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American Express Strategy And Policy

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  • Acknowledge audience – shareholders quarterly meeting WHY are we talking to them? What do we want from them?
  • Pictures Do not be four idiots standing at front of the room SIT DOWN
  • SLIDE NUMBERS!!
  • under the regulatory umbrella of the Federal Reserve, puts on consistent footing with major competitors and allows participation in programs the government has introduced to stabilize the financial markets.
  • On definitions page http://www.investopedia.com/terms/f/forwardswap.asp
  • Biggest single economy in the world Largest Deficit in world and growing USA -$791,510 million trade deficit Gdp 12 trill Service based economy 80% of gdp is generated from service sector Largest economy in the world - Sources: The Economist Pocket World in Figures: 2008 Edition Published by Profile Books, London Copyright 2007 ISBN: 978 1 84668 090 8   CIA: World Factbook https://www.cia.gov/library/publications/the-world-factbook/geos/us.html
  • http://www.gallup.com/poll/112723/gallup-daily-us-consumer-spending.aspx
  • IMF forecast USA debt as % of GDP 2008 – 88.8% 2012 – 112% Budget surplus required in 2014 – 3% of GDP just to maintain debt
  • http://www212.americanexpress.com/dsmlive/dsm/int/amexjobs/amex_jobsaboutmission.do?vgnextoid=2097615262310210VgnVCM100000defaad94RCRD
  • Hoover Stat page Overview of American express Focus on American economy as that is where Over 70% of its revenue is generated from USA Will go into greater detail in future presentations
  • (7) http://www.forbes.com/feeds/afx/2008/02/25/afx4694434.html
  • Bank of America = VISA JP Morgan = MasterCard Citigroup = multiple (American Express, MasterCard)
  • Merchant Discount Rate Acquiring bank charges 1.9% of total transaction Card issuing bank charges interchange fee = 1.7% (of 1.9%) Processing Fee Visa and MasterCard take in between 0.15 - 0.18% of total transaction value http://3400423910906416958-a-1802744773732722657-s-sites.googlegroups.com/site/4090americanexpress/home/content/AMEX.pdf?attachauth=ANoY7creecBqF4YgtDH_BFNHGpZ2WT8qo8jxFUk-4RrJyXrHjja_VYtXEq6KdFrwjydfeZ5_m6saN6g_hG2BSSL6jlmbX-2xWrRcOWfpJY-9ThZ-5vOj_8wFCwgWKXr3ZQ10AP-qmRzJ4KCjSgzmOlPuejhgFZuECZKZHoqXWxTRlgO05gdaI86yorYvuVG7tpNby2B5frzEhLp9wTrg4sjVmf2vF3_mdkrc18g8pspCBqOWr2zMUtw%3D&attredirects=0 http://3400423910906416958-a-1802744773732722657-s-sites.googlegroups.com/site/4090americanexpress/home/content/marketline.AMEXprofile.pdf?attachauth=ANoY7corFA3Acg85pFUr0pSP1jdLRXEzmSeLjThGJ8w502BA5x6LEeCqPzYIZr35PtJRD7mgkW5HY59BgWG965PFQ24p58Ne8XwZETT37UOp-Ua71ap47wGNM98Pdnlr4WZ6IY8PUZ7qa6H_lS49N3MmD8HD8BSr-21wMDIY4Sx24tydvkKaeGA1jA_x5aMjtK-ZBxIi0m4R0B1cYRkdNVbneW2czmUU7oqGf7Ni4_LEPKBA8JRg7AnYnYQ0XWtGngd9ICDeX81B&attredirects=0
  • http://www.fdic.gov/bank/analytical/banking/2005nov/article2.html#2 Figure 2 illustrates the single-issuer model, which has a more complex closed-loop card-association system in which many merchants accept payments on a card with a single issuer. In this system, the merchant sends information about each purchase, including the customer account number, the transaction amount, and verification to the card issuer.  With modern telecommunications and data processing technology, these steps are usually completed at the point of sale.  The card issuer pays the merchant and sends a monthly statement to the cardholder listing all transactions which occurred during the statement period.  The customer then pays the balance due, in whole or in part, based on the credit terms that were extended to the cardholder by the issuer.  This description applies to the original Diners Club model and, until very recently, to the Discover Card and American Express models (which have now converted to the multiple-card-issuer model, see figure 3 ).
  • (5) http://www.fdic.gov/bank/analytical/banking/2005nov/article2.html#2 Finally, figure 3 provides a basic illustration of the most complex model, the model with one card association, many cardholders, many merchants, and multiple banks. In this model, the card association (or network) plays an important role by imposing rules for issuing cards, clearing and settling transactions, advertising and promoting the brand, authorizing transactions, assessing fees, and allocating revenues among transaction participants.  Further, each participant in the credit card transaction has an incentive for participating in the network. 16   Figure 3 shows the typical flow of information and funds for a sample $100 credit card purchase.  The process begins when the cardholder presents the credit card to the merchant to purchase a good or service.  The merchant transmits to the acquiring bank the cardholder's account number and the amount of the transaction.  The acquiring bank forwards this information to the card association network requesting authorization for the transaction.  The card association forwards the authorization request to the issuing bank.  The issuing bank responds with its authorization or denial through the network to the acquiring bank and then to the merchant.  If approved, the issuing bank also sends to the acquiring bank, via the network, the transaction amount less an interchange fee. 17   The interchange fee is established by the card association.  The example illustrated in figure 3 shows $98.00 ($100.00 purchase price minus 200 basis point interchange fee) flowing from the issuing bank, though the network, to the acquiring bank.  The acquiring bank, after subtracting its own service fee, passes the payment on to the merchant. 18   In figure 3, the merchant receives $97.50 ($98.00 minus a 50 basis point fee). 19
  • https://www212.americanexpress.com/dsmlive/dsm/dom/us/merchants/nonsecure/acceptthecard/learnmoreabout/benefitsbyindustry.do?vgnextoid=734d77bebf432210VgnVCM200000d0faad94RCRD
  • https://www209.americanexpress.com/merchant/singlevoice/USEng/FrontServlet?request_type=navigate&page=restaurantHomePage
  • http://www.faqs.org/abstracts/News-opinion-and-commentary/American-Express-to-buy-2-top-supercomputers-In-a-world-of-instant-copies-who-pays-for-original-work.html Copyright © 2008 - Advameg Inc. http://www.spychips.com/press-releases/american-express-tracking-patent.html © 2003-2007 Katherine Albrecht and Liz McIntyre
  • Reuters
  • Debt thing p.94 2008 annual shareholder report
  • PG. 94 of Amex 2008 annual report
  • Pg 59 2009 3Q statements
  • PG 4. 2009 3Q financial statements PG 33 dataline
  • http://www.muckety.com/EF8B53D1705B4B503AE6A59756672556.map
  • (11) http://www.govtrack.us/congress/bill.xpd?bill=h111-627&tab=summary Highlight main points
  • Transcript

    • 1. Exploring a Renewed Strategy for 2010 and Beyond GSB Consulting Group proudly presents: 12/8/2009 © GSB Consulting Group Prepared for The Board of Directors Policy and Strategy Review Committee
    • 2. GSB Consulting Group
      • Andrew Whyte
      • Chad Abougoush
      • Curtis M. Goodman
      • Dennis Laird
      • Jason Campbell
      12/8/2009 © GSB Consulting Group
    • 3.
      • Where (#) exists in presentation, see accompanying ‘Reference Document’ for relevant sources
      12/8/2009 © GSB Consulting Group
    • 4. Presentation Index
      • Executive Summary
      • Operating Environment
          • American Economy
          • Company Mission, Business Approach
          • Credit Services Market-Share
          • Top Global Issuers of Credit Cards
          • Environmental Conclusions
      • Strategic Position
          • Competitive Analysis
          • Closed Loop vs. Multi-Issuer Model
          • Industry Orientations
          • Partnerships and Enhanced Business Services
          • Strategic Alliances
          • Technological Innovator
      • Financial Position
          • Metric Performance
          • Business Risks
          • Cash Position
          • Bank-Holding Company
      • Current Issues & Opportunities
          • Management Changes
          • Governance Relationships
          • Industry Practices
          • Impending Government Regulations
      • Moving Forward
          • Short Term Strategy Options
          • Long Term Strategy Options
          • Final Recommendations
      12/8/2009 © GSB Consulting Group
    • 5. Definitions
      • Charge card
        • A card that charges no interest, but that requires you to pay your bill in full each month.
        • Usually: higher limits, corporate, high net-worth individuals
          • Example: American Express, Discover
      • Credit Card
        • A credit card is a card whose holder has been granted a revolving credit line. The card enables the holder to make purchases and/or cash advances up to a pre-arranged limit
        • Continuous balance that is charged interest
          • Example: Visa, MasterCard
      • Delinquency:
        • Nonpayment of a debt when due
      • Revolver
        • A profitable client - someone who does not pay off their account balance each month
      • Deadbeat
        • The least profitable client – someone who always pays off balance in full each month
      • Interchange Fee
        • A fee paid by the acquiring bank/merchant bank to the issuing bank. The fee compensates the issuer for the time after settlement with the acquiring bank/merchant bank and before it recoups the settlement value from the cardholder.
      12/8/2009 © GSB Consulting Group
    • 6.
      • Forward-swaps:
        • A swap agreement created through the synthesis of two swaps differing in duration for the purpose of fulfilling the specific time-frame needs of an investor.
        • Also referred to as a "forward start swap," "delayed start swap," and a "deferred start swap."
      • Interest rate swaps:
        • Is a derivative in which one party exchanges a stream of interest payments for another party's stream of cash flows.
        • Used by hedgers to manage their fixed or floating assets and liabilities.
      • Securitization:
        • The process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors. The process can encompass any type of financial asset and promotes liquidity in the marketplace.
      • TTM :
        • Represents “trailing twelve months” of data
      12/8/2009 © GSB Consulting Group Definitions
    • 7. 12/8/2009 © GSB Consulting Group # Findings Implications Implementation Importance Timeline 1 Current state of American economy is worrisome. Unemployment at very high levels; consumer spending is down over last year. In addition both public and private debt loads are continuously growing and reaching unsustainable levels. Current economic decline increases risk of credit defaults, especially among lower socio-economic status. Also has a direct negative impact on AMEX’s profitability. Dramatic cuts to government spending trend is required to rein-in public debt loads and budget deficit. Personal spending is expected to continually decrease as consumers are forced to save more to lower household debt levels.
      • Maintain current course:
      • target high net worth clients,
      • increase cash position,
      • Avoid clients of lower socio-economic status to avoid loan defaults.
      American economic growth will not parallel historic levels, especially compared to developing nations (China, India). Japan is perfect case study of similar situation – still have not rebounded from 1990 levels, sustained low-level of economic growth Expected to stay in recessionary state for next year. 2 American Express comprises 20% of credit service market in the USA. AMEX utilizes a spend-centric model, charging 2.56% on total transaction value. The American market is oversaturated and mature with little growth potential. American Express does 70% of its total credit services business in the USA which represents an over-reliance on one single market. Profits are directly correlated to the health of the American economy (as indicated by spending). AMEX should increase global presence to benefit from new market growth opportunities. AMEX should also maintain current American market presence and expand where possible. Current business model cannot be maintained while still expecting continual growth. Expansion should be continuous since benefits will be manifested in the long-term (10 years) 3 AMEX utilizes a closed-loop business model. AMEX card members spend 2-4 times more per transaction than with competitors cards; this suggests that AMEX has great control over who their customers are. AMEX target market is high net-worth individuals and corporate accounts. Re venues (49%) are derived from a 2.56% charge of total card transaction value. Under this model profits are directly correlated to the health of the economy and amount of consumer spending. Although the AMEX business model offers greater profitability than competitors, the current business model cannot be maintained while still expecting continual growth. AMEX should maintain the current single-issuer, spend-centric business model for the domestic American market. Because it allow for more control over business and the past positive revenue effect. Currently AMEX is expanding to incorporate the multi-issuer model to accommodate growth in foreign markets. This is necessary to gain new market-share. The single-issuer model allows complete control in transaction value chain. Countries, like China, require local partnerships as a means of gaining access to their markets. Adopting the multi-issuer model makes expansion strategies feasible. Adopting the multi-issuer model will provide long-term future growth-prospects in key developing markets To expand into multi-issuer model should be done incrementally and based on local market conditions Expansion should be continuous since benefits will be manifested in the long-term (10 years)
    • 8. 12/8/2009 © GSB Consulting Group # Findings Implication Implementation Importance Timeline 4 Partnerships and enhanced business relationships have been instrumental in securing access across many industries that in turn expand AMEX’s reach to their target market. Secures new markets and access to target clients. Provides benefits for business clients thereby improving customer relationships Actively seek new strategic and exclusive partnerships (Like COSTCO) Increases brand awareness and recognition. Establishes stable revenue sources Continually seek new partnerships 5
      • AMEX credit services business-segment faces serious issues:
      • 21% decline in fee revenues and a rise in net write-offs,
      • Interest rate risk exposure as a result of floating interest rates on debt.
      If Interest rates begin to rise: A doubling of the corporate debt rate from their 4% to 8% could cost $3.6 billion more annually and effectively wipe-out the $2.6 billion in operating profit generated at current interest levels. This is realistic due to potential debt downgrades and the Federal Reserve potentially raising rates within the next eight years If write-offs continue to rise: A 50% rise in write-off percentages would create an additional $2 billion loss for American Express. Based on current write-off trends which have doubled in the last two years, this potential rise is realistic and such an outlook is considered optimistic AMEX must stop using interest rate swaps. Instead to reduce risk exposure allow for fixed interest rates on debt rather than floating rates. Currently IF rating agencies downgrade debt or IF interest rates rise, then AMEX would be very impacted negatively and the company’s ability to finance operations would be in question. Stopping interest rate swaps is crucial to stabilize future profits of the company while reducing overall risk exposure. Immediate and continuous. 6 In 2008 AMEX was granted Bank-Holding Status.  This is a major strategic advantage and will provide added financial security - providing access to sources of government financing outside of securitization (including TARP and TALF). Bank holding status opens up additional sources of capital Provides enhanced financial security Already implemented Strengthens the balance sheet by providing access to treasury funds and the ability to take deposits. Now and always
    • 9. 12/8/2009 © GSB Consulting Group # Findings Implication Implementation Importance Timeline 7 AMEX has always been the industry leader in technological innovation.  Future success in the credit-services industry will continue to be based on differentiation and maintaining a technological competitive advantage Continue funding research and development. Being the industry leader gives competitive edge and increased brand recognition brand Increase funding for AMEX Labs.
      • Retains existing customers, and provides incentive to attract new customers
      • Technological innovation should be based on
      • Fraud reduction
      • Increasing convenience
      • Maximizing profitability
      • Provides “first-mover advantage”
      Continuously be THE industry leader; 8 The President’s departure marks a critical loss of human capital. May result in transfer of strategic knowledge to competitors which will undermine AMEX’s competitive advantages. Selection of next president must be carefully decided and should factor in the individual’s objective within the company. Loss of strategic human capital to potential competitors Promote within company Be aware of potential company security breaches No choice, already in motion. Difficult to replace such a key human resource and the business connections he offers Suitable replacement must be found by January 2010. 9 Government regulations present the biggest challenge to the future profitability of the industry.  Changes to usury laws will have an impact on the bottom line. If government sets interest ceilings then revenue will be limited, especially as interest rates increase. Regulations are intended to protect consumers; possible restrictions on interest rate limit of cards will result in a loss of net income
      • AMEX should boost funding for:
      • Lobby-groups to influence key government officials
      • Consumer credit awareness campaign
      American government regulation poses single greatest threat to profitability and longevity of credit services industry Ongoing, monitor progress closely.
    • 10. Overview of the American Economy 12/8/2009 © GSB Consulting Group See Reference #2 Executive Summary Strategic Position Current Issues & Opportunities Moving Forward Population 304,059,724 GDP $13,122,000,000,000
        • Per Capita
      $43,155 2009 National Debt $12,075,130,000,000
        • Budget Deficit
      $1,275,000,000,000 Median Household Income $50,740 Average Credit Card Debt $9,797.38 # of Credit Cards per Eligible Person 3.04 Unemployment Rate 10% Small Business Loans in Moderate Delinquency Rate 4.4%
    • 11. Executive Summary Strategic Position Current Issues & Opportunities Moving Forward 12/8/2009 © GSB Consulting Group
    • 12. Executive Summary Strategic Position Current Issues & Opportunities Moving Forward 12/8/2009 © GSB Consulting Group
    • 13. © GSB Consulting Group Executive Summary Strategic Position Current Issues & Opportunities Moving Forward 12/8/2009
    • 14. American Economy Conclusions
      • Dramatic cuts to government spending trend is required to rein-in public debt loads and budget deficit.
      • Personal spending is expected to continually decrease as consumers are forced to save more to lower household debt levels.
      • American economic growth will not parallel historic levels, especially compared to developing nations (China, India). Japan is perfect case study of similar situation – still have not rebounded from 1990 levels, sustained low-level of economic growth.
      • Implementation:
      • Maintain current course:
        • target high net worth clients,
        • increase cash position,
      • Avoid clients of lower socio-economic status to avoid loan defaults.
      • Timeline:
      • Expected to stay in recessionary state for at least one year.
      Current state of American economy is worrisome. Unemployment at very high levels; consumer spending is down over last year. In addition both public and private debt loads are continuously growing and reaching unsustainable levels. Current economic decline increases risk of credit defaults, especially among lower socio-economic status. Also has a direct negative impact on AMEX’s profitability. Executive Summary Strategic Position Current Issues & Opportunities Moving Forward 12/8/2009 © GSB Consulting Group
    • 15.
      • The mission is to be the world’s most respected service brand.
      • AMEX is a world leader in global payment systems network and travel company with a focus on six main businesses:
        • Charge and Credit Cards
        • Travel Services
        • Financial Planning
        • Investment Products
        • Insurance
        • International Banking
      AMEX Mission and Business Approach 12/8/2009 © GSB Consulting Group (3 & 4) Executive Summary Strategic Position Current Issues & Opportunities Moving Forward
    • 16. Overview of American Express 12/8/2009 © GSB Consulting Group See Reference #1 Executive Summary Strategic Position Current Issues & Opportunities Moving Forward Publicly traded on the NYSE: AXP 2008 Approx. 1 Year Growth Sales $31,920,000,000 1.1% Net Income $2,699,000,000 (32.7%) # of Employees 66,000 Primary Target Market Corporate cards & high net-worth individuals Main operating region United States (approx. 70% of total business) Fortune 500 Rank #74 JD Power & Associates 1 st in Overall Customer Satisfaction (2008) Interbrand Ranking
        • 14 th most valuable brand worldwide (2006)
    • 17. Credit Services Market-share Credit Services Industry is an oligopoly where Visa and MasterCard dominate the USA credit services market – holding 75% market-share. (Each company utilizes different card-issuer models, will be discussed further in Strategic Position) 12/8/2009 © GSB Consulting Group (5) Executive Summary Strategic Position Current Issues & Opportunities Moving Forward
    • 18. Top Global Issuers of Credit Cards
      • American banks dominate global credit services industry.
      • Top three issuing banks are American and have close to $976 billion in total credit volume.
        • Translates to: 23% of global industry, 58% of American market
      12/8/2009 © GSB Consulting Group (4) Executive Summary Strategic Position Current Issues & Opportunities Moving Forward
    • 19. Operating Environment Conclusions
      • Implication:
      • Credit service industry is an oligopoly that is saturated which presents difficult growth conditions further amplified by current economy.
      Three American banks account for 23% of the global credit services industry and 58% of total American market. These banks operate primarily under the banners: Visa and MasterCard. American Express only comprises 20% of credit service market in the USA. The American market is oversaturated and mature with little growth potential. American Express does 70% of its total credit services business in the USA which represents an over-reliance on one single market. Executive Summary Strategic Position Current Issues & Opportunities Moving Forward 12/8/2009 © GSB Consulting Group
    • 20. Competitive Analysis 12/8/2009 © GSB Consulting Group 49% of AMEX revenue is derived from a 2.56% charge on total transaction value; average card member spends 2-4 times more per transaction than on competitors cards (12) Executive Summary Strategic Position Current Issues & Opportunities Moving Forward Executive Summary Strategic Position Current Issues & Opportunities Moving Forward Executive Summary Current Issues & Opportunities Moving Forward
    • 21. Closed-looped Model 12/8/2009 © GSB Consulting Group (3) Executive Summary Operating Environment Current Issues & Opportunities Moving Forward
      • AMEX mainly utilizes the closed-looped model
      • Beneficial because:
        • allows ownership and control of the entire value chain
          • AMEX charges 2.56%
            • Provides 4-8 times more merchant fee-based revenues than competitors (Visa or MasterCard)
        • provides great flexibility:
          • Issues and services own cards
          • Control entire pricing and fee structures
          • Does not rely on merchant acquirers or financial institutions as intermediaries
      • Disadvantageous because:
        • Reduced potential customer pools
        • Greater risk exposure
        • Requires independent merchant infrastructure
          • Not accepted universally
    • 22. Multi-issuer Model 12/8/2009 © GSB Consulting Group (3) Executive Summary Operating Environment Current Issues & Opportunities Moving Forward
      • Visa and MasterCard utilize the multi-issuer model.
      • Beneficial because:
        • Diversifies risk exposure
        • Allows for penetration of foreign markets through local partnerships and alliances
      • Disadvantageous because:
        • Increased exposure results in dependency on partnerships and intermediaries
        • Reduces profit potential
          • Visa only makes $0.15 per $100 transaction
    • 23. Business Model Conclusion
      • Implication:
        • Although the AMEX business model offers greater profitability than competitors, the current business model cannot be maintained while still expecting continual growth.
      • Implementation:
      • AMEX should maintain the current single-issuer, spend-centric business model for the domestic American market.
        • Because it allow for more control over business and the past positive revenue effect
      • Currently AMEX is expanding to incorporate the multi-issuer model to accommodate growth in foreign markets.
        • This is necessary to gain market-share.
      • Importance:
      • The single-issuer model allows complete control in transaction value chain
      • Countries, like China, require local partnerships as a means of gaining access to their markets. Adopting the multi-issuer model makes expansion strategies feasible. Adopting the multi-issuer model will provide long-term future growth-prospects in key developing markets
      • Timeline:
      • To expand into multi-issuer model should be done incrementally and based on local market conditions
      • Expansion should be continuous since benefits will be manifested in the long-term (10 years)
      AMEX utilizes a closed-loop business model. AMEX card members spend 2-4 times more per transaction than with competitors cards; this suggests that AMEX has great control over who their customers are. AMEX target market is high net-worth individuals and corporate accounts. Re venues (49%) are derived from a 2.56% charge of total card transaction value. Under this model profits are directly correlated to the health of the economy and amount of consumer spending. Executive Summary Operating Environment Current Issues & Opportunities Moving Forward 12/8/2009 © GSB Consulting Group
    • 24.
      • AMEX seeks to create strategic business alliances across numerous industries, with a key focus on:
          • TYPE # of Relationships or Example
          • Business-2-Business 925,000 +
          • E-commerce and Mail-Order Revolution Money
          • Government California
          • Healthcare
          • Major Retailers COSTCO
          • Restaurants McDonald’s
          • Travel Delta Airlines
          • Entertainment TicketMaster
      Industry Orientations & Partnerships 12/8/2009 © GSB Consulting Group (8) Executive Summary Operating Environment Current Issues & Opportunities Moving Forward
    • 25. Enhanced Business Services
      • AMEX offers numerous solutions for different industries:
        • Assistance to improve business efficiency
            • Industry trend analysis
            • ‘ Best practices’ approach – comparison with other competitors
        • Online merchant services
            • Cash flow management
            • Expense management
            • Faster dispute resolution
        • Revenue enhancement opportunities
            • Placement on specialized feature websites – which provides extended network reach
            • Special offerings for businesses
              • Statement-based coupons
              • Targeted advertisements
        • Reward and recognition programs for employees
            • Improves productivity and retention
        • Recently added consulting division
            • Will analyze spending trends from 127countries, 90 million cards
      • AMEX provides a variety of benefits for the business consumers in which they serve – these are intended to increase efficiencies and profitability
      12/8/2009 © GSB Consulting Group (9) Executive Summary Operating Environment Current Issues & Opportunities Moving Forward
    • 26. Partnerships & Alliances Conclusion
      • Secures new markets and access to target clients.
      • Provides benefits for business clients thereby improving customer relationships
      • Implementation:
      • Actively seek new strategic and exclusive partnerships
        • Like COSTCO
      • Importance:
      • Increases brand awareness and recognition.
      • Establishes stable revenue sources
      • Timeline:
      • Continually seek new partnerships
      Partnerships and enhanced business relationships have been instrumental in securing access across many industries that in turn expand AMEX’s reach to their target market. Executive Summary Operating Environment Current Issues & Opportunities Moving Forward 12/8/2009 © GSB Consulting Group
    • 27. Innovator in Technology
      • Originally the credit service industry was entirely paper-based
        • Paper-trail limited industry profitability
        • Reduced speed of transactions
      • Technological advances were required to meet need of:
        • Credit card fraud
        • Identity theft
        • Fast and convenient account management
        • Data collection to analyze customer spending and risk
      • AMEX was the industry leader, technological advances enhanced consumer experience while improving the overall profitability. AMEX was the first to introduce:
        • Plastic card
        • ‘ Superphone’ authorization process
        • Magnetic strip on card
        • Premium card
          • Buyer’s Assurance and rewards programs
        • Express-Net - online management tools to track spending
        • Embedded Chip and PIN
        • Photograph on card
      • Technology in credit services industry are strongly and positively correlated to profitability and risk reduction
      12/8/2009 © GSB Consulting Group Executive Summary Operating Environment Current Issues & Opportunities Moving Forward
    • 28. Continuous Technological Advancement
      • American Express Labs
        • Mobile-phone applications – merges loyalty programs with your account
        • Widget development – virtual travel agents
        • Integration with social networking sites
          • Leverages geographic information from your social network to provide travel information and deals
      • Efficiency and Service
        • Card holder can set personal alerts
        • American Express will notify customer with email or text message alerts if there has been suspected fraudulent activity
      • Fraud Protection
        • American Express was first issuer of the Smart Card in 1999
          • Smart card provides enhanced online security, loyalty applications, and secure point-of-sale payments for their customers
          • The smart card also offers no annual fee, a low fixed interest rate, and a fee free rewards program
          • Receive input that is processed on embedded integrated circuits, which in turn the card provides an output
      • Customers Tracking
        • AMEX to use RFID readers called "consumer trackers" designed to closely watch people’s movement in stores. Potential problems associated with collecting and transmitting time and location information regarding the path traversed by consumer within the merchant's facility.
      (29, 30) 12/8/2009 © GSB Consulting Group Executive Summary Operating Environment Current Issues & Opportunities Moving Forward
    • 29. Techno-domination Conclusions
      • Implication:
        • Continue funding research and development.
        • Being the industry leader gives competitive edge and increased brand recognition brand
      • Importance:
        • Retains existing customers, and provides incentive to attract new customers
        • Technological innovation should be based on
          • Fraud reduction
          • Increasing convenience
          • Maximizing profitability
      • Timeline:
        •   Continuously be THE industry leader; provides “first-mover advantage”
      AMEX has always been the industry leader in technological innovation.  Future success in the credit-services industry will continue to be based on differentiation and maintaining a technological competitive advantage. Therefore, should increase funding for AMEX Labs. 12/8/2009 © GSB Consulting Group Executive Summary Operating Environment Current Issues & Opportunities Moving Forward
    • 30. 12/8/2009 © GSB Consulting Group (18) Executive Summary Operating Environment Strategic Position Current Issues & Opportunities Moving Forward Metric Performance All metric indicators suggest a depression in the credit services business segment of American Express. This is most likely due to overall economic recession. 3Q’09 3Q’08 % Increase (Dec) FX Adj. Billed Business ($B) $156.6 175.5 (11%) (9%) Total Cards in Force (MM) 88.4 92.1 (4%) Avg. Basic Card member Spending $2,898 $3049 (5%) (3%) Card member Loans ($B)
        • Owned
      $31.5 $45.7 (31%) (30%)
        • Managed
      $60.7 $75.5 (20%) (19%) WW Travel Sales ($B) $4.4 $6.2 (29%) (27%)
    • 31.
          • Recently, net write-offs have more than doubled. This requires higher loss reserves and hurts the overall financial position of the company
        • In 2007 write-offs were 4%, now up to 9% in Q3’09
        • Loans are written off after 180-days of delinquency
        • AMEX Response: early this year AMEX provide $400 to high risk clients to close accounts
      • Average spending on cards has been declining
        • Between 2008 and Q3’09 there has been a 21% decrease in fee revenues
      • Return on assets steadily declining through 2009
        • Q3’08 ROA = 2.8%
        • Q3’09 ROA = 1.4%
          • As ROA decreases AMEX becomes less appealing to potential investors who seek consistent growth from the company
      • Return on equity (TTM) is 10.7%
        • Compared to five year average of 26%
          • ROE can be very high, but is subject to significant volatility due to leverage nature of the company
      • Overall financials of the company is trending towards being negative with higher net write-offs, declining revenue, and lowered return on assets and equity.
      Business Risks 12/8/2009 © GSB Consulting Group (19, 20, 21) Executive Summary Operating Environment Strategic Position Current Issues & Opportunities Moving Forward
    • 32. Cash Risks
      • Potential cash outflow as a result of securitization is $10 billion
      • Derivatives have switched long-term debt from fixed to floating interest rates
        • Has been beneficial in the past but in today's economic environment could be a massive liability
      • $54 billion in long term debt coming to maturity over the next 8 years
        • In current environment with higher interest rate potential this could significantly increase the cost of capital and interest expense incurred by the company
      12/8/2009 © GSB Consulting Group (25, 26) Executive Summary Operating Environment Strategic Position Current Issues & Opportunities Moving Forward
    • 33.
      • AMEX has various foreign exchange derivatives to hedge currency exposure for near term (around one year)
        • Could require additional cash to maintain positions but most are forward-swaps so no outlay required till maturity
      • Interest rate swaps:
        • Allowed hedging of short term cash flows, approximately $2.4 billion, from floating to fixed rate debt
        • Interest rate swaps have also allowed AMEX to convert over $15.1 billion in long term debt from fixed to floating rates. AMEX continues to use these swaps as debts get rolled over:
          • Has allowed AMEX to historically have 20% lower interest expense on debt
          • Floating rate increases risk associated with interest rate exposure and financial risk to the company if interest rates begin to rise significantly
      • These contracts do not create any potentially immediate large demand for cash, however the interest rate swaps do create future risk exposure due to significant interest rate fluctuations.
      Derivatives risks 12/8/2009 © GSB Consulting Group (24) Executive Summary Operating Environment Strategic Position Current Issues & Opportunities Moving Forward
    • 34. Debt-related risks “ Downgrades to the companies debt or its main subsidiaries could result in higher interest rates on unsecured debt and asset securitization also higher fees related to borrowing and reduce the borrowing capacity of the firm.” Most rating agency’s outlook suggests a downgrade is likely. AMEX relies heavily on both debt and securitization to maintain its business. If rating agencies downgrade AMEX it would be very negative to the companies ability to finance operations. 12/8/2009 © GSB Consulting Group (27) Executive Summary Operating Environment Strategic Position Current Issues & Opportunities Moving Forward Credit Agency Entity rated Short-term ratings Long-term ratings Outlook DBRS All rated entities R-1 (middle) A(high) Negative Fitch All rated entities F1 A+ Negative Moody’s
      • TRS & other subsidiaries
      • AMEX
      Prime-1 Prime-2 A2 A3 Stable Negative S&P All rated entities A-2 BBB+ Negative
    • 35. Risky Business Conclusions
      • Implications:
      • If Interest rates begin to rise:
        • A doubling of the corporate debt rate from their 4% to 8% could cost $3.6 billion more annually and effectively wipe-out the $2.6 billion in operating profit generated at current interest levels
        • This is realistic due to potential debt downgrades and the Federal Reserve potentially raising rates within the next eight years
      • If write-offs continue to rise:
        • A 50% rise in write-off percentages would create an additional $2 billion loss for American Express
        • Based on current write-off trends which have doubled in the last two years, this potential rise is realistic and such an outlook is considered optimistic
      • Importance:
      • Currently IF rating agencies downgrade debt or IF interest rates rise, then AMEX would be very impacted negatively and the company’s ability to finance operations would be in question.
      • Stopping interest rate swaps is crucial to stabilize future profits of the company while reducing overall risk exposure.
      • Timing:
      • Immediate and continuous.
      • AMEX credit services business-segment faces serious issues:
      • 21% decline in fee revenues and a rise in net write-offs,
      • Interest rate risk exposure as a result of floating interest rates on debt.
      • These issues must be addressed immediately – AMEX must stop using interest rate swaps. Instead to reduce risk exposure allow for fixed interest rates on debt rather than floating rates.
      Executive Summary Operating Environment Strategic Position Current Issues & Opportunities Moving Forward 12/8/2009 © GSB Consulting Group
    • 36.
      • October ‘09 billed business = $58 billion
      • Since 2007, the cash position has increased approximately 131% to $20.5 billion in 3Q2008.
        • Raised $6 billion in Certified Deposit Program and $7 billion in FDIC insured savings programs
        • Strategically necessary to help withstand the financial crisis in 2008
      • As of September 30, 2009 AMEX has US$18.65 billion in cash and equivalents up from $15.9 billion a year prior.
        • Cash decrease due to buy-back of $3.39 billion in government preferred shares in summer 2009
      • Bank-holding company status is largely responsible for improvements in overall cash position.
      Cash Position 12/8/2009 © GSB Consulting Group (22 & 23) Executive Summary Operating Environment Strategic Position Current Issues & Opportunities Moving Forward
    • 37. Bank-Holding Company
      • Implications:
      • Bank holding status opens up additional sources of capital
      • Provides enhanced financial security
      • Importance:
      • Strengthens the balance sheet by providing access to treasury funds and the ability to take deposits
      • Timing:
      • Now and always
      In 2008 AMEX was granted Bank-Holding Status.  This is a major strategic advantage and will provide added financial security - providing access to sources of government financing outside of securitization (including TARP and TALF). Executive Summary Operating Environment Strategic Position Current Issues & Opportunities Moving Forward 12/8/2009 © GSB Consulting Group
    • 38. Management Changes 12/8/2009 © GSB Consulting Group (16) Executive Summary Operating Environment Strategic Position Moving Forward
      • Alfred Kelly Jr. is leaving the company in the beginning of 2010.
      • His departure is a result of the inability to move up the corporate ladder into the position of CEO.
      • Loss of the top president represents a significant loss of strategic human capital.
      • In the past, AMEX senior management have been carefully selective of high performing individuals. Traditionally they have been promoted from within the company to maintain take full advantage of the already developed human capital.
      • Since 1987 he has led key business groups including:
        • Consumer Card Services Group
        • OPEN from American Express
        • Consumer Travel
        • Global Travelers Cheques
        • Prepaid Services
        • Establishment Services, North America
        • U.S. Customer Service,
        • Global Risk Management
        • Interactive Services Worldwide
    • 39. Governance Relationships 12/8/2009 © GSB Consulting Group (16) Executive Summary Operating Environment Strategic Position Moving Forward
    • 40. Human Resources Conclusions
      • Implication:
      • Loss of strategic human capital to potential competitors
      • Promote within company
      • Be aware of potential company security breaches
      • Importance:
      • Difficult to replace such a key human resource and the business connections he offers
      • Timeline:
      • Suitable replacement must be found by January 2010.
      The President’s departure marks a critical loss of human capital. May result in transfer of strategic knowledge to competitors which will undermine AMEX’s competitive advantages. Selection of next president must be carefully decided and should factor in the individual’s objective within the company. Executive Summary Operating Environment Strategic Position Moving Forward 12/8/2009 © GSB Consulting Group
    • 41. Industry Practices
      • Certain industry practices exist through legal loopholes – has increased profitability, however these are under threat from pending government regulation.
        • Contractual agreement can change with 15 days notice
        • Usury Laws:
          • Creates maximum interest rate that is allowed to be charged, however, varies by State.
          • In Marquette vs. First Omaha Service Corp., the Supreme Court ruled that a national bank could charge the highest interest rate allowed in their home state to customers living anywhere in the United States, including states with restrictive interest caps.
          • Usury friendly states like Delaware have become credit services havens where .
        • Universal Default:
          • Most credit agreements state if you are late for a payment on any credit card or credit line, with any other company, you will be treated as delinquent for other cards.
          • Includes mortgage, car loan, bouncing a cheque, going over credit limit or even inquiring about another card or loan.
      12/8/2009 © GSB Consulting Group (8) Executive Summary Operating Environment Strategic Position Moving Forward
    • 42. American Regulation
      • H.R. 627: Credit Card Accountability Responsibility and Disclosure Act of 2009.
        • Requires 45 day notice for rates increases to allow consumers to shop for better deals
        • Cannot apply payments automatically to lower interest debt
        • Elimination of “fee Harvesting” cards and fees cannot be charged to credit card
      • S.235: Credit Card Holders Bill of Right Act
        • Companies cannot increase rates due to behaviours unrelated to company credit lines (threatens universal default clause)
        • Eliminate fees for paying off balance
        • Cannot Issue cards to anyone under 21 unless can show how they can pay it off or passed financial literacy test.
      12/8/2009 © GSB Consulting Group (9) Executive Summary Operating Environment Strategic Position Moving Forward
    • 43. Impending Government Regulation
      • Implications:
        • Regulations are intended to protect consumers; possible restrictions on interest rate limit of cards will result in a loss of net income
        • AMEX should boost funding for:
          • Lobby-groups to influence key government officials
          • Consumer credit awareness campaign
      • Importance:
        • American government regulation poses single greatest threat to profitability and longevity of credit services industry
      • Timeline:
        • Ongoing, monitor progress closely
      Government regulations present the biggest challenge to the future profitability of the industry.  Changes to usury laws will have an impact on the bottom line. If government sets interest ceilings then revenue will be limited, especially as interest rates increase. Executive Summary Operating Environment Strategic Position Moving Forward 12/8/2009 © GSB Consulting Group
    • 44. Short Term Strategy Options Executive Summary Operating Environment Strategic Position Financial Position Current Issues & Opportunities 12/8/2009 © GSB Consulting Group
    • 45. Long Term Strategy Options Executive Summary Operating Environment Strategic Position Financial Position Current Issues & Opportunities 12/8/2009 © GSB Consulting Group
    • 46. Summary of Findings Executive Summary Operating Environment Strategic Position Financial Position Current Issues & Opportunities Three American banks account for 23% of the global credit services industry and 58% of total American market. These banks operate primarily under the banners: Visa and MasterCard. American Express only comprises 20% of credit service market in the USA. The American market is oversaturated and mature with little growth potential. American Express does 70% of its total credit services business in the USA which represents an over-reliance on one single market. AMEX utilizes a closed-loop business model. AMEX card members spend 2-4 times more per transaction than with competitors cards; this suggests that AMEX has great control over who their customers are. AMEX target market is high net-worth individuals and corporate accounts. Re venues (49%) are derived from a 2.56% charge of total card transaction value. Under this model profits are directly correlated to the health of the economy and amount of consumer spending. Current state of American economy is worrisome. Unemployment at very high levels; consumer spending is down over last year. In addition both public and private debt loads are continuously growing and reaching unsustainable levels. Current economic decline increases risk of credit defaults, especially among lower socio-economic status. Also has a direct negative impact on AMEX’s profitability. 12/8/2009 © GSB Consulting Group
    • 47. Summary of Findings Executive Summary Operating Environment Strategic Position Financial Position Current Issues & Opportunities Partnerships and enhanced business relationships have been instrumental in securing access across many industries that in turn expand AMEX’s reach to their target market. AMEX has always been the industry leader in technological innovation.  Future success in the credit-services industry will continue to be based on differentiation and maintaining a technological competitive advantage. Therefore, should increase funding for AMEX Labs.
      • AMEX credit services business-segment faces serious issues:
      • 21% decline in fee revenues and a rise in net write-offs,
      • Interest rate risk exposure as a result of floating interest rates on debt.
      • These issues must be addressed immediately – AMEX must stop using interest rate swaps. Instead to reduce risk exposure allow for fixed interest rates on debt rather than floating rates.
      In 2008 AMEX was granted Bank-Holding Status.  This is a major strategic advantage and will provide added financial security - providing access to sources of government financing outside of securitization (including TARP and TALF). 12/8/2009 © GSB Consulting Group
    • 48. Summary of Findings Executive Summary Operating Environment Strategic Position Financial Position Current Issues & Opportunities The President’s departure marks a critical loss of human capital. May result in transfer of strategic knowledge to competitors which will undermine AMEX’s competitive advantages. Selection of next president must be carefully decided and should factor in the individual’s objective within the company. Government regulations present the biggest challenge to the future profitability of the industry.  Changes to usury laws will have an impact on the bottom line. If government sets interest ceilings then revenue will be limited, especially as interest rates increase. 12/8/2009 © GSB Consulting Group Short Term Strategy Options: Anticipate government regulations, Financial restructuring of debt, Technological innovation. Long Term Strategy Options: Revitalize key market focus, Seek mergers and acquisitions, Enhance bank-holding status.
    • 49. Questions or Comments? 12/8/2009 © GSB Consulting Group

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