What Is an American Express Card?

An American Express card, also known as an “Amex” card, is an electronic payment card branded by the publicly traded financial services company American Express (AXP). The company issues and processes prepaid, charge, and credit cards. American Express cards are available to individuals, small businesses, and corporate consumers across the United States and around the world.

Understanding American Express Cards

American Express cards are issued by American Express and processed on the American Express network. American Express is one of only a few financial service companies in the industry that has the capability to both issue and process electronic payment cards.

American Express is a publicly traded company in the financial services industry. It offers both credit lending and network processing services, giving it a broad range of competitors in the industry. As with traditional lenders, it has the capability to issue credit products, which it provides in the form of charge cards and credit cards.

American Express has its own processing network that competes with Mastercard (MA) and Visa (V). Its most comparable competitor is Discover Financial Services (DFS), which is also a publicly traded financial service company offering both credit lending and a processing service network. With multiproduct capabilities, American Express generates revenue from both interest-earning products and network processing transaction services.

American Express Fees

American Express generates a significant portion of its revenue from transaction processing. Many merchants accept American Express cards and are willing to pay the transaction fees associated with processing because of the advantages that come with offering American Express as a payment option to customers.

In an American Express transaction, the merchant’s acquiring bank communicates with American Express as both the processor and the issuing bank in the transaction process. Merchant acquiring banks must work with the American Express processing network to transmit communications in American Express transactions. American Express is also the issuer that authenticates and approves the transaction. 

Merchants pay a small fee to American Express for its processing network services, which are part of the comprehensive fees involved with a single transaction. As both a processor and high-quality lender, American Express has built a strong reputation in the financial services industry.

Types of American Express Cards

As noted above, American Express credit cards and prepaid debit cards are offered to a variety of both retail and commercial customers. It is also an industry-leading provider of charge cards, which offer month-to-month credit with card balances that must be paid off each month.

American Express charge and credit cards follow standard underwriting procedures. The company seeks good- to high-credit quality borrowers—which means a credit score of at least 670—and generally is not a subprime lender.

American Express credit and charge cards come with a variety of benefits in the form of rewards points and travel perks, which depend, in part, on the annual fee charged. American Express cards may offer cash back on certain purchases, though they aren’t among the best cash back cards currently available. American Express also offers numerous branded prepaid debit cards, which can be used as gift cards or special-purpose reloadable payment cards.

Annual fees for American Express cards tend to run high: $95 for the Blue Cash Preferred Card, $99 for the Delta SkyMiles Gold American Express Card, $150 for the Green Card, $250 for the Gold Card, and $550 for the Platinum Card. That said, the Green, Gold, and Platinum cards have no predetermined spending limits. American Express does offer at least six cards with no annual fee. Customer service for all Amex cards is highly rated, with the company coming in No. 1 on J.D. Power’s 2020 U.S. Credit Card Satisfaction Study.

Partnerships, co-branded cards

American Express issues many of its cards directly to consumers, but it also has partnerships with other financial institutions. In the U.S., for example, Wells Fargo issued an American Express card (new applications were paused in April 2021, although this doesn’t affect current cardholders), and in Mexico, Banco Santander offers American Express cards. American Express also has partnerships with other companies to encourage consumers to apply for its credit cards. Two examples are its co-branded cards with Delta Air Lines, which allow consumers to earn frequent flier miles redeemable on Delta, and its Hilton Hotels co-branded cards.

Pros and Cons of an American Express Card

What Is an Asset-Backed Security (ABS)?

An asset-backed security (ABS) is a type of financial investment that is collateralized by an underlying pool of assets—usually ones that generate a cash flow from debt, such as loans, leases, credit card balances, or receivables. It takes the form of a bond or note, paying income at a fixed rate for a set amount of time, until maturity. For income-oriented investors, asset-backed securities can be an alternative to other debt instruments, like corporate bonds or bond funds.

Understanding Asset-Backed Securities (ABSs)

Asset-backed securities allow their issuers to raise cash, which can be used for lending or other investment purposes. The underlying assets of an ABS are often illiquid and can’t be sold on their own. So, pooling assets together and creating a financial instrument out of them—a process called securitization—allows the issuer to make illiquid assets marketable to investors. It also allows them to get shakier assets off their books, thus alleviating their credit risk.

The underlying assets of these pools may be home equity loans, automobile loans, credit card receivables, student loans, or other expected cash flows. Issuers of ABSs can be as creative as they desire. For example, asset-backed securities have been built based on cash flows from movie revenues, royalty payments, aircraft landing slots, toll roads, and solar photovoltaics. Just about any cash-producing vehicle or situation can be securitized into an ABS.

For investors, buying an ABS affords the opportunity of a revenue stream. The ABS allows them to participate in a wide variety of income-generating assets, sometimes (as noted above) exotic ones that aren’t available in any other investment.

How an Asset-Backed Security Works

Assume that Company X is in the business of making automobile loans. If a person wants to borrow money to buy a car, Company X gives that person the cash, and the person is obligated to repay the loan with a certain amount of interest. Perhaps Company X makes so many loans that it starts to run out of cash. Company X can then package its current loans and sell them to Investment Firm X, thus receiving the cash, which it can then use to make more loans.

Investment Firm X will then sort the purchased loans into different groups called tranches. These tranches contain loans with similar characteristics, such as maturity, interest rate, and expected delinquency rate. Next, Investment Firm X will issue securities based on each tranche it creates. Similar to bonds, each ABS has a rating indicating its degree of riskiness—that is, the likelihood the underlying loans will go into default.

Individual investors then purchase these securities and receive the cash flows from the underlying pool of auto loans, minus an administrative fee that Investment Firm X keeps for itself.

Special Considerations

An ABS will usually have three tranches: class A, B, and C. The senior tranche, A, is almost always the largest tranche and is structured to have an investment-grade rating to make it attractive to investors.

The B tranche has lower credit quality and, thus, has a higher yield than the senior tranche. The C tranche has a lower credit rating than the B tranche and might have such poor credit quality that it can’t be sold to investors. In this case, the issuer would keep the C tranche and absorb the losses.

Types of Asset-Backed Securities

Theoretically, an asset-based security (ABS) can be created out of almost anything that generates an income stream, from mobile home loans to utility bills. But certain types are more common. Among the most typical ABS are:

Collateralized Debt Obligation (CDO)

A CDO is an ABS issued by a special purpose vehicle (SPV). The SPV is a business entity or trust formed specifically to issue that ABS. There are a variety of subsets of CDOs, including:

• Collateralized loan obligations (CLOs) are CDOs made up of bank loans.
• Collateralized bond obligations (CBOs) are composed of bonds or other CDOs.
• Structured finance-backed CDOs have underlying assets of ABS, residential or commercial mortgages, or real estate investment trust (REIT) debt. 
• Cash CDOs are backed by cash-market debt instruments, while other credit derivatives support synthetic CDOs.
• Collateralized mortgage obligations (CMOs) are composed of mortgages—or, more precisely, mortgage-backed securities, which hold portfolios of mortgages (see below).

Though a CDO is essentially structured the same as an ABS, some consider it a separate type of investment vehicle. In general, CDOs own a wider and more diverse range of assets—including other asset-based securities or CDOs.

Home Equity ABS

Home equity loans are one of the largest categories of ABSs. Though similar to mortgages, home equity loans are often taken out by borrowers who have less-than-stellar credit scores or few assets—the reason they didn’t qualify for a mortgage. These are amortizing loans—that is, payment goes towards satisfying a specific sum and consists of three categories: interest, principal, and prepayments.

Auto Loan ABS

Car financing is another large category of ABS. The cash flows of an auto loan ABS include monthly interest payments, principal payments, and prepayments (though the latter is rarer for an auto loan ABS is much lower when compared to a home equity loan ABS). This is another amortizing loan.

Credit Card Receivables ABS

Credit card receivables—the amount due on credit card balances—are a type of non-amortizing asset ABS: They go to a revolving line of credit, rather than towards the same set sum. So they don’t have fixed payment amounts, while new loans and changes can be added to the composition of the pool. The cash flows of credit card receivables include interest, principal payments, and annual fees.

There is usually a lock-up period for credit card receivables where no principal will be paid. If the principal is paid within the lock-up period, new loans will be added to the ABS with the principal payment that makes the pool of credit card receivables staying unchanged. After the lock-up period, the principal payment is passed on to ABS investors.

Student Loan ABS

ABSs can be collateralized by either government student loans, guaranteed by the U.S. Dept. of Education, or private student loans. The former have had a better repayment record, and a lower risk of default.

An ABS will usually have three tranches: class A, B, and C. The senior tranche, A, is almost always the largest tranche and is structured to have an investment-grade rating to make it attractive to investors.

The B tranche has lower credit quality and, thus, has a higher yield than the senior tranche. The C tranche has a lower credit rating than the B tranche and might have such poor credit quality that it can’t be sold to investors. In this case, the issuer would keep the C tranche and absorb the losses.

The Bottom Line

Asset Backed Securities (ABS) are pools of loans that are packaged together into an investable security, which can in turn be bought by investors, predominantly large institutions, like hedge funds, insurance companies, and pension funds. ABS provide a method of diversification from typical bond mutual funds or individual bonds themselves. Most importantly, they are income generating assets, typically with a higher return than a normal corporate bond, all depending on the credit rating assigned to the ABS.

The underlying assets of an ABS could consist of auto loans, credit card receivables, and even more exotic investments, such as utility bills and toll roads. Such categories of ABS are referred to by different names such as CDO’s (Collateralized Debt Obligations), which are broken down into further sub-categories, such as CLO’s (Collateralized Loan Obligations). However, by far, the most popular and therefore liquid ABS are MBS (Mortgage Backed Securities), which provide an income stream from mortgage payments.

For the investor, ABS provide an income stream in line with the credit rating of the security, and offer an alternative to standard bond mutual funds.