All right. Up next, we have American Express. Before we get started, I'm going to read some quick disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative.
Getting really good at saying that, by the way.
Yes. So delighted to have with us today from American Express, Christophe Le Caillec, CFO, to our conference. Welcome, Chris.
Thank you for having me.
Second year here. Welcome back. So maybe let's start high level and talk about the growth outlook you have. Amex has been able to drive really robust top line growth since the pandemic. That's moderated somewhat over the past year, but you're still looking for growth above historical levels at 8% to 10%. How do you think about the runway for growth over the next few years? And how can you get back to that double-digit aspiration?
So I think the starting point is -- the right starting point is the TAM, the total addressable market. The way we think about it from a TAM standpoint is that the TAM is growing at about say, 5-ish percent in the U.S. It's basically GDP plus a bit of inflation. When you overlay on top of that, internationally grows at a bit faster because their cash conversion to credit is a bigger opportunity. When you put all of this together, we think the TAM is growing at like 6%, 7%. And what's specific about American Express is that we very focused on their 3 fastest-growing parts of the addressable market, international, their premium products, so say, fee-paying products. and the younger population. So when you put all of this together, we think that, that is creating the right support for our growth algorithm, and we feel confident about that.
If you think -- so that would either help you size a little bit the momentum we can go after in terms of spend. But on top of that, as you know, on the card fee, we've been growing card fees like last quarter, it was 20%. If you go over the last 5 years, been growing like in double digit for the last 5 years consistently, including during the pandemic. And so that's accretive in terms of growth rate. And NII has also been accretive for us. So we think that when you, again, put all of this together, you get to a high number -- to high growth opportunity, and that's what we're going after.
Okay. Great. And spend is obviously an important part of the revenue algorithm you just alluded to. Last quarter, billings came off a very strong fourth quarter, but it still remained above 2024 levels, including U.S. consumer growth of 7%. You noted you weren't seeing any evidence of a pull forward early April other than maybe some Easter holiday noise there and some activity in the wholesale SME side. So what are you seeing on spending trends quarter-to-date through May and June? And maybe touch on the T&E airline side as well.
Yes. So we are spending a lot of time, as you can imagine, watching this, and I look at it almost daily as well at a very granular level. The best word to describe what we're seeing quarter-to-date, I think, is consistency, consistency with Q1 once you adjust for FX and the extra day we got, the leap year we got last year. So it is consistent with what we're seeing. So consistently with Q1, we see some softness in airline spend in lodging as well. But that's not new trends. I mean those trends were discussed during the first quarter, and they were discussed by airlines themselves. But restaurant spend and other T&E remains very, very strong. So consistency, I think, is the word to describe how billing is doing.
When you look at it at the segment level, so international versus U.S. consumer or small business, it's largely consistent as well. There are some segments that are growing a bit faster and some others a bit slower. But all in all, I think it's consistent with what we saw in the first quarter. That applies as well to credit, by the way. Credit remains very strong across the board.
Okay. Great. And as we sit here and think about the prospect of inflation from here potentially with tariffs, how does that flow to Amex? You've I think, often been viewed as a bit of an inflationary beneficiary as you have higher income consumers that can spend through it. Do you think that's going to play out again if inflation creeps higher?
Yes. A modest level of inflation is a net good thing for us because it provides a bit of support for our revenue growth. And our expenses don't travel at the same speed. So net-net, we're in a good place as long as inflation doesn't translate into unemployment. So what really matters here for us, and that's what we are focused on is the second order effects on the broader economy in terms of unemployment rate, in terms of interest, in terms of funding costs, in terms of FX movement as well. That really what matters. But you're right to say that a modest level of inflation is a net good thing for American Express.
Okay. Great. And you said the word consistent a lot here, so I suspect maybe this will be your answer again. But you've done well catering to and winning over high-end consumers. So what makes the Amex premium card so attractive to these folks? How have you been able to increase your market share of premium card to 25% without maybe necessarily having to pay the highest rewards versus the competition?
Yes. At the core of this, I think, is the expertise we have in terms of manufacturing and crafting premium products. And by that, I mean that we are focused on having rational value proposition. And there are people which is like putting spreadsheets to compare Amex versus our competitors. And we compete in that space. But I don't think that's what makes the difference in terms of the attractiveness and why we've been so successful in the premium space. I think what makes the big difference is the experiential and the emotional connections that card members enjoy with an American Express product.
By experiential, I think about access to lounges, we have the biggest network of lounges. Or the treatment you get in one of those 1,500 resorts that are part of Fine Hotels of Resorts, where you can have an early check-in, a late checkout and a free breakfast. So all these experiences at scale are creating a lot of value for card members. And on top of that -- and this is probably the thing that is like the hardest for our competitors to replicate is this emotional connection that we've been able to build with our card members literally over decades, over hundreds of years. We're celebrating this year our 175th anniversary. And from the very beginning, what drove American Express was their commitment to security, to service, to trust. And this is still what's propelling American Express.
So when you get a card, a Platinum card, you know that you've got thousands of American Express professionals that are ready to take your call if you ever need any help what you're traveling, you lost your passport, you have an accident overseas, you need repatriation. And that kind of like service we provide, it creates an emotional connection with card members that is very hard for competitors to replicate and that we think is the secret sauce of American Express. And interestingly, it resonates as well very, very well with younger generations.
Right. And that's my next question. So thanks for teeing that up. So you've taken share of millennial and Gen Z. That's been a key contributor to your premium card strategy. They make up 60% of new account acquisitions, but a higher 75% of your Platinum and Gold products. So just how sustainable is your growth runway with that consumer as they mature out a little bit? And is it maybe as a follow-up, too early to start thinking about when JZ -- Gen Z, not JZ. I take the range for millennials, although maybe you can answer that one, too.
Not the JZ question, no. But I can talk about that. So the way to think about it is, and we've said it many times, it starts with the -- how we refresh products. And what we've done over the recent years is try to evolve the product so that it resonates across generations. So the value proposition includes, as you know, Uber credits or streaming benefits. And all those things resonate with all generations, but they resonate better with a younger population, thinking as well about access to Formula One Grand Prix. We have a global relationship with Formula One. Like all those things resonated with the younger card members, and they're behaving differently. They are very comfortable paying a fee because that's what they do, right, whether it's for music, whether it's for entertainment, they have this subscription model in mind and they find it completely okay to pay a fee for the experience that we are giving them.
They also tend to give us a bigger share of their wallet. They don't know that decades ago, we didn't have parity coverage. And the only thing they know is parity coverage that we have now in the U.S. So we get from the very beginning, a bigger share of their wallet than we used to, say, 20 years ago. And what I would say as well is that they engage very differently with us. All the tech investments, and maybe we'll get to it that we have developed and to make the app the best app in the industry, all the either like digital engagement and capabilities that we built, they are literally leveraging that.
They don't really call us, they chat with us. So what it means is that it's displacing expenses in our servicing center. And so you can see like over time, the portfolio is going to move in that direction to your point. So eventually, you're right, Gen Z will age, will get older as well, and they will be replaced by next generation. So at some time, we're going to break it up between millennials and Gen Z. To answer your question, I can tell you that Gen Z billing is about 5% in the U.S. of the U.S. consumer billing, but it's growing at something in the neighborhood of 40%, actually even north of 40%. So clearly, the fastest-growing segment for us in terms of generations.
And that's, I think, the first time you disclosed that, right?
I think so.
Interesting. Great. Thanks for saying that for us. So I think...
I [indiscernible] would comment about JZ.
We can talk about that offline. Related to that, I think your focus on that younger cohort has driven your credit profile as well. So maybe you could talk about how credit has been another point of differentiation for Amex your write-offs are still below pre-pandemic levels, unlike your peers, which have run above. Is this a structural shift we should expect to sustain going forward? And maybe you could just layer in the Millennial, Gen Z impact there and how maybe student loans are influencing their decisions here.
So I'll get back to that. But maybe because that credit performance is -- we have always been better than the industry, but the distance between us and the industry is increasing. And if you want to analyze this, you can track this back to our focus on premium customers and expanding the portfolio, growing in the premium space. That's the very foundation of what drives that credit performance. And to answer more specifically your question, we brought you some new numbers. So maybe we can pull up the slide. One of the most frequent questions that we get is how we think about the credit performance of the younger generations.
So what you have in front of you here, and this is also available on the website is the delinquency rate by cohort. So Millennial and Gen Z on the left-hand side and Gen X and baby boomer on the right-hand side. And we're comparing our performance versus the industry. And there are a few things that you can take away from that. The first one, which is the most intuitive is that, as you would expect, younger card members are a little bit riskier than older card members.
This is not new. But this graph will help you dimensionalize the gap and the difference. I think what matters here and the big takeaway for me are -- there are 3 of them. One is, to your point, in both categories, we're still way below where we were in 2019. And you can see as well that the industry is actually well above where they were in 2019. So the spread here is increasing. The distance from the peers is increasing. The other thing that I think is noticeable here is when you look at in absolute the delinquency rate on the millennials and Gen Z, it's actually much lower than the industry Gen X and baby boomer delinquency rate.
So this speaks a lot about the discipline with which we have executed our growth strategy. As you know, we accelerated growth. We said we are very focused on premium customers, and we did not compromise this strategy when we decided to focus on the younger generations. And you see the evidence here in those metrics, those credit metrics. And if we had shown net write-off rates, it would have been something very similar, right? So very powerful numbers, I think, and this is what we're watching.
Is there anything you noticed that maybe the competition is doing a little bit differently than you as they extend credit to that consumer? Is it maybe not underwriting the student side as appropriately or anything else to?
I'm not going to comment on what they're doing. What I can say is that the starting point for us, again, is the positive selection that we're getting from designing and focusing on premium products. I mean if you think about even for the younger generations, right, if they pay the fee for Platinum Card at $695, you're going to attract a population that is sensitive and attracted to lounge access to priority treatment in a lot of resorts to those credits and those benefits. So that positive selection is a big contributor to the performance you're seeing here in credit.
And because you talked as well about student, that's also like a very common question, student loans. what I'll say on this one is we always had student loans back in student loans -- our customers with student loans, I should say, we don't issue student loans, as you know, but we have customers who have student loans. If you go back to 2019, the proportion of our receivables and loans that was held by customers with a student loan was about 11%. Today, it's about 12%.
So despite the focus on growing with the younger card members, that proportion has really not changed at all. And as you can see, what we're getting here is the crème, excuse my French, of the younger population. And so if you focus on these student loan holders who are under stress, those people who have a high student loan and actually a lower income say, for instance, for argument's sake, you look at those customers who have a student loan north of $50,000 and an income below $100,000. Well, for us, it's less than 1% of that 12%.
So the population that is really at risk, it's a very small population. So I don't know what's going to happen exactly, especially when wage garnishment starts. I think it's in August. But I think we are in a good place. And we'll see what happened, and we'll update you as we see them.
Okay. Great. Very clear. And if I maybe squint to the disclosures there a little bit. I did notice that the Gen X, baby boomer 1.3 is in line with what you report, but I think there is some maybe differences in how you're looking at the billing statements versus the quarterly reporting. So maybe just for some of the more detail-oriented investments?
Yes. So you see like in the title, we say it's billing cycle because that's the information we get from our data provider for the industry, so on a like-for-like basis. So if you try to make it like apple-to-apple, you're going to get like a slightly different number. But the purpose of this slide was to make it apple-to-apple and compare to the industry and give you a longitudinal set of numbers.
Just wanted to make that clear for folks. Okay. Great. Moving on to the other exciting part of your business, international. Your name is American Express, but I think sometimes people forget you're a global company. You yourself are a global -- more global individual, I would say. So nonetheless, international is growing very nicely. It's outpacing the rest of your business consistently for years. It's now 20% of the business. So you've got that unique perspective due to your background. How does the international consumer or customer approach premium card? What resonates with those customers, consumers and businesses? And how does that maybe differ from the U.S.?
Yes. First is like the common platform, take Platinum, for instance, the platform is the same across the world, right? And the form factor, like the approach in terms of how we're designing and building this value proposition is like is very consistent across the world. But in every market, we try to localize it with local partnerships to make it relevant to the population and also so that like there's something local in the look and feel of the product. But I would say, on average, outside of the U.S., the population, say, the Platinum population is even more premium than it is in the U.S. They like to give you like a benchmark, we issue the Platinum Card across 23 markets. across the world and if you -- including the U.S. And if you were to stack rank by the platinum fee, the U.S. would be [ 20th ] from that 23 list of markets.
So we have one of the lowest card fee in the U.S. for the Platinum card. Outside of the U.S., you would see card members with the Platinum card traveling more overseas cross-border volume is much higher. It's something like 27%, I think, while in the U.S., it's about 5%. So it's a very global premium traveling a lot customer base that is also very much attached to the premium-ness of the brand and the quality of the servicing that we have. That global presence is important for us. It's also important for our partners. There's many partners who actually like the fact that we can deploy their brand as well across premium customer base globally, not only in the U.S.
And it's -- for us, it's also a source of innovation. Some of the biggest innovation at Amex happened in international. The Black Card, for instance, was created first in the United Kingdom. Member and member, which is like a very successful acquisition channel, especially for premium products, was actually first created in France. So it's a source of innovation. It's a source of -- it's a differentiator when we negotiate and discuss with partners. So for us, it's really an attractive part of the business. And as you highlighted, it's the fastest-growing part of the business, and we think there's a lot more momentum in that business going forward.
Yes, I'm always pleasantly surprised by the Amex as I see in the airport when I go abroad. So you're everywhere, if you like. But...
Our card members enjoy traveling.
Yes, yes. And I think also on that note, you talked about the cross-border travel, international premium travels more. We've seen a lot of headlines around international travelers or may be speculation. I'm not sure which is real versus not, but you've seen maybe fewer international travelers coming to the U.S. How important is inbound U.S. travel for your business? And conversely, have you seen your U.S. consumer customer pullback on international travel?
Yes. So we've seen what has been reported in the press quite a lot. For instance, Canadians are traveling a lot less to the U.S. That's also -- that also applies to European who are traveling less to the U.S. What we're seeing though is that they're still traveling. They're just traveling less to the U.S. So as we just talked about, we have a global presence, a global network. So Canadians are traveling to Europe instead of to the U.S., we're still going to capture that spend on the card and on our network. So for us, it's not as impactful as it might like some of the numbers might suggest.
Okay. So just replacing with travel elsewhere is. Okay. Great. Maybe let's shift gears and focus on Amex's investment strategy. I know that's something near and dear to you, Christophe. So where do you see the highest ROI across your marketing, your tech, your product development and the budget today? You added 13 million new cards last year. How and where do you decide to allocate your marketing dollars in a way that enables Amex to generate that kind of demand?
So to your point, we have a lot of discipline in the way we deploy those marketing dollars. I'll talk maybe a little bit about technology because as you think about investment, I think these are the 2 big categories, right, marketing and technology. So when it comes to marketing, and we have described this at length, so I'm not going to go down there again. But as you know, we quantify the return we're going to expect on every single -- not every single, but the vast majority of our marketing dollars, and we stack rank them. And the highest ROI win, if you want, there is like a marketplace of ideas and marketing ideas and competition for funding.
As you would expect, some of the highest ROI are seen with what we call customer marketing as opposed to prospect marketing. So this is about deepening the relationship with the current customers, cross-selling products, upgrading either companion card, for instance. So these initiatives are typically the ones that have the highest ROI. And -- but besides, I would say, the process that we use to quantify those returns, I think for me, as a CFO, the most important part here or the most valuable thing that I think is important to American Express is the this ROI culture that we have across the company.
Every single marketing person, when they design a new product, when they come up with an idea, they know that they're going to need to compute an ROI and they know that it's going to compete against other ideas. And that's a super important feature for us to make sure that every marketing dollar works really, really hard. When it comes to technology, it's a bit harder to quantify the return on technology, but there are other metrics that you can use, right? As we think about technology, we've made a lot of investments in the app. We made a lot of investments to enable card members to self-serve, and we're seeing great progress on that.
So as you may have seen a few weeks ago, J.D. Power issued their awards. And again, American Express had the best award in the industry. And it's not the first time. This is the fifth time since 2018. So that reflects all the investments that we've made to make our app the best app in the industry. We also have the best, I think, second time in a row, we have the best rating in terms of online servicing. So the point here that I'm trying to make here is that on -- we're investing a lot on marketing, and that's something that is very visible to many of you because you also receive those messages. There's also a lot of investment in the technology space, and it's paying back in terms of digital engagement from our customers, especially the younger ones, but also like the entire portfolio. And importantly, the feedback we're getting from the rest of the industry is very, very strong.
And technology underpins a lot of this, I imagine. So you alluded to some of that. So you've got this strong consumer brand with really strong customer service. Again, technology underpins that. So one example I can think of personally is your online chat functionality. It's great. I use it a lot. with that? Yes. Thank you. Where do you see more room to improve and innovate further on those features in the tech you have today?
Yes. So the way to think about it as well is like we start kind of like where you started, which is we want to make the customer journey as easy as possible, whatever channel you choose to engage with whether you want to call us, whether you want to go in the app, whether you go in the web, we want to make it like super easy for you, and we're investing our technology accordingly. Some of the things that I found the most exciting myself, for instance, is like we're using natural language processing to listen to 100% of the calls when you call us. And that allows us to analyze the calls, to rate the calls in terms of customer satisfaction, to aggregate all this feedback that we're getting from that for the entire portfolio.
Where I find it, for instance, the most exciting is in the credit and collection part of our servicing, where you can effectively by listening or aggregating the words that are being used by the card member, understand the level of stress that is going in the portfolio. So it's one way for us, and we can graph it over time to see whether the stress is increasing or not, whether they're using different words. So that's a way for us to have the thumb on the pulse of the business and to get in real-time information at an aggregated level. So we used to send -- you might remember some surveys after servicing so that you could give us some feedback. We don't do that anymore because we have this natural language processing combined with Gen AI to kind of summarize the call to aggregate the calls and generate a ton of information for us.
That's an example of the kind of things we're doing in technology or what's at the intersection of technology and servicing.
I didn't even notice that. That's probably a good thing, right? So you mentioned large language models. So as I think about AI, it's often difficult for the outside observer to understand what's reality versus hype. Can you talk about how important AI is to Amex's culture today? How are you leveraging it to run some of the more technical and analytical aspects of your business beyond just Gen AI and LLMs?
Yes. So it is a good point, and I like the question because we've been using AI for decades. And it's hard indeed to see sometimes the value of that. So I'm just going to give you like 2 tangible examples of where AI and the sophistication, not only of AI, but the data that we have allow us to create value. By that, I mean, literally shareholder value. One of the most powerful piece of AI that we have actually sits with our authorization system. And you probably don't realize, but -- or you know that we underwrite and approve or decline every single transaction. That's very different from our competitors.
And so if you're traveling overseas, say, you're in Tokyo, you swap your card in a restaurant. In that less than half a second, we're going to run something like 4,500 different rules to evaluate the creditworthiness, the profitability of these transactions or to detect potential for fraud. And we just talked about we have the best credit numbers in the industry. We also have, by far, the best fraud numbers in the industry. And when I say by far, American Express fraud cost is about 1/3 of what you're seeing with the other networks. And a lot of that is because -- not a lot of that. All of that is actually a function of this AI combined with the data that we have and the experience and talent that we have in building models and rules to identify those fraudsters.
So this is super powerful in terms of translating this technology into real value. The other example that I would give you is that -- and I'm sure you've done the math, looking at the servicing cost over a long period of time as a ratio to revenue, this is declining constantly. A lot of that has to do with the automation, the AI, the self-servicing, the capabilities we're building that allow us to generate operating leverage. And we're going to keep doing it, and we're going to do more of that in the future.
Okay. Great. And maybe in the last few minutes we have, one final question for you, Christophe. Your core customer is clearly sought after by a number of other large banks, too. Other banks have tried and failed to enter the market. Others have entered it. It seems like the competition may be heating up more recently again. You've had Capital One out there. They have made some inroads in premium consumer and small business. They just recently just closed on their acquisition of Discover. How are you thinking about the potential ramp in competition from here? And what's your plan?
So competition is a good thing. And definitely, it's making us work harder and work better. So it's a net good thing. The other dynamic that I want to highlight in terms of the competition is this one. If you go back 10, 15 years ago, we were the only provider of a platinum or a premium product in the industry. And so we were the default provider. What happened as a result of Chase entering that space, Cap One entering that space is that they expanded the TAM. I was saying earlier today that the TAM is one of -- like the TAM for the premium products is one of the fastest-growing segment. We think that we have about 25% of the fee-paying cards in the U.S. today, and that's growing.
And it's growing in part because our competitors are much more focused on that. And so that is a net good thing for us that we are benefiting from. And so the other thing that I'd say is that all these competitors, you named a few, they are trying to replicate what we're doing. We have innovated a lot over the years. We were the first one to issue a metal card. Now everybody issues a metal card. We open up lounges. Now everybody is opening up lounges. The difference is that we have over 30 lounges and our biggest competitor has about 10-ish, including the one that they will open soon.
And so we're still a lot much ahead of the competition. I would also say that we have been able to either partner and bring to bear the value of those partnerships in the premium space in a way that our competitors have not. thinking here about the partnership that we have with Delta, where, for instance, Platinum Card members can have access to the Delta Lounges. So the partnership with Delta is not only about issuing the Delta card, it's about making some of our assets available to Delta and vice versa, some of the Delta assets available to American Express. So our competitors have not done any of that.
And so we are very much ahead of the curve here, and we're working really hard to stay ahead of the curve.
Okay. Great. So I think that's all the time we have for today.
Thank you for your questions.
Pleasure as always. Thank you.
Thank you.
