American Express (AXP) Q3 2023: Net Card Fee Revenue Climbs 19% as Premium Model Drives Account Growth
Premium card adoption and fee-based product momentum fueled American Express’s record-breaking Q3, as the company leaned into its membership model and disciplined risk management to offset softness in U.S. small business spending. Management’s commitment to double-digit revenue growth and mid-teens EPS gains remains intact, with increased marketing investment signaled for the coming quarters. Capital return strategy stays steady despite Basel III uncertainty, underlining confidence in the earnings engine and credit quality.
Summary
- Premium Product Demand Accelerates: Fee-based cards now dominate new account growth, reinforcing the membership model’s pricing power.
- Credit Metrics Remain Best-in-Class: Conservative risk discipline and affluent customer profile sustain superior credit performance.
- Marketing Investment Ramps Up: Management plans to increase acquisition spend to capture robust global demand.
Business Overview
American Express (AXP) is a global payments and financial services company, generating revenue primarily from cardholder spending (discount revenue), annual card fees, interest income on revolving balances, and merchant network services. Its major segments include U.S. Consumer, U.S. Small and Medium Enterprise (SME), International Card Services, and Commercial Services. The company’s business model centers on a premium membership offering, leveraging a closed-loop payments network to monetize both sides of card transactions and deepen customer engagement through rewards, experiences, and partnerships.
Performance Analysis
American Express delivered its sixth consecutive quarter of record revenue, with broad-based growth across its diversified lines. Net card fee revenue surged 19% year-over-year, reflecting strong demand for premium, fee-based products—over 70% of new accounts acquired in Q3 carried an annual fee, and Millennials and Gen Z represented more than 60% of new global consumer accounts. This premiumization is translating into higher engagement and retention, as evidenced by industry-leading customer satisfaction scores.
Spending growth was led by U.S. consumers (up 9%) and international cardholders (up 15%), while U.S. SME billings growth was subdued at 2%, consistent with recent quarters. Commercial large corporate volumes remained flat, highlighting the segment’s role as a stable base rather than a growth driver. Travel and entertainment (T&E) spend, particularly in restaurants, remains a key tailwind, with restaurant spending up 13% and Resi, the dining platform, setting new reservation records. Credit metrics continue to outperform peers, with delinquency and write-off rates below pre-pandemic levels, and 70% of revolving loan growth coming from tenured, high-quality customers.
- Fee-Based Product Mix Shift: Over 70% of new accounts acquired carried annual fees, upholding high-quality revenue streams.
- International Card Services Outpaces U.S. SME: International billings rose 15%, offsetting muted small business growth.
- Resi Dining Platform Drives T&E Engagement: Record reservations and expanding restaurant partnerships underpin sustained T&E momentum.
Operating expenses rose modestly above plan due to increased investment in talent and technology, while variable customer engagement costs are trending below initial expectations, providing cost leverage even as marketing spend is set to rise in coming quarters.
Executive Commentary
"Millennial and Gen Z consumers continue to be the fastest-growing portion of our card member base, with spending from this demographic in the U.S. up 18% year-over-year, and they accounted for more than 60% of all new consumer account acquisitions globally in the quarter."
Steve Squary, Chairman and CEO
"The key enabler of that growth has been the discipline we use to deploy our resources. As a result, the underlying quality of our business is very strong, and I have confidence in the sustainability of the growth drivers that we are seeing."
Christophe LeCayac, Chief Financial Officer
Strategic Positioning
1. Premium Membership Model Deepens Moat
Amex’s unique membership model, which blends rewards, exclusive experiences, and premium partner offers, is driving generational relevance and high retention. The company’s focus on value-enhancing product refreshes (over 20 premium products updated YTD) and exclusive partnerships, such as the new Formula One sponsorship, reinforce brand equity and customer stickiness.
2. Fee Revenue and Account Acquisition Engine
Fee-based products now represent the majority of new accounts, with new card acquisition—not fee hikes—powering growth in card fee revenue. The acquisition engine is supported by sophisticated marketing, with management signaling an increase in spend to capture opportunity across global segments.
3. Risk Management and Credit Quality
Best-in-class credit metrics are a product of disciplined risk management and a premium customer base. Over 70% of new revolving balances come from tenured cardholders, and delinquency rates remain below pre-pandemic levels. Management expects only modest normalization, with reserves still below historical averages.
4. SME and Non-Card Lending Diversification
The U.S. SME segment, while currently soft, remains a strategic focus, with Amex expanding its suite of working capital and non-card lending products (now over $10 billion in balances) to deepen relationships and capture a larger share of small business financial needs. The Cabbage acquisition and integrated checking/lending offerings are key enablers.
5. Capital Management Amid Regulatory Uncertainty
Capital return remains robust, with $1.7 billion returned to shareholders in Q3, and CET1 at 10.7%. Management is actively engaged with regulators on Basel III, but does not expect near-term changes to its capital return policy, underlining confidence in the business’s capital generation and resilience.
Key Considerations
This quarter highlights American Express’s ability to sustain growth through premiumization, disciplined risk, and diversified revenue streams, even as certain segments face cyclical headwinds.
Key Considerations:
- Millennial and Gen Z Penetration: Younger cohorts now drive the fastest spending and account growth, supporting long-term relevance and lifetime value.
- Marketing Spend as Growth Lever: Planned step-up in marketing investment aims to capture global demand and sustain account acquisition momentum.
- Softness in U.S. SME Billings: Small business spending growth remains subdued, but management views this as cyclical, not structural.
- Cost Structure Leverage: Variable engagement costs trending lower than expected, providing margin buffer as OPEX rises with strategic investments.
- Resilience to Macro and Regulatory Shifts: Premium customer base and diversified revenue insulate AXP from broader macro and regulatory volatility.
Risks
Key risks include prolonged softness in U.S. SME spending, potential regulatory capital increases from Basel III, and a shift in consumer behavior due to macroeconomic pressures. While credit quality is superior, any acceleration in normalization could pressure reserves and provision expense. Regulatory changes (such as open banking or reward accounting treatment) remain watchpoints, though management currently sees limited direct impact.
Forward Outlook
For Q4 2023, American Express guided to:
- Revenue growth in line with full-year guidance of around 15%.
- Variable customer engagement expenses at approximately 42% of total revenues for the year.
For full-year 2023, management maintained guidance:
- EPS between $11 and $11.40.
- Marketing spend of approximately $5.5 billion.
- Operating expenses of around $14.5 billion, slightly above original forecast.
Management emphasized ongoing confidence in double-digit revenue and mid-teens EPS growth targets for 2024 and beyond, supported by continued investment in product innovation, marketing, and risk discipline.
- Premium customer engagement and new product launches as growth drivers.
- Capital return policy unchanged pending Basel III clarity.
Takeaways
American Express is executing a premiumization strategy that is deepening engagement, growing fee revenue, and sustaining best-in-class credit performance even as certain segments face cyclical softness.
- Premium Card Growth Drives Resilience: Fee-based product adoption and Millennial/Gen Z penetration are expanding high-value customer cohorts and supporting durable revenue streams.
- Disciplined Risk and Cost Leverage: Credit metrics remain superior, and cost discipline in variable engagement expenses provides margin flexibility as marketing ramps up.
- Watch SME Recovery and Regulatory Developments: Investors should monitor the pace of SME billings recovery and the final Basel III rules for any impact on capital return or business mix.
Conclusion
American Express’s Q3 results reinforce its premium membership model as a durable growth engine, with strong fee revenue, disciplined risk, and resilient consumer demand. The company’s focus on generational relevance and capital return positions it well for continued outperformance, though regulatory and SME segment trends warrant ongoing attention.
Industry Read-Through
AXP’s results highlight a clear industry divergence: premium card issuers with strong brand, affluent customer bases, and value-rich membership models are capturing outsized fee and engagement economics, even as mass-market and SME spending growth slows. Resilience in travel, dining, and experiential categories signals ongoing consumer appetite for differentiated rewards and access, while best-in-class credit metrics underscore the value of disciplined risk management. Regulatory capital changes remain a sector-wide watchpoint, and the shift toward fee-based product growth may pressure competitors to enhance their own value propositions or risk losing relevance among high-value customers.