American Express

The world became more interconnected in the 19th century as railways and telegraph expanded the reach of business. By facilitating long-distance transactions, express shipping became vital to many industries, including finance. This softens any surprise accompanying the fact that two of the largest financial firms in the United States today, Wells Fargo and American Express, each began in the express shipping industry. American Express evolved to become a financial services company over the span of several decades but the two industries were interdependent from the start of the company.

Express Business

Prior to the advent of express shipping companies, brokers and banks employed their own messengers. Express companies provided an outsourced alternative and made transactions connecting parties scattered across larger distances more efficient. The express shipping business was tied to financial services from its infancy; among the most frequently transported items were financial documents, gold, and currency. In America, perhaps the first express company was formed in 1834 and operated between Boston and Providence, Rhode Island.

American Express itself was founded in 1850 from the combination of three existing express services in New York. It would be decades until the company diversified into finance but the express business was, like finance, a trust-based industry. It may have actually helped the company’s reputation when, in September 1855, the government was robbed of $50,000 in the possession of American Express. Though the loss was not insignificant compared to its $750,000 in capital at the time, the company promptly made good on the loss.

American Express’s founders included Henry Wells, William G. Fargo, and John Butterfield. Wells Fargo, the express company turned bank, was formed from departing American Express founders frustrated by the company’s decision to forgo an expansion into California. Nonetheless, by 1862, American Express had 890 offices, more than 1,500 employees, and ran express trains along 10,000 miles of railway.

Money Orders

Competition with railways, which could refuse to carry the business of express companies, led American Express to shift into financial services. The company began issuing money orders in 1882. In doing so, it competed with the postal service, which sold money orders as well. In an era before checking accounts were common, ordinary people used money orders for recurring transactions, like bill payment. Money orders could be bought in small denominations, often in amounts of $5 or $10.

American Express reached an agreement with Kidder, Peabody & Co. and Baring Brothers to allow American Express money orders to be redeemed at almost forty locations across ten European countries. So, immigrants to America began using money orders to send wages back home.

Traveler’s Cheque

International payments were still inconvenient. Money orders and other means of transferring money abroad had their limitations. Indeed, sometime around 1890, the President of American Express, J. C. Fargo, was travelling in Europe and found it difficult to obtain payment on a letter of credit he intended to use to draw money while abroad. Letters of credit could only be redeemed at a bank and banks often had very limited hours.

A growing number of Americans were travelling abroad, especially in Europe. The number of American tourists travelling there rose from around 30,000 per year in the late 1850s to 94,000 by the end of the century.

Eager to introduce a better solution within a year of J. C. Fargo’s foreign trip, American Express introduced the traveler’s check (then known even to Americans as a ‘cheque’). The company guaranteed convertibility at a fixed exchange rate ahead of time and these exchange rates were printed on the check.

Designed for convenient and frequent use, the traveler’s check could be bought in small denominations and would be refunded if lost. To encourage acceptance, American Express also covered the losses of businesses accepting checks that turned out to be fraudulent. To prevent fraud in the first place, the checks featured watermarks and a double-signature system. The user would sign the check once on top when purchasing the traveler’s check and when it was used would sign once more, at the bottom, in the presence of the person or business who would cash it.

The first American Express traveler’s cheque was cashed at the Hotel Hauffe in Leipzig, Germany

What made the American Express traveler’s check so useful was that the company did not rely exclusively on partnerships with foreign banks to cash their checks abroad. Instead, the company promoted acceptance of the product directly to European railroads, steamship lines, and hotels. American Express itself opened its first international office in Paris in 1895, followed by one in Britain and Germany in 1896 and 1898 respectively. In the coming years, it extended its payments services into Argentina, Brazil, China, Japan, Egypt, and India.

In 1915, American Express even entered another part of the travel business by selling rail and steamship tickets and foreign tours, a kind of travel agency. In any case, during the First World War, the American government nationalized its express shipping industry and so, after seventy years in this business, American Express was mostly left as a financial company.

Credit Cards

With a new empire to defend and worried of what the advent of credit cards might mean to its traveler’s check business, American Express launched its own card in 1958, then printed on paper. A quarter million American Express charge cards were issued on its launch and 17,500 businesses accepted them from the start. After one year, the business had 475,000 cardholders and their cards were accepted at 32,000 businesses.

American Express achieved much of this initial success by taking over another card product, the Universal Travel Card, issued by the American Hotel Association, which gave it 160,000 of its customers. The paper cards were replaced with plastic the next year. American Express cards with magnetic strips and the associated reader were introduced in 1971. In time, this allowed their customers to take advantage of the growing presence of ATMs.

American Express found particular success with credit cards. Its product quickly overtook other early entrants into the American credit card market, Diners Club and Carte Blanche. American Express had twice as many cardholders as the former and four times as many as the latter by 1970 and this relative scale rose to over seven and ten times respectively in just a few years.

As with the traveler’s checks, widespread acceptance was essential to success. By the early 1980s, American Express cards were accepted at three-quarters of American department stores, which had previously favored their own credit card products by accepting only those. Though the 1970s and 1980s saw Visa and Mastercard take much of the mass market, leaving American Express with just 12.5% market share by 1984, the company continued to be the largest player in the higher-end ‘prestige card’ market.

The company expanded into insurance and investments by acquiring Fireman’s Fund Insurance Company in 1968, Shearson Loeb Rhoades, Inc. in 1981, and Investors Diversified Services, Inc. in 1984, before divesting itself of most of these businesses. American Express opted to stick with credit cards, where network effects work to an incumbent’s benefit to a far greater degree than in insurance or investment brokerage.

Lesson

American Express was founded to make trade more efficient and reliable. Such a statement justifies its eventual transition into the business of facilitating payments. The money order and traveler’s check were, in some ways, quite obvious extensions of express shipping, at least in hindsight, and the credit card, a natural extension of those products. All these financial innovations relied on a large amount of invisible infrastructure, the relationships that American Express formed with the many businesses that accepted these payment methods. The products were only useful because of the network effects that have allowed American Express to survive into the 21st century.

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