American Express CEO Ken Chenault sees great promise in the market for the young, but growing, digital payments business. He also believes rivals in the company's core credit card business are going to have to change their business models to improve revenue.
During an hour-long question and answer session at the Sanford C. Bernstein Strategic Decisions Conference in New York City, Chenault said American Express has benefitted from the rapid rebound in spending among affluent consumers, its diversified portfolio and the firm’s "spend-centric" model.
That’s one that profits from the number and size of transactions clients execute, rather than the balances they carry on their cards. This type of "lend-centric" model favored by traditional banks, Chenault said, needs to be changed.
"Pre-crisis the A-R (accounts receivable) growth rate in the industry was between 5 percent to 6 percent", he said. That has changed, he said. A-R growth is no longer keeping up with billings growth as consumers deleverage or keep smaller balances on their cards.
"I think this will pose a challenge to those that have a lend-centric model," Chenault said.
At American Express, 20 percent of its revenue is derived from spread—the difference between the interest rate it charges customers and the rate it pays on the money it borrows. For traditional banks, Chenault said 40- to- 80 percent of the company’s revenue has relied on spread, with most banks at the 60 percent level.
If banks cannot reignite A-R growth to drive spread revenue in their cards business, he said, they are going to have to change their model to generate more revenue on a consumers spending, rather than their borrowing habits. This is one reason he believes more banks are going after Amex's core, affluent client base.
Chenault also spoke at great length about the rapidly-evolving mobile payment space. The credit card firm's offering here is a mobile application called "Serve" which is accepted wherever American Express cards are accepted. It is also available to iPhone users, or those using phones powered by Google's Android operating service.
Serve can also be funded from any source. Being device and funding agnostic gives Amex's product an advantage over new entrants to the mobile payment field like Google Wallet, according to Chenault.
Google Wallet's success will turn on retailers’ willingness to adopt readers using a new technology, called NFC or Near Field Communications, and that’s a problem, according to Chenault.
"It could be an interesting product, but here are some of the challenges from my perspective," he said. "Number one is they are reliant on NFC technology. The one thing you want to be careful about with merchants, is you have to convince them to switch out their existing terminal or do a side-by-side. NFC has not been widely adopted. NFC needs to be widely adopted for this to be successful."
While Chenault believes mobile payments will eventually be a real force in the payments business, he points out right now only 1.5 percent of all merchants have the capability to accept mobile payments. That means there is a "long runway" before this technology is widely adopted.
Asked about the ability of the New York-based firm to maintain the premium prices it charges merchants to accept its cards in their stores, Chenault said Amex will be able to maintain its pricing by developing programs that steer more Amex clients to the merchants' outlets.
He declined to name the retailer but cited a "pay for points" program Amex did in conjunction with the company that generated a 40 percent increase in new customers at the store. The average spend by those Amex customers was 77 pecent above other clients.