User:Crocodile Punter/Stored

The typical credit card business model
When a consumer makes a purchase using a credit or charge card, a small portion of the price is paid as a fee (known as the merchant discount), with the merchant keeping the remainder. There are typically three parties who split this fee amongst themselves:
 * 1) Acquiring bank: the bank which processes credit card transactions for a merchant, including crediting the merchant's account for the net value charged to a credit card.
 * 2) Issuing bank: the bank which issues the consumer's credit card. This is the bank a consumer is responsible for repaying after making a credit card purchase. The issuer's share of the merchant discount is known as the interchange fee.
 * 3) Network: the link between acquiring banks and issuing banks. These banks have relationships with a network, rather than with each other, for fulfilling card purchases. This allows a card issued by a community bank in Peru to be used at a shop in Sri Lanka, for instance, without requiring the banks to have a direct relationship with each other. The two largest networks in the world are Visa and Mastercard.

The average merchant discount in the United States is 1.9%. Of this, approximately 0.1% goes to the acquirer, 1.7% to the issuer, and 0.09% to the network.

Most Prime and Superprime card issuers use the majority of their interchange revenue to fund loyalty programs like frequent flyer points and cash back, and hence their profit from card spending is small relative to the interest they earn from card lending.

How American Express differs
American Express typically plays the role of all three parties above, keeping the entire merchant discount. In recent years Amex has begun authorizing other banks to either acquire or issue on Amex's behalf, primarily in countries where Amex would otherwise have little or no presence.

Most importantly, Amex also charges a higher merchant discount than Visa or Mastercard. The size of the premium can differ radically: in the US Amex charges 66 basis points more (2.56% vs 1.9%, though higher-end Visas and Mastercards charge above 2%), while in Australia it charges (2.2 times) as much as Visa/Mastercard due to Australian interchange regulations.

Amex uses this higher discount revenue to invest in rewards programs which give a higher payout than competing programs. These richer rewards programs, in addition to a premium brand and a reputation for superior customer service, allows Amex to attract a disproportionate share of affluent consumers. Amex then uses its strength with affluent consumers to justify charging a higher merchant discount rate, implying that if a merchant does not accept Amex cards he will lose affluent customers. This creates a self-reinforcing loop.

Due to what Amex calls its "spend-centric strategy", card spending and fees are responsible xx% of Amex's card profit, vs. 10-40% for other issuers. Amex also tends to make more money from annual fees than other issuers do.

One tension in Amex's business model is acceptance, a volume vs. margin trade-off. Because Amex charges a higher merchant discount fee, it is not as widely accepted as Visa or Mastercard. Amex's business model depends on having a higher discount fee, however, making it difficult to lower it. The company has to strike a balance, keeping its fee low enough to attract sufficient merchants, but high enough to fund rich rewards and drive its business model. In countries where Amex charges a small premium, like the US, it has near-parity acceptance, but its card rewards are not significantly richer than those of its competitors. In countries where it charges a large premium, its cards often have a much higher rewards payout than competing cards.

Most banks fund their lending, both card and otherwise, through deposits. Without deposits, however, Amex has historically funded its lending through outstanding travelers cheques (which function like non-interest-bearing deposits), the wholesale funding markets, and securitization. As travelers cheques have declined in popularity since the rise of ATMs, Amex has begun seeking traditional deposits through online high-yield savings accounts. The freeze in wholesale funding markets and securitization during the Financial Crisis of 2007-2009 caused Amex to accelerate these deposit-raising efforts, and also caused them to decrease growth in lending.

Due to its focus on affluent customers, Amex has historically had lower levels of credit losses than other issuers. The gap has almost disappeared for Q3'08 to Q1'09, however, as card issuers of all types experienced heightened credit losses.

American Express NavBox
Joint Ventures:
 * Industrial and Commercial Bank of China - Forbes
 * American Express (Saudi Arabia) Ltd. - joint venture with Saudi Investment Bank - Saudi Online
 * Rearden Commerce - Infoweek
 * Respond.com - Internet retailer

Network card countries: List
 * Latin Ameica / Carib: Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Netherlands Antilles and Aruba, Nicaragua, Panama, Peru, Puerto Rico, Venezuela
 * Europe: Belgium, Croatia, Cyprus, Czech Republic, Denmark, France, Greece, Ireland, Iceland, Luxembourg, Macedonia, Malta, Mauritius, Norway, Poland, Portugal, Slovenia, Spain, Sweden, Switzerland, Turkey
 * Africa & Middle East: Israel, Lesotho, Namibia, Saudi Arabia, South Africa, Swaziland

American Express

Citigroup NavBox
Joint ventures Citigroup
 * Nikko Citigroup
 * Shanghai Pudong Development Bank
 * Brasil Telecom

Frequent Flyer Programs
Unaffiliated:
 * Mileage run
 * Loyalty business model
 * Air Miles (Canada)
 * FlyBuys (Australia)