All right, I think we're going to get started. Welcome, everybody. Thanks for joining. My name is Terry Ma. I'm the new Consumer Finance analyst at Barclays. Very pleased to have Doug Buckminster here, Vice Chairman of American Express. So welcome.
Thank you. It's great to be here. I also wanted to point out that with me today is Kerri Bernstein, our Head of Investor Relations, and Kartik Ramachandran, who will be succeeding her in the IR role after Q3 earnings.
So great. I think we'll just get right into it.
Let's do it.
Can you maybe just talk about the competitive landscape for Premium Cards, what you're seeing from the competition and what Amex is doing to stay ahead?
Yeah. Well, you know, they call the National Football League a copycat league, and I think U.S. payments, not very different, right? Copycat league in the NFL, somebody's running a good offensive scheme or defensive scheme. People break it down, they co-opt parts of that. And I think competitors have noticed that we've had a lot of success with premium products over the last five, six years, especially our Platinum Gold product line, our premium, co-brand products. And you know, our, our responsibility is to not squander the advantage that we have in that space, where we have tremendous assets in terms of hotel programs, air programs, travel booking, lounges, and you see a lot of competitors piling into there.
What we need to do is continue to up our innovation cycle, discern the next source of new value the customers are going to appreciate and that we can credibly provide to them. You know, one of the things that's interesting to me, you know, over the last five, six, seven years, interest in premium payment products has expanded dramatically in the U.S. and really across the age spectrum as well. And I think if we do our job well, as that market expands, the category leader tends to benefit disproportionately. And I think you see it even when, you know, Chase announces that they're opening a new lounge and there's there's media pickup of that. You know, inevitably they'll talk about our Centurion Lounge footprint and the 15 domestic, 23 international lounges we have and the value that that creates, right?
So it's about continuing the product and service innovation cadence that we have a history of doing.
Got it. So Amex has spoken in depth in the past about pricing for value. So take the Platinum Card, for instance. There's a $695 fee. It offers 1,400 of benefits. I think most consumers are smart enough to figure out how much of that they can actually get. So can you maybe talk about how you approach constructing the value prop and pricing to minimize attribution? And then is there some sort of natural ceiling for what the fee can get to?
Yeah. Well, you know, on the Platinum product in particular, we refreshed that in 2016, took the price from $450 to 550. We refreshed it again a couple of years ago, and as you noted, took the price to $695. When we go through one of those refresh cycles, we're trying to do three things. We're trying to add a new infusion of highly relevant customer value. We're trying to price for that value, as you know, and while doing that, increase demand for that product, even at the higher price point. And if you look at Platinum and Gold over the last five, six years, you actually see every time we have raised price, not only have we had really good and very strong retention numbers, but we've actually increased demand in terms of the number of applicants for that product.
And so is there any evidence yet that we're bumping up against some theoretical ceiling for price? I don't see it yet. And in fact, if you go outside the United States, we have markets like Japan, where that Platinum product is highly competitive and is priced over $1,000.
Great, helpful color. So another area where Amex has had success is getting more members into fee paying products. Last quarter, 70% of the cards acquired were fee paying cards. Net card fees have grown 20% year-over-year. So how do you think about the sustainability of that net card fee growth?
Well, you know, we've been in double digits for the past five years, including through the pandemic, when, you know, there was a significant discontinuity. It all comes back to our ability to kind of keep up that highly relevant refresh cycle every three years, and then obviously create new value in between those large-scale refreshes, like the announcement of the Newark Airport lounge yesterday, would be an example of a mid-cycle infusion of value that is most likely going to create a significant incremental demand. I think it's also important to note that it's not just that the % of new customers paying fees has increased. The average fee that they are paying has also increased materially as well, as more volume has flown into our premium charge and co-brand products.
So you've also done a good job gaining momentum with millennials and Gen Z. I think in the second quarter, 60% of the consumer new consumer accounts were from those two cohorts. Billings were up over 20% for both those segments. So can you talk about what endgame you're in with respect to penetration of those two segments? And at some point, do you just, d oes the acquisitions plateau, and then you just focus on gaining more share from them? Market share, that is.
Yeah. I think it's an and, right? If you go back to 2015 or so, when I started working on the U.S. consumer business, there were a lot of questions about our relevance to younger consumers. At the time, the label was Millennials, digital natives. Were we gonna be successful, or were we just kind of their parents' T&E product? So we think of it as generational relevance, not necessarily labeled on any particular cohort or demographic, but are we doing a good job of ensuring that our products are relevant for younger consumers? Under 35 is typically the threshold that we cut it at.
That's kind of what's behind a lot of the experiential value, the dining value that you see, the digital partnerships, Uber, food delivery that you see built into the products, very much aimed at that demo. And if you look at our strength under 35 in terms of acquisitions, it's continuing to tick up. It's fueling a significant part of our volume growth. And one of the great advantages of younger consumers is if you hold on to them, and by the way, we have better retention stats with under 35 new customers than we do with over 35 new customers, then you have a long runway to grow with those consumers as their income increases, as their spend increases.
And so we love that segment, and we view the health of our brand for the under 35 segment as one of the key health indicators for our business, our business model, and our product set.
Got it. That, that's helpful. So I wanted to switch gears and talk about revenue growth for a moment. You guys put out an aspirational target of 10%+ revenue growth in 2024 and beyond. Pre-pandemic, you were growing closer to 8% in 2019. So can you maybe just remind investors what the key drivers of that 10%+ revenue growth is?
Well, I think the step up from 8% to 10% is largely driven by two2 factors. One is the product and service innovation that we talked about. I would say we did not squander the pandemic. We pulled back on new customer acquisition. We invested in existing customers, but we also invested in a lot of product and service innovation as well. And so when we came out of the deepest part of the pandemic in 2021, we were ready to go with new product. And so that product innovation that creates demand is certainly a key factor. The other factor, undoubtedly, is that we have stepped up marketing investment in a material way. If you look at where we are today, where we were last year compared to pre-pandemic, it's a meaningful increase.
You put those two factors together, and that's what I think drives the acceleration.
Got it. So sticking on the theme of revenue growth, the second quarter growth rate, revenue growth rate, that is, was 12%. That's ahead of your long-term target, but it did decelerate quite a bit from the 22% in the first quarter. So as investors look out into the back half of 2023 and into 2024, how should they think about the growth trend?
I mean, I think you should rely on the comments that we made in our second quarter earnings call, right? Which is we expected a deceleration in Q2. Q1 growth rates were benefiting from some material Omicron year-over factors, and we knew it was gonna come down. We feel like we're in a period of stability now. It's becoming much easier for us to forecast volumes and other dynamics, you know, as certain headwinds and tailwinds associated with the pandemic have abated. And so what I would say is we feel like our volumes are stable. They're where we expected them to be, and they are sufficient for us to meet our 2023 revenue guidance as we said in Q2.
Okay, got it. So maybe can you just provide an update on spend trends this quarter and just overall consumer health? The network volumes were up 9% last quarter. They did decelerate from 16% in the first quarter. So how are volumes trending in the third quarter, and how would you characterize the overall health of the consumer based on what you're seeing?
Yeah. Well, I think volumes are, as I said earlier, stable and where we expected them to be, very much in line with the overall revenue guidance. You know, when we talk about volumes, we typically talk about billings, and there's stability there. U.S. consumer and our international card services continue to have robust growth rates. We've seen some moderation in small business. We talked about that in Q2. Small business tends to be a more volatile spend segment for us, and I think that was exacerbated with some of the pandemic effects around liquidity, around demand, around supply chain. We think it's an industry-wide phenomenon, but I would characterize all the segments as stable as we move through Q3, and in line with our what's required to meet our revenue guidance.
I would say on the revenue side, too, you know, we always look at, at volumes, and we are a spend-led company. At the same time, we've got really, you know, we've got a good three-legged stool on revenue. We're seeing some really healthy growth from net interest income, largely fueled by existing customers. And as you mentioned, we're seeing some strong card fee growth as well.
Got it. It's helpful. So the international segment has been a strong area of growth for Amex. Volumes were up 17% year-over-year in the second quarter. That said, it is a smaller part of the business. So what are the strategic goals internationally in the short term and long term? And how do you plan on achieving them?
Yeah. You know, the international segments, both small business and consumer were our fastest growing segments as we headed into the pandemic. Our international business, I would argue, suffered more than our domestic business. We're a little bit more travel-centric outside the US, and a number of the markets had more draconian responses to the pandemic than we did here in the US. You know, last year, we announced that we were gonna put our commercial and consumer issuing businesses together outside the US. I love that. I'm a big proponent of it.
You know, we tend to be kind of more of an underdog in international markets, and whatever we can do to make sure our marketing capabilities, our sales, our product development, our partnerships are serving all of our issuing activities, the faster we're gonna be, the more efficient, that we're gonna be. I would say the big opportunities outside the U.S., we have a great premium franchise. I mentioned our ability to price behind our brand and value in some of those markets like Mexico or Japan. But we're also in the earlier innings of building out our small business franchise outside the U.S., growing very rapidly, heading into the pandemic, growing rapidly now. But still, in terms of total market penetration, far behind where the U.S. business is.
I would say the same thing about bringing borrowing and financing capabilities to our members outside the United States. The legacy of our charge card pay in full product line is still strong, and it's really in the last couple of years that we've started to introduce installment payments and revolve capabilities across the broader product base. I think those two things together should support some accelerated revenue growth for a period of time in international.
Got it. So I wanted to touch on your acquisition strategy. You purchased Kabbage, a few years ago and then Resy in 2019. Can you maybe just talk about how those two acquisitions fit into the overall strategy and the benefits you've received?
Sure. Yeah, we've, as you mentioned, we purchased Resy in 2019, and I have to admit that like a year later, that did not seem like a very good idea, with restaurants across the country shutting down. But our thesis behind Resy was, first of all, our biggest travel and entertainment category, spend category is restaurant. It's not airline, it's not hotel, it is restaurant. And we also knew that for younger generations under 35, dining and food delivery were gonna be keenly important to our value proposition. What we liked about Resy is it allows us to do two things at the same time. One, create special value for our customers within that ecosystem, right? So access to reserve tables and such at in-demand restaurants, we call it our Global Dining Collection.
And at the same time, since it's an open platform, prospective customers can see that value on the platform, and then we make it easy for them to apply for an American Express product. And so we have some meaningful Gold and Platinum Card distribution through the Resy platform, and we love, we love that acquisition. We love that model. I think, you know, we continue to look at the dining space and make sure that our offering is robust, and we might use it as a model as we think about other opportunities to make acquisition to drive customer value. On the Kabbage side, it's largely the same situation, right?
We were looking to expand the range of banking products and services that we provide our customers, and when they came on the market, we saw a way to accelerate our entry into things like cash flow management tools, business lines of credit, so on and so forth. And so that SME, that software, that product that we bought from Kabbage, has been a key ingredient of accelerating progress against our broader financial services vision for small and medium enterprises.
Got it. That's helpful. So another area of focus has been building out the digital banking franchise. So you've had a high-yield savings product for a while. More recently, you introduced Rewards Checking for consumers and Business Checking for smaller businesses. Can you maybe just talk about the value props of each of these products and how they fit into the overall strategy?
Yeah. I mean, I love those, I love those products. We're still early on. I would still say there are some roadmap features that we need to build out. You know, we just announced the other day that we'd brought joint account functionality to our, checking products, which is hugely important to our, our customer base. We've got some other things in the pipeline that I think are gonna make it a fully functioned checking account that is suitable as both a supplemental or a primary checking account, and that is what we're, what we're focused on. But the value proposition is strong, right? I mean, we have a premium APY sitting out there at about 100 basis points, lower than what you would expect on a high-yield savings product, meaningfully more than you're gonna get from, most checking accounts at, at large banks.
For the debit access to that account, we offer rewards value of basically 0.5 rewards point for every $1 of spend. You don't find many debit products from trusted issuers like ourselves that provide that kind of rewards value on debit spend. So we like both the funds in motion and funds at rest value inherent in that, those checking products. And right now, we kind of look at it as another service to provide our members. We are entirely focused at this stage on marketing that product to existing customers and positioning it as a compelling checking product, but also as a benefit of membership. Much as we've done in the travel and lifestyle space, we try to surround that payments functionality with a distinctive set of services in financial services as well as lifestyle.
Got it. Helpful. So I wanted to switch gears, and you just talked about capital adequacy and the impact of Basel Endgame. So there's some uncertainty on timing and what actually gets implemented. But the requirements, as it's written right now around ops risk, would actually impact Amex's capital. So how big of a focus or concern is it for Amex? And how should investors think about capital return if those changes are implemented?
Well, I mean, obviously, we're very focused on it, very active in that area. I think I would just harken back to what Jeff Campbell said in the Q2 earnings announcement, right? Which is, we do not see in the short or moderate term, however, this sorts out having a meaningful effect on our capital actions. It's important to remember, I think, you know, we have a target of between 10%-11% CET1. We were 10.6, I believe, at the end of Q2, and that's 350 basis points above our regulatory requirement. And right now, as we look at it, we don't see it having meaningful strategic or financial effects for our business.
I'd also remind, if we felt like we needed to ramp up that capital level for whatever reasons, regulatory, rating agency, what have you, you know, we have—we produce tremendous amount of capital return each year, which is what drives our 30% return on equity, 30% plus. And so right now, we're relatively sanguine about the effects that it'll have on required capital levels or capital return.
Okay, got it. I wanted to round out the discussion and talk about strategic priorities. Can you maybe just talk about the two or three that you're most focused on going forward?
Yeah. Well, you know, whenever we get together as a team, one of the things we always make sure to remind ourselves is, like, one of the worst things we could do, one of the biggest risks we face, is getting bored with our core business. We're in a great business. Great levels of growth, really strong financial returns. We're in the right geographies around the globe to capitalize on the payments, consumer lending business. And we've got, and we've got some great momentum. The last thing we need to do now is get distracted by remote adjacencies where we have a questionable right to win. And so a lot of our priorities feel very close to home, right?
They feel like continuing to strengthen our product and service offerings to our consumer and business members, and that means building out our capabilities in entertainment, staying ahead in travel, capitalizing on the dining momentum we have, a limited set of, adjacent financial services like savings, and checking. So I would say we are a product innovation-led company, and so focusing a tremendous amount of energy there is gonna be required. Continuing to innovate our marketing, capabilities and distribution is certainly, a priority. Continuing to build our merchant acceptance. We're at parity here in the U.S. It's made a big difference to our business, and we have some ambitious targets about increasing merchant acceptance in major cities outside the United States as well. And, I would say a track record of progress over the last couple of years in those categories, as well.
So I, I'd probably leave it at that, but those are the areas where we're spending, you know, 80% of our energy right now.
Okay, great. I'm gonna pause right now and just go to the, audience response questions. So, operator, can you queue the first one up? So first question: Will Amex meet, beat, or miss 2023 EPS range of $11-11.40?
I'm not meant to vote, am I?
No. So 68% thinks you'll meet, 19% beat, and then 13% miss. All right, can we just queue the second one? Over the next year, would you expect for a position in Amex to... one, increase, two, decrease, or three, stay the same? So fairly bullish. So 46% increase, 36% stay the same, and 18% decrease. Okay, so I'm gonna open it up to Q&A right now. Any questions from the audience?. No questions at all. All right, so I'll go. So you mentioned increased marketing spend is one of the big drivers of sustaining your 10%+ revenue growth. Can you maybe just talk about how much flexibility up or down you have on that, if, you know, maybe revenue growth doesn't get to 10%+?
Well, I mean, the vast majority of our marketing spend is, it's not channel costs, it's not sales people. A lot of it is cost that we incur when we actually book a new account, right? In the form of card member incentives and other things. So there's actually a fair amount of flexibility there. It's flexibility I hope we don't have to pull too aggressively, but I think you saw it in the pandemic, right? Some of it was demand driven, but we took prospect acquisition down by probably 50% during the pandemic, and we took it down quickly. On the ramp-up side, like in terms of flexibility to spend more, there are always lead times for campaigns and offers and such.
There's another, for me, important health metric for the business. We maintain a large unfunded list, which if we decide we want to invest more within a one to two- month period, we can get new offers, new campaigns into the marketplace to exploit that additional demand.
Great, that's helpful. I wanted to go back to just the account growth for millennials and Gen Z. Can you maybe. Is there any color you can provide on, I guess, the credit performance of those two segments versus your, I guess, the core customer segment before?
Yeah. Well, it's, if you look at new acquisition performance, new vintage performance, it's highly comparable with, t o older cohorts. We obviously do not use age explicitly in our underwriting, but we use a holistic picture of their credit bureau and other factors in underwriting. And, you know, the Millennial, Gen Z, new customers that we're bringing on have decidedly super-prime credit profiles, well above the 720 threshold for super-prime . I should also say it's a good opportunity to talk about- like, I hear a lot about student loan forbearance going away, and what kind of effect do we think that'll have, and with our focus on Millennial and Gen Z, have we become disproportionately exposed to that risk?
What I would say is our percentage of receivables associated with customers who have a student loan is the same now as it was prior to the pandemic, and it is, by our estimates, below the industry average as well. And so we're monitoring closely. We've obviously built products over the pandemic to help people who find themselves with short-term cash flow issues with, like, our Financial Relief Program . So we're ready to react to whatever happens, but we're not thinking that we put ourselves in a difficult position there in any way.
Great. Do you want to quantify what the industry average is and where Amex stands relative to that?
I would say. Let me put it this way, I think we're about 20% below where the industry is in terms of our percent of receivables that are exposed to student loan borrowers.
Okay, fair enough. Helpful. Maybe just to touch on the credit reserve, for a moment. Your net losses are still below 2019 levels, but Jeff has talked about the reserve ratio trending higher, going forward. Can you maybe just talk about that and why there's a divergence between, that guidance versus what other issuers have guided to?
Well, I think, you know, if, if you look at our delinquency and write-off rates, we are still below pre-pandemic levels, and we, as we've said, believe we will remain below pre-pandemic levels, throughout 2023. Beyond that, we'll see what happens in terms of macro and such, but we, we like the hand we're working with. If you look at our delinquency distributions, if you look at our weighted, balance weighted FICO averages, all better than pre-pandemic, right? So despite the, the relatively heady growth and some of the focus on younger customers, we feel like we're in a, in a good position there. In terms of reserve, you know, as we trend back up to day one CECL levels, you know, what really drives our reserve is the quality of our portfolio, which, as we've said, is looking quite good.
The macro outlook, right? We use Moody's forecast of the economy around unemployment and other factors. And so what you can see is you can certainly see a portfolio that is healthier in terms of contemporaneous credit metrics, that is being accompanied by reserve additions because you end up with a more pessimistic view of the external macro environment. And so, like, those trends are always in play. I don't think we do a particularly good job of kind of explaining how much of our reserve build is coming purely from volume, how much is coming from contemporaneous credit quality, and how much is coming from that forward-looking macro view that's being incorporated through the CECL model.
Yeah, that's helpful color. So we have a few minutes left. I'll open it up again. Any questions? We got one right here.
Hi there. Thank you. Just if you could provide some color on your view regarding competition from the new technologies and all the fintechs that keep coming along?
Yeah, I mean, you know, we're relatively plugged into new developments in fintech and such. Clearly, that area, in terms of new competition, has become a little bit more muted over the last few years as interest rates have gone up and as the venture ecosystem has changed a little bit. Where I spend most of my time thinking about emerging technology-led competitors is: how can that help power our core business? How will it change customers' expectations around how they interact with their travel, lifestyle, and payment-type products? I tend to be less concerned about some technology-led startup putting us out of business.
You know, payments, especially in the U.S., is a scale game when it comes to funding, it comes to distribution, the data assets that are required to market and underwrite well. But where we spend most of our time is how are and where we spend most of our time with our team out in San Francisco that does venture investing is, who are the folks that are working on new technologies, products, and business models that can power our core and are likely to disrupt the way customers want to interact with these services?
Great. Any more questions? If not, I think we'll wrap right there. So thank you, Doug.
Thank you, Terry. Appreciate it.