AmEx's Online Credit Card Processing Revolution

Written by Chris Titus, CFA

Language: English (business)

Level: Intermediate and above

Vocabulary

• online credit card processing
• cutting edge technology
• reloadable
• social media
• slashed
• entrenched

Warm Up Question:

• When you take a trip with miles you've accumulated, how does your credit card company pay for the miles they award you?
• How does your credit card company earn money? We will read about one revenue channel.
• Do you feel more comfortable paying over the Internet if you see a Visa or American Express logo on the merchant's page?

Article

American Express (commonly referred to as "AmEx") announces the acquisition of Revolution Money, an Internet-transaction company, for $300 million. The deal provides AmEx with a reloadable, prepaid product technology that can compete with alternative online credit card processing services designed for social media sites. The company also plans to develop mobile credit card processing solutions in the U.S.

"New payment products and platforms are evolving rapidly and it's important for us to keep identifying cutting edge technologies," said AmEx Chairman and Chief Executive Kenneth I. Chenault.

Credit card processing fees, the amount a merchant pays per transaction for accepting credit cards, has long been a source of tension between merchants and credit card processors. To compete with larger, more entrenched companies, Revolution Money slashed its credit card processing fees by up to 75% for merchants.

Questions

• How often do you use your credit/debit card?
• Do you ever use it online? If not, why?
• Why is AmEx making this acquisition?
  Acquiring a cutting edge technology that will expand their business and keep customers making all their purchases (plastic, online, mobile) through the AmEx system, for which they earn a fee on each transaction.
• So, how do credit card companies earn their money?
• Is this expense hidden from the consumer?
  Yes
• How much is AmEx paying for Revolution?
  $300 million
• What do they offer AmEx?
  The ability to retain customers and earn more from their transactions in new media channels
• Can you name a few social media websites?
  Facebook and LingoPass! are examples
• Can you name a few credit card processors?
  Think of the logos you see in stores:
  Visa, MasterCard, Discover, AmEx
• How has Revolution Media competed with these companies? 
  Better service, price, technology, etc.? Price and technology

Activity

You are the CEO of PayPal, a global online credit card processing service that is owned by EBay. For years, your company has operated in a niche industry with little competition. You hear about AmEx's acquisition and realize that a much larger company is going to begin competing directly with you.

• Make a list of three possible actions you could take to protect your business?
  Examples include acquiring new technologies, slashing prices, promotions, etc.
• Before you select one, tell us the pros and cons for each
  For example: How will slashing prices affect your long-term profitability and ability to compete?
• After you select one solution, describe it.
  For example: If it is a promotion, maybe create an advertisement or describe the terms of the promotion. If it is a new technology, what does it do and why is it better than the current technology.
• Lastly, tell us three things you need to consider when implementing the solution
  For example: Will a new technology be disruptive for your current clients?

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