Growth in customer acquisition and engagement do not come without associated costs in today's intensely competitive U.S. credit card market.
American Express Co. reported increases of 22.1% in the third quarter and 30.3% for the first nine months of 2019 in expenses related to card member services, its income statement line item that captures the costs of various benefits related to credit card products.
The expansion to $558 million for the quarter marked the 10th-consecutive three-month reporting period in which the year-over-year rate of increase topped 20%, according to a review of disclosures in several American Express financial supplements.
"We continue to expect this line to be our fastest-growing expense category as it includes the cost of many components of our differentiated value propositions such as airport lounge access and other travel benefits, which we believe are difficult for others to replicate and help support the strong acquisition and engagement we are seeing on our fee-based products," said CFO Jeffrey Campbell during an Oct. 18 conference call.
To that end, American Express reported net card fees, which represent revenue earned from annual card membership fees, of more than $1.03 billion in the third quarter. That marked an increase of 18.7% from the year-earlier period. And unlike the card member services expenses, where the growth rate decline sequentially from 35.3% in the second quarter, the third-quarter expansion in net card fees was the strongest American Express has posted in any quarter in at least the past five years.
Campbell attributed the record level of net card fees to the company's "the disciplined approach to product refreshment" and the value propositions offered by its various cards.
"Nearly 70% of the cards we've acquired this year are fee-based products, providing us recurring subscription-like revenues," said American Express Chairman and CEO Stephen Squeri during the call. He observed a "steady stream" of revenue as more existing cardholders shift into fee-based products and in reflection of the company's emphasis on what Campbell described as a "more premium-oriented mix" of cardholders.
American Express specifically cited growth in its Platinum, Gold and Delta Air Lines Inc. card products as well as expansion in certain international markets for the higher net card fees. The Platinum and Gold cards carry annual membership fees of $550 and $250, respectively. Various co-branded Delta Sky Miles cards have annual fees ranging from zero to $450.
The company said in its Form 10-Q that the increase followed its enhancement of the value associated with premium products by adding new benefits that are driving higher engagement with new and existing customers. But there has been some customer churn as well, and American Express and certain of its credit card issuing peers have been tweaking benefits associated with fee-based products in recent months.
For example, the "premium roadside assistance" feature of the American Express Platinum card is set to end, effective Dec. 31, according to a recent communication. So, too, is the travel accident insurance benefit for travel-related purchases made on or after Jan. 1, 2020. The company also plans to scale back the scope of extended warranty and purchase protection benefits for Platinum cardholders. The former feature will offer up to one additional year of warranty coverage as opposed to up to two additional years currently; the coverage duration for the latter feature will be reduced to 90 days from 120 days for eligible purchases made on or after Jan. 1, 2020.
Citigroup Inc. discontinued various benefits on certain of its U.S. credit cards in September, citing low levels of usage over a sustained period. Bank of America Corp. CFO Paul Donofrio said during an Oct. 16 call that his company in its credit card customer acquisition efforts had "scaled back on people we think are trying to game the system or [are] just going after promotions." Discover Financial Services reported a lower level of promotional balances in its card business during the third quarter.
Douglas Buckminster, group president of global consumer services at American Express, said during an appearance at an investor conference in September that he had been "heartened by some of the rationality that I see in the market" in the form of issuers "dialing back" card acquisition incentives and certain benefits.
"I think a more rational competitive environment is good for everyone," he said, "and ultimately a hedge against an overheated lending environment as well."