American Express is a large player in the points and miles universe. It offers a line of charge and credit cards that earn its proprietary Membership Rewards, along with having co-brand partnerships with Hilton, Marriott and Delta.
Dealing with the bank can be a bit of a love-hate relationship. AMEX cards offer generous sign-up bonuses, provide unequaled travel benefits and the AMEX Offers program can be lucrative.
However, AMEX has a restrictive “once per lifetime” sign-up bonus limitation on its cards and the AMEX RAT (Rewards Abuse Team) is notorious for claiming back bonuses or closing accounts for seemingly minimal infractions.
Finally, the American Express Platinum card, which used to be one of the best travel cards out there, is now a coupon book requiring cardholders to redeem endless rebates to make the card worthwhile.
But that’s how we see things from the travel rewards point perspective. While we think we’re the main customers for AMEX, we’re not. Once you see things the way AMEX does, things make more sense.
That’s why I found this video from CNBC about American Express so interesting:
While the title says the article is about why wealthy Americans love American Express. They cover a lot more than that topic.
First, they explain that AMEX is different from other credit cards. They only have 7.5% of the cards in circulation in the US (even Discover has more at 8.1%) but their stock price and earnings have continued to grow.
The reason for this is that American Express is both the lender and the processor. This is different from Visa or Mastercard where those networks process the transactions, but the lender is a bank like Wells Fargo, Chase or Capital One.
For those cards, Visa or Mastercard gets the swipe processing fee and the bank makes money on interest and other payments like annual fees.
American Express gets to keep the processing fee, interest payments, late fees, and annual fees. In fact, AMEX made 9.9 billion dollars in interest fees in 2022 but they made $30 billion in merchant fees.
While the common wisdom is that banks want you to carry a balance because that’s how they make money, AMEX doesn’t use that business model.
American Express is fine with high-spending customers who pay their accounts in full each month. In fact, the more you spend on the card, the better for AMEX, because AMEX makes money on the purchase, not on the debt. American Express is willing to pay for premium perks to attract that customer. In 2022, AMEX paid $17 billion for services and rewards for cardholders. This includes rewards points, lounge access, special events and other perks.
It’s working because the average AMEX cardholder spends 3X more on their cards than customers from the other banks.
AMEX’s closed-loop model, where it’s both the processor and the lender, allows it to have increased insight into the spending patterns of its customers. So Chase and Citi may know how much you spent and where you spent it, AMEX goes one further and knows exactly what you purchased. This is how the RAT team is able to determine if you purchased a gift card at the supermarket to meet a spending requirement.
On a more positive note, this granular data allows AMEX to tailor offers to its customers at a more personal level than the other banks. Ever wonder why AMEX Offers are so much better than similar programs from Chase and Citi? It’s because AMEX knows what people are spending money on, and can follow those trends. It also means that AMEX Offers feel more personalized, thereby nurturing the relationship between AMEX and its cardholders.
In addition, AMEX is able to directly negotiate with merchants for special offers, and merchants are willing to make deals because AMEX brings high-spending customers.
It’s a positive feedback loop. AMEX customers spend more money, so merchants want AMEX customers and will pay higher fees to AMEX, then AMEX can provide better benefits to those high-spending customers.
That could be why we might be thinking that the AMEX Platinum card isn’t what it used to be. And while we complain about the $75,000 minimum spend required to get a guest into a Centurion lounge, that’s a drop in the bucket for the high net-worth cardholders who love AMEX. And they’re the cardholders AMEX wants to keep happy.
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