American Express Company AXP Moat

Key data

The moat

The proposition is unusual and it holds because of who accepts it. American Express asks the cardholder for money up front, every year, before a single purchase is made. In exchange the cardholder gets a lounge, a set of credits and a claim on service that the issuer will actually honour, and, importantly, the sense that the card says something about them.

That last part is the moat and it is a brand, not a network. Because the customer is affluent and spends more per transaction, the merchant is willing to pay a higher rate to accept the card, which funds the benefits, which attracts the next affluent customer. It is a closed loop in both senses: Amex issues the card and acquires the merchant, so nobody sits between it and either side.

What the moat produces is pricing power in its purest form. Net card fees grew from $2.33B to $2.86B in six quarters, 23%, on a card base that grew 5%. Customers are paying materially more each, and they are not leaving.

Widening or narrowing

Both series that matter move the right way, every quarter.

*Discount rate derived from disclosed revenue and volume.*

Six quarters of unbroken card growth, six quarters of unbroken fee growth. The discount rate is the one line that softened, from 2.257% to a trough of 2.221% in December before recovering to 2.230%, and the compression is under four basis points across the whole period. That is mix rather than pressure: more everyday spend at lower-rate merchants dilutes a rate nobody is actually negotiating down.

The overrated case. The fee growth is the strongest evidence here and it is also the most flattering way to read a repricing. Amex has refreshed its premium cards repeatedly and raised the price each time, and a refresh lifts the fee line once and then laps itself. Fee growth of 23% over six quarters on 5% more cards is a price increase, not a franchise expanding. Whether it recurs depends on whether the customer thought the credits were worth it, and the second year after a refresh is when that shows.

On profit pool, Amex holds by far the fattest slice available in payments. Owning both the issuing and acquiring side means it keeps the discount rate, the annual fee and the interest, where a four-party network keeps only a few basis points. That is why its revenue per dollar of volume is roughly seven times a network's.

The moat is widening.