Imagine logging into eBay, excited to use your American Express card to grab that coveted item, only to find out eBay no longer accepts AmEx. This scenario became a reality on August 17, 2024, when eBay Inc. (EBAY) officially stopped accepting American Express Company’s (AXP) credit cards due to what they call “unacceptably high” processing fees.
eBay made this move after months of criticism over rising credit card transaction fees. According to eBay, despite technological advancements and increased investment in fraud protection, fees for processing transactions have only increased. They argue that this trend is due to a lack of competition among credit card issuers, which keeps costs high. This decision was made public over two months ago, giving users time to prepare for the switch.
With $10.11 billion in revenue last year, EBAY is pushing for stricter regulations to encourage competition and “help reduce transaction processing costs for merchants and their customers.” Credit card processing, or swipe fees, are what businesses pay every time a customer uses a card. These fees can range from just over 2% of each transaction to as high as 4% for premium cards. These fees are among the highest operating costs for businesses, often leading to higher consumer prices and reduced sales.
American Express is known for its high fees, which is why eBay decided to cut ties. EBAY’s decision came after negotiations between the two companies broke down. Despite the move, AXP downplayed the impact, stating that “eBay represents less than 0.2%” of its total network volume. They expressed disappointment but insisted that eBay’s decision limits customer payment options and “take away the service, security, and rewards that customers value when paying with American Express.”.
Is It a Big Hit to Either Company?
Surprisingly, while EBAY and AXP part ways, Amex isn’t too worried. The company’s fiscal 2024 first quarter report revealed that over 60% of new account openings came from Millennials and Gen Z, two demographics they’re keen to keep growing. But the big question is, are these youngsters spending their money on eBay?
Last month, eBay adjusted its sales forecast to $2.50-$2.56 billion, compared to $2.57 billion recorded in the second quarter (ended June 30, 2024), hinting that sales might be slipping. However, the company’s stock has been on an upward trend this year. EBAY shares have gained more than 35% year-to-date and nearly 12% over the past three months.
According to eBay, most customers are “willing to use alternative payment options,” like Visa, Mastercard, and Discover. So, while ditching Amex might be inconvenient for some, most eBay shoppers are likely to switch to another payment method without much fuss.
Despite inconsistent consumer spending, the company managed to squeeze out profits with a 1.2% year-over-year increase in its net revenue of $2.57 billion. It wasn’t a huge leap, but it was enough to exceed analyst expectations of $2.53 billion. Its gross merchandise volume (GMV) also inched up by just 1% from the prior year to $18.42 billion. In the earnings release, eBay cited “an uneven discretionary demand environment in our major markets” as a reason for the sluggish figures.
On the bottom line, EBAY reported a non-GAAP net income of $602 million and $1.18 per share, up 8.5% and 14.6% year-over-year, respectively. It also surpassed the consensus EPS estimate of $1.12 per share, which is impressive.
Analysts seem to expect this trend of modest revenue growth and stronger earnings to continue. They anticipate EBAY’s full-year revenue to increase by just 1.9% year-over-year to $10.31 billion. However, its earnings per share is forecasted to grow by 13.5% this year to $4.81 and 7% in 2025 to $5.14.
Could This Be a Tipping Point for Amex?
Amex has been riding high in 2024, but eBay’s decision to cut ties with the credit card giant could be a sign of a broader shift. That raises the question: Will other companies follow suit, or is this just a one-time loss?
For large retailers, credit card processing fees are significant, typically ranging from 1.5% to 3.5% per transaction. These fees quickly add up, turning into billions in profit for credit card companies each year. Amex, however, tends to charge about 1% more per transaction compared to competitors like Visa, Mastercard, or Discover. Because of this, some local businesses and select merchants have stopped accepting Amex cards altogether. That’s a bummer for loyal Amex users.
Shares of AXP took a hit recently after Bank of America Securities analysts raised concerns that the stock might be overvalued, with limited room for further growth. The investment firm downgraded Amex from a “Buy” to a “Neutral” rating, maintaining a price target of $263 per share, signaling caution about the company’s future potential.
eBay’s Cost-Saving Strategy in a Volatile Market
As the Federal Reserve considers lowering interchange fees, eBay’s decision to drop American Express highlights a broader effort to reduce costs amid economic uncertainties. With inconsistent consumer spending and inflationary pressures, particularly in markets like the U.K. and Germany, eBay is strategically reducing costs to bolster profitability.
By cutting high transaction fees, eBay could reduce overhead and better position itself in the fiercely competitive eCommerce market. While the initial reaction might include some pushback from loyal Amex users, the long-term impact on EBAY’s marketplace could be decidedly positive. As the payments landscape continues to evolve, this decision may signal the start of broader changes designed to create a more competitive, cost-effective, and user-friendly environment for both consumers and merchants.
