As if the news of American Express’ direct banking test in Germany wasn’t interesting enough (MW December 1), this week the company has revealed the move involves a joint venture with plastic card rival Europay.
The trial, which if successful will also be launched in the UK, is taking place in Berlin and Hamburg.
According to an Amex spokes-man, the telephone banking operation includes a cheque guarantee card bearing both the American Express Card and Eurocheque logos. Eurocheque is part of Europay.
Europay was formed four years ago from a merger of Mastercard’s European affiliate, Eurocard International, and Eurocheque International to stem Visa International’s growth in Europe.
The prospect of Amex producing a co-branded card with an international financial rival would have been unheard of in the Eighties.
Then, the company was awash with money. Under former chief executive Jim Robinson, it began diversifying into stockbroking and investment banking, private and commercial banking. At one point it even made an ambitious bid for Walt Disney.
It was a disastrous attempt to become a worldwide financial services institution, moving far away from its core cards and travellers cheque business.
It was this core business which suffered greatly during the recession. Amex’s premium pricing policy and high retailer commissions – as much as six per cent commission when rivals were charging as little as 1.6 per cent – led to retailer boycotts.
In the US, Amex lost 1.6 million customers between 1991 and 1993, with membership falling to 21 million. During the same period in the UK it lost about 200,000 customers, according to Euromonitor statistics.
Robinson, who had been chairman and chief executive since 1977, left at the end of 1992 after an alleged boardroom coup. The diversification strategy was reversed and the new divisions were gradually sold off.
Meanwhile, in its core market Amex has faced two major problems. The first is the need to offer cheaper, more versatile products.
In 1992 the company reduced retailer commission rates and paid for the cuts by slashing costs. Between 1991 and 1992 6,500 employees were axed. Last year new chairman Harvey Golub issued a cost cutting directive intended to achieve a reduction in operating costs of $500m (327m).
The second problem it faced was the greater competition for upmarket customers. This has come from Visa and Mastercard targeting corporate cards; investment banks, such as Coutts and Citibank, moving into personal banking; and bank card issuers eating into Amex’s core market of affluent households, travel and entertainment spenders.
Underlining the pressure on Amex is the fact that UK rivals – such as the Co-operative Bank – have more Gold card members.
Roger Ashworth, marketing manager of card services at the Royal Bank of Scotland, says: “Amex is finding it difficult to develop its business out of the travel and entertainment market as credit card use grows.”
As banks and others have become more involved in the cards market, stealing customers from traditional card issuers, there is a benefit in being able to offer bank services as well as charge and credit card facilities.
It is the same rationale that forced Prudential UK to announce next year’s entry into the banking sector (MW October 27). It is not that it wants to take custom from the banks – it wants to stop the banks luring its own customers.
In contrast Amex’s answer has been to pursue a twin-track strategy of adding value at the top end, while executing massive cost cutting across geographical markets.
There is probably a great deal of slack in the mass market for cards, but the top end of the sector -which is the only one Amex is interested in – is saturated. These customers are highly profitable.
But with more players getting involved at the top end, Amex has prudently tied its existing customers into the company, rather than simply offering reduced fees and more convenience.
In April it launched a credit card aimed at weaning existing customers away from rival credit card com-panies with an APR four per cent lower than bank credit cards.
In June it struck a deal with Motorola and Cellnet offering a telecoms service to its own customers, distributing mobile phones and services in the UK. Amex is also believed to be considering selling private healthcare plans and a range of travel-related products.
However, the direct banking move stands out from the others. It is the first time in Europe that the company has had to work with a direct rival in order to penetrate a market.
Amex has failed to make significant in-roads in Germany where Deutschmarks and Eurocheques are the preferred methods of payment in most retail outlets. Whereas the UK has 37 million credit and charge cards in circulation, Germany, with a population of 80 million, has just 9 million. Mastercard/Eurocard dominates the card market.
A representative of an international credit card rival says that Amex’s latest move into direct banking makes sense: “Of all the brands in the market which could stretch into other areas, Amex has one of the strongest profiles.”
Amex is often used as a company card, usually through the corporate card for travel and entertainment. Amex is an aspirational brand, reflected in its advertising featuring Terence Conran, Stanley Kalms, Anita Roddick, and Marie Claire editor Glenda Bailey. It also has numerous co-branding tie-ups with upmarket products and services including the Forte Group, Qantas and AT&T.
But there are potential risks. “I think trying to encourage customers to use the brand for personal banking as well will prove difficult,” says the same source. “Personal banking sets up a very different set of relationships with customers to credit and charge cards.”
The rival says tying up with Euro-cheque is potentially a high risk strategy, unlike Visa and Mastercard, which carry other brands on their cards, Amex is a standalone brand.
“The brand image has always benefited from being distinct from other financial services companies,” he says. “If Amex is joining with Eurocheque it may cause longer term damage to the brand, it may lose its exclusive and elite status.” It may also cause long-term consumer confusion.
Amex has historically placed great emphasis on the fact that its financial and travel-related services are offered by a single company, unlike its rivals. Consequently, the possible launch of a co-branded direct banking service is not just another joint venture or business deal, it represents the greatest single challenge to its brand image the company has ever faced.