Wednesday, November 2, 2011

American Express in Payment Processing Sector

American Express is a major player in the payment processing sector, but it is also a larger global financial services company providing a range of products and services that include Credit Card and Charge cards, Expense Management, Consumer and Business Travel services, merchant acquisition and processing, point-of-sale, servicing and settlement. Its customers include Consumers and Businesses of size small to large corporations. The network diagram below shows the map of company’s products, customers and the channels it uses to market its products and services to its customers.

American Express is unique among Credit Card networks. Major networks such as MasterCard and Visa do not directly issue cards to consumers. Distributor institutions such as Bank of America or Citibank issue Visa or Mastercard to their customers. American Express credit cards are also distributed through Banks, but unlike Visa or Mastercard, Amex is also a direct lender to cardholders. Thus, in addition to card processing fees from distributors, it also earns direct income from cardholders through interest charges, late fees and annual fees.

Because of its unique model, American Express is the largest credit card network by revenue, even though Visa dwarfs it transaction volume. Amex’s estimated 2011 revenue is $31.3B out of which $14B are from credit card products. 

The network diagram below shows Amex’s relationships in the market. The nodes in this diagram represent companies with Amex at the center and the connections represent the recent deals, partnerships and acquisitions that it has made. Analysis of each connection reveals Amex’s strategy to continue to be relevant in the fast-changing payment processing sector.

Through Amex’s network analysis and its comparison to the market network, we can identify Amex’s strategy for each layer in this sector. The sector stack diagram shows the nature of Amex’s presence in different layers of this sector.

A new layer of Payment Intermediaries are emerging in this sector. These intermediaries are essentially a platform which handle all types of payment transactions and create a new value proposition for not just the merchants but also consumers. Paypal is the major player in this layer. Amex launched its own payment processing platform, called Serve. 

Delivery Mechanism, or the choice of multiple payment modes in an existing layer but is being transformed because of digital and wireless technologies. Online payment option has existed since the time ecommerce began. However, credit card is still the most used payment option. In recent times though, Credit Card themselves are changing. All major players have launched credit cards with built-in wireless chip that enables a contactless payment at POS. American Express too has ExpressPay card that makes contactless payment possible.

Mobile technology is transforming this layer in a big way. 

There are mainly two ways companies are using mobile technology to enable payments. One way is that when a consumer purchases a product at a store, instead of providing their credit card, they can just give their phone number and the amount would be charged on their mobile bill. Amex has partnered with Payfone to enable this type of mobile payment. This mode is gaining traction is lot of emerging countries where mobile penetration is much more than the credit card penetration.
Another way of mobile payment is the Google Wallet way, where the smartphone itself acts as credit card. When a consumer purchases a product at a store, instead of providing their credit card, they can just wave their smartphone as if it were a card and the payment would be charged on their credit card account. Google, in partnership with Mastercard, Citibank and Sprint recently launched Google Wallet. Visa is working on a similar initiative but Amex does not yet have any partnership or alliance to enable mobile payment in this way. Instead Amex is focusing on making its Serve a unified platform for processing transactions and is relying on Payfone to handle the customer’s POS payment experience.

Services is the new layer that is being added in this sector. Virtual currency ( for ex, for in games purchases ), Local Deals ( like Groupon ) and automatic coupon redemption are the areas in which Amex is very active to create greater value proposition for its consumers. On the Business side, Amex acquired Accertify which provides fraud protection. Amex is also selling technology based information products and services to its business customers. With Amex’s presence or partnership in each layer, it is in advantageous position to provide BI and Analytics services.

As technology is transforming this sector, Amex is putting its energy in making Serve a unified payment processing platform. Consumers can create a Serve account and use any type of credit/debit card or their bank account to find their serve account. With the Serve account they can seamless make payment to anyone. For ex, they can make payment to their friend to share the dinner bill. Or they can use Serve account to make a mobile payment for an online or in-store purchase.

To summarize, layers in this sector are in transformation stage. American Express is working on a unified digital payment platform, but it does not have a digital wallet solution. Depending on which mobile payment approach becomes dominant, Amex may have to enter into new partnerships. The Serve platform is in nascent stage and most of the partnerships have only been announced. If it is able to execute on its Serve platform, Amex will remain a major and relevant player in this sector in 2015.

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