Why Rich People LOVE Amex, SECRETS Explained

All right, guys. Welcome to the show. So, we have this video, Why Wealthy Americans Love American Express from CNBC. In this episode of the show, I wanted to watch it with you guys and give you my reaction. Let's go. 52.9 billion. That's the total revenues net of interest expense Amex made in 2022. 52.9 billion. That's a lot of revenue. The graph on screen kind of wasn't related to the 52 billion. Those are something else he was showing. So, Amex, basically, they make a lot of money. That's what they're trying to say. But despite its impressive earnings, Amex is far from dominating the credit card industry. Well, it depends on what metric, I guess. But, you know, statistics can be fiddled with and used to show different things. So, let's see what they're actually getting at with this. Its domestic payment volume is far behind that of Visa and MasterCard. And it lags behind Discover based on the number of cards in circulation. But if you're looking at, you know, the amount of money spent on Amex cards, it's way more than Discover because Discover aims at the low end of the market. Their cardholders are less affluent. They've leaned into our people who use the card a lot, spend a lot of money and pay it off. It looked like that guy, he recorded on a green screen and then the editor, like, just sort of didn't realize that was the idea. He was supposed to replace the green screen with the background and he just left it green. What was that guy talking about again? Oh, yeah. So, he was saying that Amex is kind of aiming at people who, they spend a lot of money in the card and then they do pay it off. It's not 100% true. You can go into debt on Amex cards now. I mean, I guess they do have their credit card, you know, products like the Hilton card, airline co-branded cards that are credit cards. But even their flagship like charge cards like the gold and also the platinum, although they are sort of like charge cards in that you can, you know, you can spend a lot on them. They have no preset spending limit, but they also have a pay over time limit, which is like a credit card function, which is normally a lot lower, maybe like 20% of what you can actually spend on the card and paid off in full each month. So, you can still go into debt and pay interest on Amex's charge cards now. They're willing to cater to that crowd by giving them premium perks, whether that's at the airport or things they can use every day, you know, whether that's a Walmart Plus membership or Uber Cash. In other words, they're willing to turn the cards into a coupon book in order to attract these affluent consumers. The funny thing is, though, even though everyone criticizes it, like all the Walmart Plus credits and all that stuff, it actually works. Because if you listen to the Amex earnings calls, which I do, try to listen to the whole thing each quarter because I cover this stuff. They always say how well it's working, right? The whole plan of adding credits and increasing the annual fees. It works, even though everyone criticizes it. And it's able to bring in these wealthy consumers. And they're also targeting Gen Z and millennials heavily now. Armed with impressive rewards and a loyal customer base, Amex has achieved impressive growth. The company's revenue has increased over 32% since 2017. 32% since 2017, that's nine years. So, that would be like over a 3% or so increase in revenue per year. That's quite a big increase. So, what is the secret to Amex's success? And where is it headed next? Here, they're going to get into the real stuff and tell us the secrets and why they are so good at attracting rich people and making them love Amex. American Express began as a freight forwarding company in 1850, transporting various goods across a rapidly expanding nation. It wasn't until the late 19th century that it began its transformation into a payments company. Yeah, that's right. They used to be railroads and courier service, basically. That's why it's called American Express, because they would get your package there on time. And then the government started, like, nationalizing the railroads. I think it was in the late 1800s or something. And that's when they started switching to financial services. And traveler's checks was like their first financial product. And then later on, they had credit cards. In the 1950s, following its high success from traveler checks, it introduced its first charge card to offer customers a more convenient way to pay. The first ones in the 50s, they followed Discover. Discover came out slightly earlier than Amex, but they followed Discover. And these were just pieces of paper that had the card numbers on them. And then that was linked to an account. So it was really about the account number. The card looked pretty easy to fake, to be honest. What sets Amex apart from the rest of the industry is the way in which their network operates. Most credit cards from companies like Visa and Mastercard function in what's called an open loop system. So Amex issues its own cards and they run on Amex. So they are both the lender, the one who's actually lending you the money that you're swiping the card to, you know, using to pay with for things. And they are the network, whereas other credit cards would be, say, issued by Chase, but on like the Visa network. So there's two parties involved. Chase is lending the money, but the actual network that the payments go through is Visa. So you've got like two different parties making the money on that one transaction. Actually, often it's more than two parties, because you have a few other companies that do little things in the network. But with Amex, it's just American Express and American Express. They are both the lender, the issuing bank and the network. Visa and Mastercard are merely card networks. So they process transactions, but they're not actually issuing credit. American Express is both. So the disadvantage of that, if you're just the network, you only make money off of the network fees, the swipe fees. Like when someone swipes the card, it charges like 2% or whatever to the merchant. That's what Visa and Mastercard make. But Amex, because they are the issuing bank as well, can make money on all sorts of different things like annual fees, interest fees, late payment fees, all sorts of stuff and the merchant fees. And actually, their merchant fees are more than Visa and Mastercard as well. That really enables them to see exactly what their customers are spending down to the item and have all that extra data where they can then advertise or target different reward spends. So yeah, because they're the bank and they're the network, they have way more data than other card networks have. And they can see exactly what you're spending your money on, on your statements. Apparently, other networks like Visa and Mastercard, they just get the dollar amount. They don't actually get the breakdown. That only goes to the bank. So basically, what this guy is saying is because they have so much data, they can really target like the Amex offers specifically to people, or they can see what large groups of card members like. And that's when they bring in new benefits and do refreshes. It's totally targeted at where people's spending is and what people want to do. So that's why it's kind of been so successful. This closed-loop system also allows Amex to earn money from interest, unlike Visa and Mastercard. The company generated about $9.9 billion in net interest income in 2022. That's actually pretty impressive, considering that Amex already has a culture of charge cards, like the gold and platinum cards. They're not really known as cards you pay interest on. People kind of have in their mind that they're charge cards. But yeah, obviously, they do have a load of other credit cards as well. So they earn money from interest, over $9 billion. But that's only like 20% of their revenue for the year. So they have a load of other sources that they earn money off too. So they get paid anytime a transaction is processed. And then there are also other levers, like people who pay annual fees, or carry debt, or other things that incur charges. Oh, there's our green screen guy again. So yeah, he's giving you a few different earning sources, annual fees, swipe fees, interest, and then other fees and charges, basically. Fees charged to merchants that accept its cards brought in more than $30 billion in 2022, contributing to more than 58% of Amex's total revenue net of interest expense for that year. Wow, so that's their biggest single revenue source, basically the merchant fees, $30 billion per year. That's like 60%, I think, of their income, if it was around $50 billion. So you know, Amex does charge higher merchant fees than other issuers, higher than Visa and Masca. That's why you get some little mom and pop stores that are like, no Amex, you know. But you know, because the Amex cardholders are so wealthy, you're never going to get like the Rolex store saying, no, we don't accept Amex, you know. So yeah, I guess the places that count are still always going to accept Amex. The places where it would be useful for you to use an Amex card, because you want like the shopping protections that Amex cards provide, and the insurances and stuff. Those places are normally always going to take Amex. They charge a premium to their merchants to take their cards. And the merchants are willing to pay that premium because American Express is bringing them the most affluent, biggest spenders. So that's what we were saying, isn't it? You know, Amex cardholders, they tend to have higher net worth, especially platinum card and even centurion cardholders. These people are like millionaires and billionaires. And when Amex is able to bring its clientele to those stores, because they've advertised them, maybe they've done an Amex offer for that store, which has brought a load of people in like, you know, to the Rolex store or to Gucci or to stay at a hotel owned by Hilton or Marriott or whatever. They're bringing their customers over there. Hilton and Marriott and Gucci and Rolex, they don't mind if they're charged a little extra 1% or half a percent on the merchant fees, the swipe fees. And that's because they know that those people are going to spend a lot of money and it kind of cancels it out. Big spenders are Amex's most important asset. Recent reports claim that Amex card members spend on average three times as much annually as those who aren't members. Whoa, that's an impressive statistic. It is also true that credit cards try to make you spend more, right? They do make you spend more. So people who use credit cards, they always spend more than people who use cash. And then within credit cards, people who have Amex spend three times what the regular people spend, which is crazy. That's where rewards come in. In just 2022, Amex spent almost $17 billion providing services and rewards to its card members. Wow. So their revenue was what, like $50 billion? And they gave back $17 billion through rewards and services. Well, he said rewards and services. So it probably includes like the Centurion lounges, probably includes some other insurance and things like that on the card. But then also the Amex points, right? Which can then be converted to airline miles. Or if it's like Hilton card, it would be like Hilton points, Delta miles, Delta SkyMiles if you've got the Delta card. So $17 billion on rewards. That's really incredible. So their merchant fees were $30 billion and they're giving back $17 billion. So that's over half what they earned with merchant fees. That high spend centric model is the reason why they can provide such strong rewards that they do. So the reason they have such good earnings rates and welcome bonuses and that kind of stuff is just because their people, you know, their card members just spend so much money. I guess like if you're spending at one point per dollar on like, you know, the Platinum card, they're probably making money on that, aren't they? If you're spending on flights with the Platinum, five points per dollar that they're giving back to you, I doubt they're making any money because they're giving you five points back, but they're getting probably like 3% or less in the merchant fee. Because the people that are spending are actually making this up in their spend behavior. Their spend behavior, they're spending so much money that it makes up for the amount that Amex gives back. They can create rewards that feel to you as the consumer, like this program was custom designed for me. I wonder what she's specifically talking about there though. Maybe it's Amex offers because they can see your spend and then they can put offers into your account that kind of target your spend behavior. That could be it. Or it could just be that, you know, when they have so much data, they can see what the group overall spends on, the average things that people spend on, and they can kind of, you know, tailor that when they bring in their refreshes and stuff, which they do a lot these days, normally accompanied by a slight increase in the annual fee. But yeah, they can bring in, you know, new benefits that are tailored to what they know their cardholders like. Like they can go out and recruit all of the top hotels and all of the top restaurants and have specialized offers and specialized rewards and stuff to bring consumers, the affluent consumers, to those hotels, to those restaurants. And everyone sees benefits from their role in the middle of connecting those dots. From a point of view, you could say it's actually a marketing company, not a finance company. They develop this finance product, but they use that to market it to all these hotels. Kind of like what they say about McDonald's. What do they say? McDonald's is like the biggest real estate company in the world. It's not actually a restaurant. It's a real estate company. You know, they have obviously the restaurant business, but underlying, they have all this real estate where those restaurants are located. Well, I guess with Amex, you could say it's one of the world's best marketing companies. It's also what you say, like the cardholder, you are the product, right? Like this is not the product. You are the cardholder because they're marketing you to all those hotels and airlines and stuff that they partner with. Very interesting when you think about it like that. Having an affluent customer base also gives the bonus advantage of decreased credit risk. Delinquency rates for Amex have remained substantially lower compared to other major issuing banks. Okay, so that's another part where they make money or they just lose less money compared to other issuers because Visa, MasterCard, or I guess banks like Discover or Credit One or whatever, they probably have quite a high rate of delinquencies because they are aiming at that lower end of the market where people have less money. They're more likely to miss payments or even not pay the card completely and have it go to collections. And the bank then sells the debt for pennies on the dollar and has to write it off, right? It's like written off as a loss on the balance sheet. So yeah, that's definitely an advantage with Amex too. It's really one of the reasons why investors kind of focus on this stock in a downturn. It's considered a safety play and that's why we're outperformed with the stock today. When there's a recession, less people will go delinquent on their credit card accounts because these people have more of a cushion, more money in the bank. Even if they lose their income, they probably can just spend their savings until the economy recovers or they get a new job or their business does better or whatever. So yeah, they've got that cushion as well. The biggest threat for Amex is the competition within the credit card industry. To me, the biggest weakness or danger for American Express really is that marketplace power of Visa and MasterCard and what they may decide to do with it. Hmm, yeah, okay. Interesting take. Yeah, I guess that would be seen as a threat. Like if Visa and MasterCard kind of like both wanted to support something together and kind of conspired, I guess that would probably be like some law against that though, like a monopoly or whatever. There are a couple of new acts in Congress that they kind of trying to pass. They'll probably never pass, but they limit credit card merchant fees. I think that would also be a threat as well, like government legislation. But Amex probably spends a lot on lobbying too. Visa and MasterCard also probably spend a lot on lobbying against that kind of stuff as well because they also benefit from providing rewards to get people to spend more money. So yeah, very interesting video. And to sum it up, I guess you could say the reason the rich love Amex is a few things. One, it's very targeted to their lifestyle because they do just have so much data on you. Also the fact that you can swipe, you know, however much you want with this almost, right? I've used the check spending power tool with this platinum card and I would be approved for $125,000 in one transaction with this. I could buy like a Mercedes or something with one transaction on this card. The most I've ever swiped is $21,000. I think that was on the gold card. Not this one though, the business gold card. It was the first ever transaction I did immediately after getting the card. I checked it would go through with the check spending power tool and it said that it would. And I charged $21,000 to it for a tax payment and it went through. They did call me the next day though and say, sir, you know, are you going to pay that off? Just pay it off. Yeah, just don't give us a heart attack. You know, pay it off, pay it off. So I did pay it off anyway and it was all good. But yeah, I like that thing about Amex. Like if you charge obviously one of those really high amounts like $100,000, you do have to pay it off that month because the pay over time amount that you can actually pay interest on and roll over to the next month is a lot smaller. I think on this card, it's like 20,000 but I can charge 125,000 in one transaction if I want to and pay it off that month. So that's another thing that the rich find really useful about Amex. Basically any charge will go through. And you know, it's only really people who have a lot of money in the bank that kind of need that, right? Because if you're poor, you're not going to be charging $100,000 because then you're going to go into debt, right? So you know, that's also another reason. But probably there is a little bit of a risk because Chase is really trying to target the higher end customer now with the revamped reserve card. I still don't think it's as good as the Amex Platinum but they're definitely providing a bit of competition for Amex. Really interesting video, great one CNBC. I can't believe I'd never reviewed that. It's been around for like three years already. But yeah, let me know what you think in the comments below. Please subscribe to the channel and we'll see you next time. Bye-bye.