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
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
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
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
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
Nonpayment of a debt when due
A profitable client - someone who does not pay off their account balance each month
The least profitable client – someone who always pays off balance in full each month
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.
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.
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.
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)
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
Retains existing customers, and provides incentive to attract new customers
Technological innovation should be based on
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.
$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%
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.
Maintain current course:
target high net worth clients,
increase cash position,
Avoid clients of lower socio-economic status to avoid loan defaults.
Expected to stay in recessionary state for at least one year.
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 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)
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
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
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.
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:
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
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 .
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.
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.