Largest integrated processor means they know what you buy
AXP business model is unique in that they are integrated (see above). They own the network and are a card issuer and merchant acquirer. They have a direct relationship with their millions of card members and merchants. While Visa and Mastercard are the middle men (network only) whose direct customers are banks. AXP's advantage is that it knows where we buy, the time, the category of goods and whether it is online or offline. They have a unique data set that could be very valuable. They are already benefiting by having fraud rates half that of Visa and Mastercard because they are able to detect and stop fraud earlier.
When it rains it pours Costco and DOJ
Costco was their largest co-brand customer (see below). The lower returns and constraints on serving competitors of Costco was too much for AXP to reapply. While Costco is a loss (10% of their cards) it allows them to explore relationships with other retail partners. AXP is positive that they can retain the majority of Costco customers as over 70% of their spending on the card occurs outside of Costco warehouses. As a co-branded product the customers are as much theirs as Costco's. They are also appealing the anti-trust ruling that allows retailers to steer customers to payment methods other than AXP. Losing the Costco card exclusivity contract actually reduces the anti-trust risk.
Like Visa and Mastercard AXP is benefiting from the move away from cash to card. Yet AXP is a very different business model to the Visa/Mastercard networks. As mentioned before they are integrated taking on the financing risk of mainly credit spend not debit. This integration helps with analytics but it means the banks are a competitor to AXP whereas banks are customers of Visa/Mastercards network. Still AXP is a prestige brand AXP card members spend three to four times more on average than Visa and Mastercard customers.
On a 14x multiple the stock looks good especially compared to the networks multiples but a concern is management keeping their EPS target for 2017. AXP believe they can return to targeted growth of 12-15% by 2017 but competition has stepped up. It seems there should be a number of headwinds. The strong dollar should continue to affect international revenues and net write offs near historic lows of 1.5% should increase going forward. We believe this earnings uncertainty will lead the stock to trade in a range for the next year until investors get confidence in management targets or more likely targets get lowered. For the time being we prefer the networks like Visa but AXP is one to watch.