(Bloomberg) -- Ken Chenault addressed his last investor conference Tuesday as head of American Express Co., delivering a stark warning: China’s payments model is coming, and U.S. banks risk being sidelined.
Some of America’s largest lenders made an epic mistake a decade ago when they cashed out their joint ownership of Visa Inc. and Mastercard Inc. through initial public offerings, according to Chenault. Banks that once controlled the plumbing of payments across the country will have a harder time fending off new entrants that offer consumers innovative ways to move and spend their money, blending finance with commerce, he said.
Breaking off the card networks “was one of the biggest strategic blunders of the last 20 years,” said Chenault, 66, who will step down as chairman and chief executive officer in February. “They didn’t understand what they were giving up, and they lost sight of where the puck was going. Along with yielding pricing power to the network, the banks also limited their access to data and merchant relationships at a critical time.”
In China, payments are rapidly shifting from cash to apps and mobile devices, leapfrogging the traditional banking industry. Jack Ma’s Alipay and Tencent Holdings Ltd.’s WeChat Pay handle 90 percent of those transactions, creating a vast e-commerce ecosystem. That position at the nexus of payments, commerce and other services is a “major advantage,” Chenault said.
But a decade ago, lenders including JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., Wells Fargo & Co. and HSBC Holdings Plc broke off their jointly owned card networks. Mastercard conducted an initial-public offering in 2006, Visa in 2008. Both stocks have soared since.
“They gave it up on the cheap, and now the roles are totally reversed,” Chenault said, calling it one of the most amazing business stories of the past 20 years. “An industry literally transferred wealth over to two associations. They were nonprofits. That’s unbelievable.”
To be sure, Chenault’s indictment of banks was also a defense of his own firm’s strategy. American Express deploys a so-called “closed-loop model,” meaning it issues cards as a bank and operates the network that handles transactions.
It’s important, he said, to bridge such functions and to offer additional services to differentiate your company and lure customers. “We can’t be reduced to simply facilitating a payment,” he said.
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