretty big here given that the new business was Wells Fargo. Nonetheless, things were
going well for Amex as well. They were expanding into the money order business and their monopoly
was still intact up until 1866 when they saw their first major competitor called Merchants Union
Express Company. Amex and Merchants Union fought fiercely for market share over the next two years,
but in 1868, they decided to simply join forces and create American Merchants Union
Express Company. Honestly, that’s quite a long and cumbersome name, but fortunately, they would
shrink the name back to American Express in 1873. They had successfully avoided a long-term
clash with Merchants Union, but this fiasco made them realize the importance of diversification.
And with that, Amex would start to explore new paths throughout the next few decades.
FINANCIAL SERVICES:
Amex started off by thinking of new ways they could build customer loyalty
and provide more value. Many of Amex’s customers were small local businesses that were using Amex
to source their goods. These local businesses didn’t have the resources to constantly travel
to their suppliers and negotiate better prices. But, Amex already had agents all over the place.
So, in 1878, Amex started negotiating with suppliers on behalf of their clients,
and this has turned into one of the trademarks of Amex today. Of course, they’re no longer
negotiating purchase orders; instead, they’re negotiating for high-demand items and experiences.
No one knows exactly how Amex pulls it off, but if you’re a platinum cardholder or better yet a
centurion cardholder, Amex can get you anything you want whether that be front row seats to a
Lakers game or an invitation to Justin Bieber’s wedding. Anyway, going back to the 1870s, this
new negotiation service was a massive hit with customers, and Amex would follow up this success
with the Traveler’s check in 1891. If you’re not familiar with what a traveler’s check is, it’s
basically just a safer way to carry money with you while you’re traveling. Instead of carrying cash,
you carry a traveler’s check and redeem it for money when you arrive at your destination. This
was particularly appealing to international travelers who regularly traveled to Europe.
This transformed Amex into an international business, and they would open offices in England,
Germany, and Paris. Soon after, World War 1 rolled around, and Amex would
score a deal with the British government. Amex was contracted to deliver letters,
money, and relief packages to British prisoners throughout the war. And by the end of the war,
Amex was delivering 150 tonnes of parcels every single day to just prisoners. It looked like
things couldn’t get any better, but then the American government would screw over Amex.
THE GREAT WINTER: Throughout the winter of 1917,
the US would experience a massive coal shortage which meant that it became extremely expensive to
ship items across the US. This wasn’t optimal for Amex, but given that shipping rates had gone up
across the board, Amex didn’t really have to worry about losing customers to competitors. They did,
however, have to worry about the government. On December 26, 1917, President Woodrow Wilson
ordered the railroads to help in the war effort by helping them move troops, supplies, and coal,
and all contracts between railroad companies and express companies were nullified.
While this was an unfortunate turn of events, Amex couldn’t really complain
given that the decision was made for a much more important cause. Wilson’s next decision, however,
was definitely something worth complaining about. Treasury Secretary William McAdoo
proposed the idea of consolidating all existing express companies into a nationalized company.
President Wilson approved this proposal, and with that Amex lost their express business. All express
companies were hurt, but Amex was hurt the most given that they were the largest express company.
They lost 10,000 offices, 30,000 employees, and their rights to 71,000 miles of railroad.
The new nationalized company was called American Railway Express Agency, and though the US would
return ownership to the private companies in 1920, it would never be the same. Amex had
lost everything that was unique to them. They had given up a highly respected personalized express
service, and in return, they basically got a 40% stake in USPS. And no one likes USPS. In 1929, the
assets and operations of American Railway Express would be transferred to Railway Express Agency,
and that was basically the end of this business. The company declined for decades until it finally
filed for bankruptcy in 1975. I guess it was a good thing that Amex had sort of diversified
into traveler’s checks, but this didn’t help much. For the US, the great winter only lasted a couple
of months, but for Amex, it would end up lasting 41 years until they stumbled upon credit cards.
CREDIT CARDS:
Amex had considered the possibility of launching a credit card as early as 1946,
but it wasn’t until the launch and success of the Diners Club card that Amex decided to take the
plunge. At the end of 1957, Amex announced that they were going to enter the credit card business.
From the very beginning, Amex was set on targeting the premium market and capturing high spenders.
They charged an annual fee of $6 which was $1 more than the Diners Club’s $5 fee. Amex figured that
this would make their card seem more exclusive and desirable, and they were completely right given
the massive demand that followed. By the time the official launch happened in October of 1958,
Amex had already issued 250,000 cards. Initially, the cards were printed on paper, but in 1959, Amex
introduced plastic cards with embossed numbers. Similar to how everyone wants a metal card today,
back in 1959, everyone wanted Amex’s new plastic card. Amex further built on this exclusive image
with the Gold Card in 1966 and the Platinum Card in 1984. The Platinum card was invite-only,
and Amex only picked the highest spenders with the best payment histories. Aside from being hard
to qualify for, the Platinum card carried a hefty annual fee of $250 which has since grown to $695.
And to persuade people to pay these hefty fees, Amex introduced their famous Membership Rewards
program in 1991. Within just 10 years Membership Rewards became the world’s largest card-based
rewards program, and Amex has held that title ever since. Aside from building an exclusive image
amongst customers, Amex was concurrently building exclusive relationships with merchants. They
offered lower merchant fees to restaurants and businesses if they exclusively accepted American
Express. This worked pretty well between 1981 and 1991, but a group of merchants would start to
rebel against Amex in 1991. Instead of exclusively accepting Amex, they started to exclusively accept
Visa and Mastercard. And with that Amex would back off with their exclusivity deals, but they would
never give up their exclusive image. AMEX TODAY:
Even today, exclusivity is the name of the game when it comes to Amex because their
business model is radically different from the rest of the industry. A lot of credit
card companies make their money on the high-interest rates they charge.
And given that 55% of Americans carry a credit card balance, this is quite profitable. But this
model would never work for Amex because they only issue cards to customers with excellent credit.
And the thing is, people with excellent credit don’t carry balances. Amex is well aware of this,
and this is why many of their cards don’t even allow customers to carry a balance.
The Amex Green Card, Gold Card, Platinum Card, and Centurion Card are all charge cards which
means that you have to pay your balance in full every month. Amex has become more lenient over
the past few years, and introduced workarounds that allow you to sort of carrying a balance,
but this is by no means their focus. In that case, you might think that their annual fees are their
focus. Amex cards often carry annual fees in the hundreds of dollars and even thousands of dollars,
but while this pulls in a lot of revenue, it’s not exactly that profitable. You know,
sourcing tickets to Justin Bieber’s wedding and giving customers access to Centurion airport
lounges aren’t exactly cheap. And, given that their customers are smart spenders,
most of them are not gonna pay a $5000 annual fee unless they’re confident they can milk $6000 worth
of value. But then why does Amex spend so many resources on what seems like a zero-sum or even
negative-sum service? Well, the answer is that you are their partner, and they’re willing to go
to extreme lengths to keep you happy. You see, the key to Amex’s business is not high-interest rates
or high annual fees, the key is the high fees they charge merchants. Visa and Mastercard only charge
1.25 to 2.5% per transaction, but American Express charges 1.5 to 3.5% per transaction.
This may not sound like much, but an extra 1% on every transaction adds up super fast.
Because of this, most merchants aren’t a fan of Amex, but they’re forced to accept Amex because
all the high spenders prefer to use Amex. And this creates a super unique business dynamic.
Visa and Mastercard partner with retailers to try to get you to spend as much money as possible
and pay as much interest as possible. Meanwhile, Amex partners with you to try to get as many
retailers to accept their high fees as possible. And so far, they’ve been extremely successful at
this given that 99% of US merchants who accept a credit card also accept American Express. So,
how about we keep up this streak and continue supporting American Express. Do you guys have
an Amex card? Comment that down below. Also, drop a like if you’re a fan of Amex’s business
model. And of course, consider joining our discord community to suggest future
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