Amex’s recipe for small-business lending: Heavy on the Kabbage

With the COVID-19 pandemic creating unprecedented challenges for small businesses, American Express has increasingly targeted its investments in that niche.

Two months ago, Amex announced it was acquiring online lender Kabbage, a move the card brand positioned as a way to provide more loans to small-business owners and complement its already strong business card portfolio.

“Kabbage is going to accelerate our efforts in small business, from a platform perspective, and will help us create an SME digital banking platform, which is all inclusive,” Stephen J. Squeri, chairman and CEO of Amex, said Friday during the company’s third-quarter earnings call.

Through Kabbage, Amex will offer more cash-flow management tools to small business clients, while also encouraging mom-and-pop operations to borrow money for working capital products.

This focus on small businesses is part of Amex’s strategy to ride out the pandemic, which has had a stark impact on its earnings. For the third quarter, Amex reported net income fell 40%, to $1.1 billion, compared with net income of $1.8 billion a year earlier.

The company, feeling the impact on consumer and corporate travel spending, saw total revenue for the quarter fall 20%, to $8.8 billion, compared to $11 billion a year earlier.

However, Amex demonstrated a steady recovery during the pandemic, as the third quarter’s revenue total topped the $7.7 billion it reported during the second quarter.

In addition to acquiring Kabbage, American Express forged ahead with marketing spending, including what Squeri called the company’s largest small-business promotion to date with its Shop Small campaign in 18 countries and territories.

“It would have been easy for me to tell my team (during the pandemic) to reduce marketing spend by 20% … but what we are focusing on as a company is to build this franchise for the long term, and the investments that we are making will play out for years to come,” Squeri said.

American Express decided to do its Shop Small promotion in late June in the U.S. because so many small businesses were closed in May, its initial target date, due to state lockdown guidelines, Squeri said.

“We would pull back on marketing from both an acquisition perspective or support perspective if we see closures or if we don’t have a line of insight, and the nice part about that is we have the flexibility to do that,” Squeri said. “But what we are committed to doing is to continue to invest in this franchise for the longer term.”

Many of Amex’s partnerships with tech providers are geared toward SMEs as well, Squeri said, with B2B payment automation through as an example.

Squeri is also optimistic that the company’s work in China of the past two years to secure a network clearing license, which it was granted earlier this year, will begin paying off soon with the processing of domestic payments in the country. Amex has entered a joint venture with Express Hangzhou Technology Service Limited for its work in China.

Amex executives acknowledged that, while trending slightly upward in September, cardholder spending and the travel and entertainment sectors remained low because of the pandemic. Still, the company remained aggressive in cardholder acquisition, with a 40% increase in cards acquired at 1.4 million, up from 1 million during the second quarter though still down from the third quarter of 2019.

“That is down from last year, but we are selectively doing it because we have more line of sight into behaviors and into the potential customers we can acquire,” said Squeri, adding that Amex cardholders are more readily spending in different categories from previous years because of the pandemic affecting lifestyles.

Amex saw slight increases in its non-travel and entertainment revenue, while travel and entertainment revenue was down 69% year over year. The focus on small business at this time also helps the bottom line in that 80% of SME volume is in the non-travel and entertainment sector.

“The foundations of our business are very long-term customer relationships,” said Jeffrey Campbell, Amex’s chief financial officer. “When you look at our best customers, the attrition rates are remarkably low, and customers stay with us a very long time.”

The income categories for Amex divisions reflected the pandemic’s effect on spending and loan volumes, as well as periods of business shutdowns.

The global consumer services group reported net income of $855 million, down from $991 million a year earlier, while global commercial services reported $220 million in net income, compared to $568 million for the same period last year.

Global commercial services reported $220 million in net income, compared to $568 million a year earlier, while global merchant and network services reported $263 million in income compared to $523 million a year earlier.


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