How American Express Makes Money

American Express Overview

If any company deserves accolades for giving away a host of free offers to its customers, it’s the one that’s been doing credit cards sine 1958: American Express Co. (AXP). As one of the biggest credit card companies in the world, American Express generates revenue from transactions occurring at partner merchants, as well as through annual membership fees and interest income. Few other corporations can offer such a wide array of cash rewards, flights, theme park admissions, rental cars, hotel upgrades, and gift cards, all in exchange for absolutely nothing except buying stuff that you presumably would have bought anyway.

Despite all the rewards and benefits, American Express is an extremely profitable company. In fact, these customer incentives ultimately help contribute to the profitability. In 2023, American Express generated about $60.5 billion of revenue and net income of about $8.4 billion.

American Express was founded in 1850 as a freight forwarding and mail service company. In 1891 the company introduced its famous travelers' checks. It launched its first charge cards in the 1950s and has since gone on to become one of the best-known credit card companies around the world. Besides credit card services, American Express also offers a host of other digital products.

On June 25, 2018, American Express benefited greatly from a Supreme Court ruling that stated that vendors can’t nudge customers toward using one type of debit or credit card over another. American Express typically charges higher fees, making it in merchants’ best interest to urge customers to use other cards.

As of May 4, 2024, American Express had a market cap of just below $166 billion. During 2023, American Express's earnings per share increased 14% to $11.21. The company expects EPS growth of 9% to 11% during 2024.

How Does American Express Make Money?

American Express divides its operations into three large segments: Global Consumer Services Group (GCSG), Global Commercial Services (GCS), and Global Merchant and Network Services (GMNS). Broadly, the company earns revenue from two major sources: cardholders and merchant partners. American Express has a “spend-centric” model aimed at growing the number of overall transactions on its cards through special offers, incentives, and strong customer loyalty.

Among cardholder revenues, American Express earns money from interest on outstanding balances, card fees, conversion fees, and more. However, the largest portion of the company’s revenue is discount revenue derived from transactions occurring at partner merchants around the world.

American Express’s cardholder revenue

One of the main reasons the entire business model stays viable is that American Express has tens of millions of cardholders who don’t understand how it works, demonstrating this by carrying a balance and owing interest. As with all credit cards, outstanding balances tend to generate massive interest, which spells larger revenues for the issuing company. We won’t explain the basics of how credit cards work right here, but those carrying a balance help to allow the rest of us to ride free. Late payers generate further revenue through late fees and penalty interest. With 80.2 million American Express cardholders charging $1.46 trillion in 2024, that’s a lot of revolving credit. Obviously not all of this spending resulted in interests charges, as many people by the full balance each month.

There’s more to American Express’ strategy than just collecting interest from tardy customers. Like many credit card issuers, American Express has premium cards that charge an annual fee, and the fees on its top cards are massive. Annual fees can reach up to $695 for American Express’ publicly available cards and $5,000 for its legendary, but very real, invitation-only Centurion card, which also has a one-time initiation fee of $10,000. The company does offer several free co-branded and entry-level cards.

American Express also generates revenue from other fees, including member delinquency fees and foreign currency conversions.

American Express’s merchant revenue

Most of American Express’ gross income is categorized as “discount revenue,” better known as “merchant fees”. Famously, American Express earns money by charging high merchant fees, higher than those its competitors charge. However, in 2018 American Express did offer its largest cut to merchant fees in 20 years. This did help to raise acceptance of its cards.

As to why merchants willingly accept American Express and thus pay the higher fees, the average American Express cardholder is relatively wealthy, and it’s worth the increased fees to get said customers in the door. As a result American Express can charge more than MasterCard Inc. (MA) and Visa Inc. (V) do, because American Express card members tend to spend more per transaction than other credit card users and buy more frequently. While the percentage charged to each merchant is still small, when cardmembers charge $1.46 trillion, it creates a huge amount of revenue for American Express.

In the past, the majority of American Express cards charged no interest. You had to pay your bill in full every month or else the company would close your account and send a collection agency after you for the balance. This stands in blatant contrast with the modus operandi of other credit card companies, which charge interest high enough to keep cardholders beholden for decades. American Express had a different strategy—hook the merchants, not the cardholders.

With the advent of American Express’ Blue Cash and related cards, as well as the Pay Over Time feature on Green, Gold, and Platinum cards, now the idea is to hook the cardholders, too.

Future Plans

In its 2020 annual report, American Express indicated that it had focused on four strategic initiatives over the prior year: expanding its leadership in the premium consumer area, continuing to grow its commercial payments segment, improving its global integrated network, and continuing to focus on its digital offerings. In its 2023 annual report the company continued to repeat these goals and focus areas. Particularly since announcing the reduction in merchant fees in March of 2018, American Express has signaled that it may be revising its business model to keep fees across the board lower in an effort to boost the overall number of transactions.

Key Challenges

For all of its success, American Express still lags behind its major competitors, Visa and Mastercard, when it comes to global acceptance and card marketshare. While American Express is still behind Visa and Mastercard in terms of global acceptance as well as card marketshare in the U.S. and abroad, it has closed the gap in terms of acceptance in the United States. American Express cards are accepted by 99% of business that take credit cards in the United States. For the customer, this means that the days of being unable to use your American Express card in the United States are basically over. However, you may still have trouble using it when traveling abroad.

Though American Express has reduced its merchant fees, these remain higher than those of some other credit card companies, which may be a barrier to wider merchant acceptance in many foreign countries. At this point, nearly all American businesses are accepting American Express regardless of the higher fee. However, American Express has some advantages as well: As both an issuer and a network, it is able to provide a more streamlined, predictable service than can Visa or Mastercard, neither of which typically issues its own cards.