EXHIBIT 99.1
INFORMATION RELATED TO FORWARD LOOKING STATEMENTS
THIS PRESENTATION INCLUDES FORWARD-LOOKING STATEMENTS, WHICH ARE SUBJECT TO
RISKS AND UNCERTAINTIES. THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE,"
"OPTIMISTIC," "INTEND," "PLAN," "AIM," "WILL," "MAY," "SHOULD," "COULD,"
"WOULD," "LIKELY," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE ON WHICH
THEY ARE MADE. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE ANY
FORWARD LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED
TO, THE FOLLOWING: THE COMPANY'S ABILITY TO MEET ITS ROE TARGET RANGE OF 33 TO
36 PERCENT ON AVERAGE AND OVER TIME, WHICH WILL DEPEND IN PART ON FACTORS SUCH
AS THE COMPANY'S ABILITY TO GENERATE SUFFICIENT REVENUE GROWTH AND ACHIEVE
SUFFICIENT MARGINS, FLUCTUATIONS IN THE CAPITAL REQUIRED TO SUPPORT ITS
BUSINESSES, THE MIX OF THE COMPANY'S FINANCINGS, AND FLUCTUATIONS IN THE LEVEL
OF THE COMPANY'S SHAREHOLDERS' EQUITY DUE TO SHARE REPURCHASES, DIVIDENDS,
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME AND ACCOUNTING CHANGES,
AMONG OTHER THINGS; THE COMPANY'S ABILITY TO GROW ITS BUSINESS AND MEET OR
EXCEED ITS RETURN ON SHAREHOLDERS' EQUITY TARGET BY REINVESTING APPROXIMATELY
35 PERCENT OF ANNUALLY-GENERATED CAPITAL, AND RETURNING APPROXIMATELY 65
PERCENT OF SUCH CAPITAL TO SHAREHOLDERS, OVER TIME, WHICH WILL DEPEND ON THE
COMPANY'S ABILITY TO MANAGE ITS CAPITAL NEEDS AND THE EFFECT OF BUSINESS MIX,
ACQUISITIONS AND RATING AGENCY REQUIREMENTS; CONSUMER AND BUSINESS SPENDING ON
THE COMPANY'S CREDIT AND CHARGE CARD PRODUCTS AND TRAVELERS CHEQUES AND OTHER
PREPAID PRODUCTS AND GROWTH IN CARD LENDING BALANCES, WHICH DEPEND IN PART ON
THE ABILITY TO ISSUE NEW AND ENHANCED CARD AND PREPAID PRODUCTS, SERVICES AND
REWARDS PROGRAMS, AND INCREASE REVENUES FROM SUCH PRODUCTS, ATTRACT NEW
CARDMEMBERS, REDUCE CARDMEMBER ATTRITION, CAPTURE A GREATER SHARE OF EXISTING
CARDMEMBERS' SPENDING, AND SUSTAIN PREMIUM DISCOUNT RATES ON ITS CARD PRODUCTS
IN LIGHT OF REGULATORY AND MARKET PRESSURES, INCREASE MERCHANT COVERAGE,
RETAIN CARDMEMBERS AFTER LOW INTRODUCTORY LENDING RATES HAVE EXPIRED, AND
EXPAND THE GLOBAL NETWORK SERVICES BUSINESS; THE SUCCESS OF THE GLOBAL NETWORK
SERVICES BUSINESS IN PARTNERING WITH BANKS IN THE UNITED STATES, WHICH WILL
DEPEND IN PART ON THE EXTENT TO WHICH SUCH BUSINESS FURTHER ENHANCES THE
COMPANY'S BRAND, ALLOWS THE COMPANY TO LEVERAGE ITS SIGNIFICANT PROCESSING
SCALE, EXPANDS MERCHANT COVERAGE OF THE NETWORK, PROVIDES GLOBAL NETWORK
SERVICES' BANK PARTNERS IN THE UNITED STATES THE BENEFITS OF GREATER
CARDMEMBER LOYALTY AND HIGHER SPEND PER CUSTOMER, AND MERCHANT BENEFITS SUCH
AS GREATER TRANSACTION VOLUME AND ADDITIONAL HIGHER SPENDING CUSTOMERS;
FLUCTUATIONS IN INTEREST RATES, WHICH IMPACT THE COMPANY'S BORROWING COSTS AND
RETURN ON LENDING PRODUCTS; THE CONTINUATION OF FAVORABLE TRENDS, INCLUDING
INCREASED TRAVEL AND ENTERTAINMENT SPENDING, AND THE OVERALL LEVEL OF CONSUMER
CONFIDENCE; THE COSTS AND INTEGRATION OF ACQUISITIONS; THE SUCCESS, TIMELINESS
AND FINANCIAL IMPACT (INCLUDING COSTS, COST SAVINGS AND OTHER BENEFITS
-1-
INCLUDING INCREASED REVENUES), AND BENEFICIAL EFFECT ON THE COMPANY'S
OPERATING EXPENSE TO REVENUE RATIO, BOTH IN THE SHORT-TERM AND OVER TIME, OF
REENGINEERING INITIATIVES BEING IMPLEMENTED OR CONSIDERED BY THE COMPANY,
INCLUDING COST MANAGEMENT, STRUCTURAL AND STRATEGIC MEASURES SUCH AS VENDOR,
PROCESS, FACILITIES AND OPERATIONS CONSOLIDATION, OUTSOURCING (INCLUDING,
AMONG OTHERS, TECHNOLOGIES OPERATIONS), RELOCATING CERTAIN FUNCTIONS TO
LOWER-COST OVERSEAS LOCATIONS, MOVING INTERNAL AND EXTERNAL FUNCTIONS TO THE
INTERNET TO SAVE COSTS, AND PLANNED STAFF REDUCTIONS RELATING TO CERTAIN OF
SUCH REENGINEERING ACTIONS; THE COMPANY'S ABILITY TO REINVEST THE BENEFITS
ARISING FROM SUCH REENGINEERING ACTIONS IN ITS BUSINESSES; THE ABILITY TO
CONTROL AND MANAGE OPERATING, INFRASTRUCTURE, ADVERTISING AND PROMOTION
EXPENSES AS BUSINESS EXPANDS OR CHANGES, INCLUDING THE ABILITY TO ACCURATELY
ESTIMATE THE PROVISION FOR THE COST OF THE MEMBERSHIP REWARDS PROGRAM; THE
COMPANY'S ABILITY TO MANAGE CREDIT RISK RELATED TO CONSUMER DEBT, BUSINESS
LOANS, MERCHANT BANKRUPTCIES AND OTHER CREDIT TRENDS AND THE RATE OF
BANKRUPTCIES, WHICH CAN AFFECT SPENDING ON CARD PRODUCTS, DEBT PAYMENTS BY
INDIVIDUAL AND CORPORATE CUSTOMERS AND BUSINESSES THAT ACCEPT THE COMPANY'S
CARD PRODUCTS AND RETURNS ON THE COMPANY'S INVESTMENT PORTFOLIOS;
BANKRUPTCIES, RESTRUCTURINGS, CONSOLIDATIONS OR SIMILAR EVENTS AFFECTING THE
AIRLINE OR ANY OTHER INDUSTRY REPRESENTING A SIGNIFICANT PORTION OF THE
COMPANY'S BILLED BUSINESS, INCLUDING ANY POTENTIAL NEGATIVE EFFECT ON
PARTICULAR CARD PRODUCTS AND SERVICES AND BILLED BUSINESS GENERALLY THAT COULD
RESULT FROM THE ACTUAL OR PERCEIVED WEAKNESS OF KEY BUSINESS PARTNERS IN SUCH
INDUSTRIES; THE TRIGGERING OF OBLIGATIONS TO MAKE PAYMENTS TO CERTAIN CO-BRAND
PARTNERS, MERCHANTS, VENDORS AND CUSTOMERS UNDER CONTRACTUAL ARRANGEMENTS WITH
SUCH PARTIES UNDER CERTAIN CIRCUMSTANCES; A DOWNTURN IN THE COMPANY'S
BUSINESSES AND/OR NEGATIVE CHANGES IN THE COMPANY'S AND ITS SUBSIDIARIES'
CREDIT RATINGS, WHICH COULD RESULT IN CONTINGENT PAYMENTS UNDER CONTRACTS,
DECREASED LIQUIDITY AND HIGHER BORROWING COSTS; FLUCTUATIONS IN FOREIGN
CURRENCY EXCHANGE RATES; ACCURACY OF ESTIMATES FOR THE FAIR VALUE OF THE
ASSETS IN THE COMPANY'S INVESTMENT PORTFOLIO AND, IN PARTICULAR, THOSE
INVESTMENTS THAT ARE NOT READILY MARKETABLE, INCLUDING THE VALUATION OF THE
INTEREST-ONLY STRIP RELATING TO THE COMPANY'S LENDING SECURITIZATIONS; THE
COMPANY'S ABILITY TO INVEST IN TECHNOLOGY ADVANCES ACROSS ALL AREAS OF ITS
BUSINESS TO STAY ON THE LEADING EDGE OF TECHNOLOGIES APPLICABLE TO THE
PAYMENTS INDUSTRY; THE COMPANY'S ABILITY TO PROTECT ITS INTELLECTUAL PROPERTY
RIGHTS (IP) AND AVOID INFRINGING THE IP OF OTHER PARTIES; THE POTENTIAL
NEGATIVE EFFECT ON THE COMPANY'S BUSINESSES AND INFRASTRUCTURE, INCLUDING
INFORMATION TECHNOLOGY, OF TERRORIST ATTACKS, NATURAL DISASTERS OR OTHER
CATASTROPHIC EVENTS IN THE FUTURE; POLITICAL OR ECONOMIC INSTABILITY IN
CERTAIN REGIONS OR COUNTRIES, WHICH COULD AFFECT LENDING AND OTHER COMMERCIAL
ACTIVITIES, AMONG OTHER BUSINESSES, OR RESTRICTIONS ON CONVERTIBILITY OF
CERTAIN CURRENCIES; CHANGES IN LAWS OR GOVERNMENT REGULATIONS; OUTCOMES AND
COSTS ASSOCIATED WITH LITIGATION AND COMPLIANCE AND REGULATORY MATTERS; AND
COMPETITIVE PRESSURES IN ALL OF THE COMPANY'S MAJOR BUSINESSES. A FURTHER
DESCRIPTION OF THESE AND OTHER RISKS AND UNCERTAINTIES CAN BE FOUND IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006, AND
ITS OTHER REPORTS FILED WITH THE SEC.
-2-
- --------------------------------------------------------------------------------
AXP FINANCIAL COMMUNITY MEETING
KENNETH I. CHENAULT'S PRESENTATION
AUGUST 1, 2007
- --------------------------------------------------------------------------------
[FOR SLIDES ACCOMPANYING THIS PRESENTATION, PLEASE REFER TO THE AMERICAN
EXPRESS COMPANY WEB SITE]
Good afternoon. And welcome to our second financial community meeting of the
year.
Let me get right to our agenda.
I'll begin by summarizing our year to date financial and business performance.
You've already seen the details of our results in our earnings release and
supplement, so I'll just cover the highlights.
After that, I'll spend some time giving you my perspective on some elements of
the company's next chapter of growth.
Because we're in so many aspects of payments - as an issuer, a network and an
acquirer/processor - I believe we have unique opportunities for growth
relative to our peers. I'll share how I see our growth evolving, as well as
some tactics we're likely to deploy in the future.
Our deep drill today is on Global Network Services, or GNS. It's been 3 years
since we covered GNS at one of these forums and, as you know, a lot has
happened over that time.
While we've had a successful network business in international for a number of
years, back in 2004 we had only just announced our first U.S. partnership with
MBNA. Since that last presentation we've made tremendous progress in the U.S.,
in addition to accelerating our growth in many other markets.
GNS now makes a significant contribution to our business metrics and our
financials. As a result, GNS is no longer just a potential opportunity - it is
a growing, successful business.
-3-
Peter Godfrey, President of Global Network Services, will give you a current
look at this business, as well as a perspective on our potential.
We'll then end, as always, with any questions you may have for me, Dan Henry,
Peter or any other member of the management team.
* * * * * * * *
Let me start with our financials.
As you've seen, we generated excellent results in the first half of the year.
Through June, we exceeded all of our on-average-and-over-time financial
objectives.
o Year To Date revenues net of interest grew by 10%, an exceptionally
strong showing, particularly considering the impact of rising interest
rates;
o Our growth in Earnings Per Share from Continuing Operations was 19%;
o And our Return on Equity was 38%.
As you can imagine, I feel very good about our results and our business
momentum. Our performance across payments has been consistently strong,
whether looking at customer segments, geographies, or business lines.
Here's a look at some of our metrics, starting with billed business.
Year to date, our multi-year investment strategy continues to pay-off in terms
of the momentum we've built within our spend-centric model. Reported billings
through June were up 15%, continuing a double digit trend we've achieved since
2003.
On a relative basis, we continue to outperform most of our issuing peers.
Our billings growth once again has us at the top tier of the industry.
One particularly compelling point is that, even in the midst of one of the
most competitive environments I can remember, we've not only managed to
sustain our strong growth, but to increase the gap between us and our major
peers.
-4-
Since 2003 our billings growth has exceeded that of each major issuing peer.
As an example, over the last three years we added over $210 billion in
spending to our base......
....... over twice the gain of our next nearest competitor.
As I said earlier, I believe our performance has resulted from the powerful
combination of our spend-centric model and our multi-year investment strategy.
The share gains for 2006 have now been reported, and the strength of our
relative performance is quite clear.
In the U.S., which is shown here, we've steadily gained share in general
purpose charge and credit card spending. While we currently don't participate
in the separate debit market, our volumes have outpaced the combined growth
rate of both types of spending for the last two years.
A similar slide for charge and credit spending in many international markets
would show the same positive trend.
We also had excellent growth in our card base. June year over year card growth
of 10% was very strong, and translates into the addition of 4.2 million net
new cards so far this year.
We've generated good proprietary growth, in addition to the excellent growth
generated by our network partners, both in the U.S. and internationally.
The next metric is average proprietary cardmember spending, an indicator we
monitor closely given our spend-centric focus. Average basic cardmember spend
was up 8%, well above overall economic growth and reported rates of consumer
spending.
The strength of this metric is even more notable given the large number of
cards we've put on over the last several years. As cardmember spending
historically ramps up over time, this indicator gets dampened when there is a
large denominator increase. Given this effect, an 8% growth in average spend
is further evidence of the success of our spend tactics.
-5-
Within our business model, loan balances are an outcome of our spend
increases. So, along with our gains in billings, we also saw excellent growth
in managed loans, which were up 21% at the end of June.* While this is very
strong growth, it is generally consistent with the billings growth we've seen
across our lending products.
Our growth in receivables also continues to outpace our peers. Our 21%
increase* puts us well above the single digit growth rate of most major
players. Given that each of these competitors has a lend-centric model, and
therefore depends on AR growth to drive revenues, this slide clearly shows the
hurdle they face in generating future top-line performance.
As I noted with our billings performance, our gains in AR have come against
the backdrop of a tough competitive environment. But, as with billings, we've
not only been able to outgrow our peers, but to increase our gap over time.
This slide shows you the growth rates of the 6 major card issuers over the
last 6 quarters. As you can see, a number of competitors had significant ups
and downs in their growth rates over this time. Our growth rate, however,
continued to stay high and generally increased, even in light of the
significant growover challenges we faced in certain quarters.
Because of this strong relative performance, we expect that our share gains in
lending have continued this year.
Related to our AR metric is spend velocity, another dynamic of our model that
differentiates us from other players.
This ratio looks at our billed business levels relative to our receivables and
is an indicator of our efficiency in generating spend and utilizing capital.
And, as you can see, we've increased this metric over time.
The difference between our spend model and a lend model is quite clear when
you look at the spend velocity of our peers. As you can see, our spend
velocity is more than twice the level of our next nearest competitor.
In our worldwide charge and lending businesses we currently generate
approximately 6 dollars of spend for every dollar of receivables.** This is
driven by our high spending card base, as well as by the acceleration of
billings within GNS.
- ---------------
* On a GAAP (i.e., owned) basis, cardmember loans grew 33% at June 30, 2007
versus June 30, 2006.
** Reflects spend velocity determined using managed receivables. Using GAAP
(i.e., owned) receivables, during 2006 the Company generated 7.8 dollars of
spend for every dollar of receivables.
-6-
As a result, the growth of our card business requires far less capital than
the level required by our competitors.
There are two important points to note about our loan growth.
First, it is being generated from our spend centric model. Our growth is not
being driven by balance transfers from new, unknown customers.
Instead, our growth is coming largely from the revolve spend of tenured
customers. For example, Consumer Credit Card balances from cardmembers with
more than 6 months of tenure make up 90% of that portfolio, a trend that has
been consistent over the past 24 months.
Also, as you can see here, our U.S. consumer and small business loan portfolio
is quite diverse. We're not relying on one product or one pricing proposition
to generate growth, but instead have pursued a balanced approach consistent
with our long-stated spend-centric strategy.
Our mix of balances has not changed dramatically since 2005, which means we've
generated growth across the products in our portfolio over this time. The
faster growing products over this time have been our rewards-based lend
products, including co-brands, Blue Cash and much of the Blue portfolio, and
lending on charge. These products also come with the best risk profile given
their respective link to either a reward incentive, a charge product or, in
many cases, both.
As an aside - the products and percentages shown here include both consumer
and small business balances. If you recut these numbers by customer segment
small business would represent 16% of our total portfolio.
The second point I'd make about our growth is that it is not coming at the
expense of our credit performance. Once again we put up very strong credit
numbers in the quarter.
We're not generating growth by loosening our standards and hunting in the
sub-prime space. And we're not buying balance growth with 0% APR offers. (In
fact, our managed yield has been very consistent over the last several years,
and the percentage of our portfolio on promotional rates has declined.)
-7-
We continue to pursue growth in the prime and super-prime lending segments
and, as a result, we continue to focus our acquisition efforts in the mid to
upper tier of prospects.
For example, as you can see here, of the new credit cards approved in the U.S.
on a year to date basis, 89% have a FICO score greater than 660, a mix that
has stayed very consistent with last year.
This demonstrates that our year to date growth rate is not being driven by the
acquisition of lower quality cardmembers. Instead, we're sticking to our
spend-centric strategy and continue to target and acquire very credit worthy
customers.
In addition, the FICO scores across our entire portfolio of consumer and small
business credit cards are also both high and consistent. As of June, 84% of
our balances have scores above 660, a strong number for our industry as you
can tell from the reported master trust numbers for our peers.
Now I should note that these FICO numbers are actually an outcome of our
acquisition methods, rather than an input. Our proprietary credit models have
advanced far beyond relying on FICO scores as our only selection criteria.
Instead, we consider a range of robust factors before making an offer to a
prospect. For example, we consider their total size of wallet; we segment a
prospect's needs between their spend and revolve capacities; we look at their
home value. By using a wide range of factors we believe we're far more
knowledgeable about a prospect's true creditworthiness before they even join
our franchise.
As you can see here, given our focus on the upper end of the market, our U.S.
metrics are far better than the industry average, with performance that
continues to be among the best in class.
As with other U.S. issuers, we did have a negative year over year impact in
writeoffs; but this variance was largely driven by the prior year, not the
current year. Last year's writeoffs were abnormally low due to the favorable
carry-over impact of the 2005 U.S. bankruptcy legislation, while this year
we've returned to more normal trend levels.
-8-
In fact, our current credit performance remains very much in line with
historical trends, as you can see here.
Our current writeoff rates, whether lagged or coincidental, are below the
levels of 2003 and 2004, and are about equal to the levels of 2005 before the
impact of the bankruptcy law change.
The dramatic decrease in rates in 2006 was the result of people accelerating
their bankruptcy filings into 2005 in order to qualify under the old law. As
the impact of the bankruptcy law worked through the year we did see our rates
rise. But as you can see, excluding this impact in 2006, writeoffs remain at
an historically low level - a level that, for the most part, has now
normalized for post-legislation bankruptcy trends and for the current economic
environment.
The ongoing investments we're making in our risk capabilities, and our focused
efforts to bring in higher spending, more creditworthy cardholders, are paying
off. Our credit quality continues to be well controlled and I remain quite
comfortable with the level of risk within our business.
Looking across the metrics for our payments business, you can see that we've
achieved strong results. By executing successfully against our spend-centric
model, and reaping the benefits of our multi-year investment strategy, we were
able to grow our volumes while also achieving good bottom-line results.
Now, I do recognize that there are concerns in the market about the current
credit environment. Given issues in the sub-prime sector, the risk position of
all financial companies is being closely scrutinized.
While I can't speak for all of the players out there I can speak for our
company.
The fact is that, for anyone in the lending business, any time you grow your
business you take on risk. If you add new customers, if you lend more to
current customers, you automatically add to your risk levels. The only way to
stop adding to your risk is to stop growing, period.
Our 21% growth* in balances as of June is an exceptional number, and is even
more notable when compared against our peers. We saw an opportunity in the
marketplace and we took advantage of it. Peers were cutting back on marketing;
we ramped up.
- ---------------
* Managed basis. On a GAAP (i.e., owned) basis, cardmember loans grew 33% at
June 30, 2007 versus June 30, 2006.
-9-
This is similar to the tactic we employed in 2003 and 2004, when we
accelerated our investment spending on acquisition and loyalty as others
scaled back. In fact, the actions we took back then are still contributing to
our balance growth today, in that our current growth is really the cumulative
outcome of our multi-year investments.
Those past investments clearly paid off in terms of our metric growth and
profitability. And I have no reason to believe our recent investments won't
produce similar results.
Now I'm not saying we'll sustain a 20%+ growth over the long-term. 20% is a
high hurdle for any company to consistently achieve. But, when we have the
opportunity to responsibly grow our business, we will. When we have the
opportunity to use our enhanced risk capabilities to increase our lending to
the right customers at the right economics, we will. When we can exploit a
competitive window of opportunity to gain share, we will.
As I said earlier, I'm comfortable with our risk position for several reasons:
o First, we're staying within our core segments of prime and super-prime
customers.
o We're sticking with our spend-centric strategy, of which lend balances are
an outcome, not our main objective.
o Our lending yields have stayed consistent; we're not giving away margin
to buy balances.
o And our ROE is growing, so our investments continue to perform.
Across our payments businesses this year we've met three important objectives:
we grew the top-line, we grew the bottom-line, and we responsibly invested for
the future.
Our final metric is not directly related to our payments business, but is key
to our spend-centric model nonetheless.
On a year to date basis travel sales were up 8%, reflecting some strengthening
in the corporate segment, as well as very strong growth in U.S. Consumer
Travel.
-10-
Looking at our expense growth you can see that, consistent with the trend
we've reported since 2001, we also kept good control over expenses.
Our human resource costs, other opex and marketing, promotion, rewards and
cardmember services lines have each grown slower than our key volume metrics.
HR expenses have grown in the 4% to 5% range since 2001, as has other opex
when adjusted for the various gains and other items reported in our 2006 and
2007 releases.
While our year to date growth in marketing, promotion, rewards and cardmember
services is only 3%, it's actually more relevant to look at this line by
quarter.
As we noted in our release, we increased our marketing and promotion in the
quarter, even as a number of our competitors stated that they had pulled back
on these investments. While this line declined by (4%) year over year in the
first quarter, we increased our investments in the second quarter, leading to
a 9% increase.
As we noted in our release, we accelerated some marketing spend to take
advantage of the tax benefit we booked in the quarter; but even without this
additional investment, this line would have grown at approximately 5% in Q2.
As we've mentioned to you before, we've become very disciplined in flexibility
planning, which allows us to ramp up or scale back on investment spending
depending on the environment. Given the growover challenges we had in the
first quarter in our provision and interest lines, we appropriately scaled
back on marketing.
However, in the second quarter, business momentum was strong and we recognized
a $65 million net of tax benefit from the IRS. As a result, we took the
opportunity to ramp up marketing spend above our planned levels and invest
more in future business growth. This marketing spend included dollars for card
acquisition, as well as for cardmember loyalty initiatives.
As I said earlier, with several competitors cutting back on M&P, we wanted to
take full advantage of this market opportunity.
-11-
Through June, we generated a 38% Return on Equity, above our stated long-term
target of 33% to 36%. Our superior returns were the result of our
profitability and our efficient use of capital. As we've told you before, we
look to appropriately balance our capital utilization based on our business
and growth needs, leading to a productive mix of ROE generation across payment
products such as GNS, lending and charge card.
This performance, along with our continued work to optimize our capital
structure, allowed us to return a high proportion of capital to shareholders
in the form of both dividends and share buybacks. Through June we returned 85%
of capital to shareholders, a number in excess of our 65% long-term target.
* * * * * * * * *
So, as you can see from our results, the company's core business performance
continues to be strong. We're executing against our strategies, we're growing
the top and bottom lines, we have good operating leverage and, very
importantly, we continue to invest.
As we enter our next phase of growth, the strength of our foundation --
including our market leadership in our core customer segments and our organic
opportunities -- makes me confident that we're positioned to sustain our
performance.
There are several elements of our business and our business model that will
ultimately drive our moderate to long-term growth - elements that I believe,
in combination, are unique to us.
The first factor in sustaining our growth is our strategy - specifically, our
spend-centric strategy.
We've talked at length about the advantages of a spend-centric approach
before, so I won't go into the details again today.
Suffice it to say, our spend strategy - with its focus on high spending, high
value cardmembers -- will remain at the core of our future growth. As we've
discussed, there are multiple advantages to our spend approach, including the
affluent base we target, the premium margins we earn, and our ability to
consistently re-invest in value.
-12-
For all of the talk by our issuing competitors of success in the premium
space, they are still predominantly dependent on lending to drive their
financials. They still face the same hurdles they always have - restrictions
on their ability to grow given their credit limit focus, and a dependency on
APR levels in a highly competitive marketplace.
The comparative metrics I put up earlier clearly show that most other issuers
have little strength on their top-line, leading me to question how their card
segments will consistently contribute to growth on the bottom-line.
The second driver of our sustainable growth is our structure, which is also
unlike anyone else in the marketplace.
This is another topic we've discussed before - our processor plus structure,
which allows us to participate in all elements of the payments revenue chain.
As with our strategy, our operating structure also sets us apart. While our
peers compete with us in narrower categories - as issuers, networks or
acquirer/processors - we have the advantage of being in all three.
External attention has historically focused on our issuing business, but that
is only one component of our model. Our network business competes against
Visa, Mastercard and Discover and is becoming a larger and more significant
contributor to our results and our growth. And we also have a merchant
acquiring and processor business that operates similar to First Data.
On a relative basis I believe these two pieces of our business have been
undervalued, a point recently noted in several press articles and market
reports.
For example, the spend going through our network has been growing at double
digit levels over the last 19 quarters, driven largely by our proprietary
cardmembers, but with an increasing contribution from GNS.
Our increased scale and effective expense control have also led to expanded
margins across our network. This is unlike several of our network peers who
have instead relied on increases in interchange and currency conversion fees
to grow earnings and margins.
-13-
Without commensurate value, pricing increases are difficult to maintain and
rely on beyond the short-term. I believe that our economic model, which is
driven by spend and merchant value, is inherently more sustainable and serves
to increase the value of our growing network business.
Another important element of sustainability is the potential for growth that
exists across our businesses.
As I've discussed before, we have a range of sources for future growth.
The most basic component of growth is the ongoing increase in consumer and
business spending, both in the U.S. and across international.
For example, from 2003 to 2006 non-government expenditures in the U.S.
increased by approximately 6% per year. Spending projections through the end
of the decade continue to show fairly steady growth in this number, with U.S.
spend expected to be up 5% a year over this period.
Key markets outside of the U.S., such as India, China and Brazil, are
projected to have even stronger spend gains.
So, given the spend-centric focus of our business strategy, global economic
growth is the first level of opportunity within our model.
Beyond economic growth are the penetration gains of plastic within the
payments industry.
I've shown you this chart before, but the numbers remain compelling. As you
can see, there is a lot of growth potential for us in each of these segments.
In fact, as just one example, Nilson's projection is that spending on plastic
within the U.S. consumer segment will grow by 12% between 2005 and 2010. This
growth will be driven by continuing to convert cash and check payments onto
plastic. So, as you can see, even within the most penetrated segment of spend,
the growth projection is quite substantial. This implies that the other,
less-penetrated segments will also expand their use of plastic, with
industries such as B2B and healthcare offering sizable potential.
-14-
Some people outside of the card business mistakenly view this as a mature
industry. As you might imagine, with projected double digit growth rates, I
tend to disagree with that characterization.
The final element of growth comes from our company specific initiatives. This
is the growth potential we control, the potential that is ultimately realized
from the success of our investments and our strategy.
This growth is driven by the basics, such as acquiring new high value
customers and merchants, and deepening the loyalty of existing ones, as well
as by newer opportunities in adjacent businesses.
We've had terrific success in each of these areas over the last 6 years, but I
believe there is still substantial potential in markets around the world.
For example, one opportunity we're accelerating is expanding our share of
spend with existing customers. Al Kelly took you through the potential of this
capability in his presentation last year, but here's just a reminder of its
power.
Before we developed our share of wallet application, we would look at two
Cardmembers - each spending $30,000 annually - as being pretty similar and,
from a marketing standpoint, we'd treat them about the same.
However, with our patent-pending Share of Wallet models, we now have greater
insights. In reality, one Cardmember might be spending $30,000 with American
Express and $3,000 on other general purpose plastic .........
While the second may be spending $30,000 with us and $220,000 with
competitors. In the first case we have a loyal customer with a high share of
wallet. With the second cardmember our share of wallet is quite modest.
Through this new insight we know where to specifically look for growth. For
both cardmembers we want to convert cash, check and debit spend onto our
product, while for the second cardmember we also want to convert his or her
other general purpose plastic spending.
This Share of Wallet application, which is unique to us, is an important tool
in that it shows us where to hunt more productively for future growth. We can
identify which cardmembers don't give us the majority of their spend, and even
those customer spend categories where we have the greatest opportunity, say
for example in supermarkets or gas stations.
-15-
We've expanded this capability to our U.S. small business base and have plans
to roll it out for international consumers and U.S. middle market companies as
well. Armed with this information, our investments can be far more focused,
and therefore far more effective.
We also have significant potential in business areas outside of consumer
proprietary payments. These opportunities leverage the existing infrastructure
of our card business, while expanding our potential into profitable, adjacent
growth areas.
Examples here include opportunities such as: Global Network Services, the
corporate middle market; and business to business payments. You'll hear from
Peter in detail on GNS, so let me just touch on these other 2 examples.
Our corporate middle market business, for example, which is defined here,
capitalizes on the MIS, servicing and processing capabilities we developed for
our large corporate business.
Middle market has had terrific growth over the last few years, with compound
annual spend up 19% since 2003, and net income up 23%. Also, because we can
leverage existing assets as we grow this business, our profit margins within
middle market are the largest within our card portfolio.
Another example of an adjacent opportunity is our Source To Settle business
within the large corporate market. Source to Settle is the model we're using
to capture a greater share of the indirect business spend of our corporate
clients. Given that the revenue pool for these B2B payments is estimated to be
over $25 billion there is a lot of potential to tap.
While we participate in this market today with our Corporate Purchasing Card,
we've now expanded into electronic invoice processing, an attractive
adjacency. By tying invoice processing together with a payment product we
believe we can add significant value to our corporate product suite.
So, I feel very good about our prospects for generating growth from our
company-specific initiatives.
-16-
o We continue to have a robust pipeline of investment opportunities;
o Our strategy, with its focus on high spending, affluent customers, has
generated excellent financial returns; and
o We have both a flexible business model and the financial discipline to
appropriately balance our investment options.
The final factor that I believe will contribute to sustaining our growth is
also unique to us, and that is our broad business base and the diversity of
resources we bring to bear against our growth opportunities within payments.
As you know, our core payments business is quite diverse, with: a broad
portfolio of products, such as charge, lending and co-brand; varied business
segments, such as consumer, small business and mid to large corporate; and a
wide range of geographies.
Over the years these core businesses have developed a significant number of
valuable and leverage-able resources.
First, as you can see here, are our assets, from our brand to our affluent
customer base to our ROE.
In addition to these assets, we also have proven excellence across a number of
capabilities such as servicing, risk management, marketing, sales and
reengineering.
And finally there are the relationships we've fostered with merchants,
corporate clients and GNS partners.
Every item on this page is a strength that we bring to our core businesses
each day. Every item on this page is an asset that I believe can be levered
into future growth.
And while these resources are valuable on their own, in combination they're
made even more so because they're unique to us. Because of our processor plus
model and our spend-centric strategy, no one else has the combination of
issuing, network and acquiring/processing resources that are at our disposal
for future growth.
-17-
As an example, consider the growth example I gave you earlier - electronic
invoicing. Since we did not have a product in this area ourselves, we chose to
buy instead of build. This led us to acquire Harbor Payments, a leading player
in the electronic invoice space.
Realizing the growth potential in this adjacent business is made easier
because of the existing resources we bring to bear.
For example: our brand, our processing infrastructure, our marketing,
servicing and information management capabilities, and our corporate client
relationships. Also, in the case of Harbor, since it was an acquisition,
another asset we utilized was our capital generation.
Going forward, we'll continue to invest in organic growth by acquiring
cardmembers, acquiring merchants and growing our spend levels with existing
customers. But I believe we'll also be making more growth investments in
opportunities that leverage the resources you see on this slide.
For example, they could be opportunities that leverage two of the anchors on
this page - our affluent customer base and our merchant network. By using our
information management capabilities to effectively match the needs of our high
spending cardmembers with the products and services of our merchants, we add
value to both groups.
For cardmembers it might be providing them with access to events and
experiences they can get nowhere else. For merchants it could be developing a
targeted marketing program that significantly increases their response rates.
In these examples we take the role of a pro-active intermediary, adding value
to both parties and earning economic benefits commensurate with that value.
Our payment product is an enabler of this exchange, but in this case we'd have
a revenue stream generated from the value-added, relationship-based services
provided to our cardmembers and merchants.
In addition to leveraging existing resources for growth, we'll also look to
make investments that add to the resources shown here. This could mean
developing or buying a new capability, or adding scale to a capability or
asset we already have. Depending on the economics, I could see this playing
out as either a build or a buy scenario.
-18-
The combination of these elements - our spend-centric strategy, our processor
plus model, our growth opportunities and our resources - provides us with what
I believe is unique potential in the marketplace, and unmatched growth
characteristics.
o Our spend-centric strategy provides premium margins and the ability to
reinvest for growth;
o Our processor plus model allows for efficient use of capital, leading to
an exceptional ROE;
o We're in an industry with excellent growth prospects and we're a company
with excellent executional skills;
o We have existing aggregations of consumers, small and large businesses,
and merchants;
o And, we have a range of strong, diversified and, in many cases,
unique assets, capabilities and relationships that can be
applied to both organic and adjacent business opportunities.
* * * * * * * * *
As we all know, the payments industry continues to evolve rapidly, and I
believe the next few years are likely to be a period of transformation. Our
history shows that, as a company, transformation is something we do very well.
Over 157 years we've been a freight company, a travel company and a financial
services company.
I believe our portfolio of businesses, along with the assets and capabilities
we've developed over the years, will give us exceptional leverage as the
industry evolves. Because, while our competitors are locked into traditional
models as an issuer, a bank or a network, our spend-centric strategy and
processor plus structure give us the flexibility to meet the needs of our
customers and generate growth more broadly.
In fact, as we move forward, I believe our evolution will have us looking less
and less like a traditional financial services company. At our core we'll be a
payments company, but we'll also be:
o A company that provides customized services for high spending customers
around the globe;
o A company that provides businesses with information, services and
expertise that allow them to more productively manage expenses and grow;
-19-
o And a company that helps millions of merchants gain access to the best
customers, while providing insights and marketing resources they can't
replicate elsewhere.
For several years now we've generated great momentum, with strong business
metrics and exceptional financial performance. We've benefited from a
disciplined, multi-year investment strategy and a consistent focus on growth,
both of which will continue in the future.
Given this focus, our growth potential, and the commitment and excellence of
our people, I'm confident that we're well positioned to sustain our
performance over the moderate to long-term. The payments industry will
continue to evolve, as will our company, but our commitment to growth and
shareholder value will remain unchanged.
* * * * * * * * *
As I mentioned earlier, one important source of our future growth will be our
Global Network Services business.
Now, before I introduce Peter, let me make one point. From time to time we get
questions about Global Network Services and how it fits into our current
segment reporting. GNS is a successful component within our Global Network and
Merchant Services segment, but it is not the only business in this segment.
This segment is primarily the results of our global merchant network,
including the merchant economics from the spending of both our proprietary and
our network cardmembers.
So, back to GNS. As you've seen from the growth rates we publicly report, GNS
is expanding rapidly and, over time, has become an increasingly significant
contributor to our consolidated business metrics and our financial results.
Those who follow our company know the history of the GNS business. While we've
operated GNS internationally for many years, until 2004 we were prevented from
entering the U.S. by Visa and Mastercard's anti-competitive bylaws. As soon as
these rules were struck down in federal court, we moved quickly on this
opportunity. We now have 7 GNS partners in the U.S., with large issuers such
as Citi, Bank of America, and GE.
-20-
GNS is important in its own right because of the growth it generates and the
contribution it makes to our earnings and returns. But GNS also brings another
critical element to our long-term strategy - it brings optionality.
As we look at individual markets and decide on our growth strategies, our
choice is no longer limited to "Do we launch a proprietary product here, or do
we not enter this market at all?" With GNS in our company portfolio we gain
flexibility.
We still have our proprietary option, of course, but now we also have the
choice of signing issuing deals with local partner banks to supplement our
proprietary business. Or the option of licensing a local partner as an
independent operator within a market. Or establishing a joint venture with a
partner, such as we've done in Switzerland and Belgium.
Each market is unique. And with GNS we can tailor our strategy on a market by
market basis in order to optimize our long-term growth.
Given how quickly the payments industry and individual markets can change,
having options ...... having flexibility ...... is critical to the long-term
success of any global company. With GNS we now have options we didn't have
before.
During its period of greatest global expansion and financial success, GNS has
been led by Peter Godfrey. Peter has been President of Global Network Services
for 7 years, and previously served as President of our proprietary card
businesses in Europe, Middle East and Africa.
Before joining American Express, Peter had a successful career with Midland
Bank and HSBC, and at one point served as Chairman of Mastercard in the UK
(his one blemish in an otherwise stellar career). Given his broad, relevant
background and his exceptional management and relationship skills, GNS is in
very good hands.
Peter .......
-21-
- --------------------------------------------------------------------------------
AXP FINANCIAL COMMUNITY MEETING
PETER GODFREY'S PRESENTATION
AUGUST 1, 2007
- --------------------------------------------------------------------------------
[FOR SLIDES ACCOMPANYING THIS PRESENTATION, PLEASE REFER TO THE AMERICAN
EXPRESS COMPANY WEB SITE]
Thank you Ken, and good afternoon. It's my pleasure to be here today, and give
you an update on Global Network Services.
As Ken mentioned, we last presented on this business in February of 2004.
Since then, we've made a great deal of progress. We've signed new partnerships,
strengthened relationships with existing partners, and driven strong growth.
Importantly, we view this as a journey. The economics of this business are
very attractive. We've laid a solid foundation. We have substantial
opportunities around the world. And we're proving to be an attractive
alternative to Visa and MasterCard.
Today, I'd like to give you a progress report and address five core areas:
o What is GNS?
o How does GNS support American Express' growth strategy?
o How does GNS bring value to our partners?
o What are the misconceptions about GNS? And finally,
o How do we view GNS's potential?
First, What is GNS? GNS is a business built around partnerships with financial
institutions that issue American Express-branded cards that are accepted on
our global network. Many of our partners also sign new merchants to our
network and manage those relationships.
Since GNS began in 1997, we've signed a strong and powerful network of
partners. As you can see from this slide, which features partners we've added
since 2004, we've significantly expanded our presence worldwide. We're present
in every region throughout the world - from developing markets to mature
markets; from leading national institutions to some of the largest regional
players.
-22-
I believe a good way to demonstrate our growth is to take a look at where we
were when we last presented to you, and where we are now.
As of the end of 2003:
o We had 79 partners in 89 markets - now we've grown to 112 partners in 122
markets.
o Our partners had launched 350 different card products - now we've
nearly doubled that to 640.
o GNS partners had more than six million cards in force then - now it's
nearly tripled to 17.6 million.
o And to give you a flavor of what this means, GNS cards now comprise more
than 20% of the Company's overall Cards in Force.
o In 2003 our acquiring partners had more than two and a half million
merchants on our network - that's now increased to nearly 4 million.
As these charts clearly show, our bank partners are a powerful addition to the
American Express network. Since 2003, Cards-in-force issued by GNS partners
have grown at a compounded annual growth rate of 32%. Spending on these cards
has grown by 39%.
In order for you to truly understand our GNS strategy, it's important that I
explain our different partnership constructs. Our partnerships are customized
based on local conditions and American Express' strategic plans in that
market. They fall into three main categories, and each provides an attractive
revenue stream.
Our most common partnerships are what we call independent operators, or IOs.
We have 56 of them around the world, in markets where we don't offer a
proprietary local-currency card. IOs issue local currency Cards in their
market, and usually serve as the local merchant acquirer and processor.
With IOs, our revenues come from a variety of sources, including:
o Card licensing fees
o Royalties on Cardmember billings
o Foreign exchange conversion revenue
o Royalties on merchant acquisition volume, and
o And in some partnerships, royalties on net spread revenue
-23-
These partners also help us to expand our local merchant coverage. This allows
both proprietary and GNS partner Cardmembers to use their Card more
extensively when traveling to markets where we haven't traditionally had a
large local presence. The benefit of GNS partners serving as the merchant
acquirer is evident in the increased inbound spending that we're seeing in
many parts of the world.
Next, we have 52 network card license partnerships, or NCLs. This is the type
of partnership we have here in the U.S. They help strengthen our brand
presence and gain market share in countries in which we have a proprietary
business and in some cases, an IO partner. NCLs are licensed to issue American
Express-branded cards, but American Express typically owns the relationships
with merchants.
With NCLs, GNS retains a share of the discount revenue earned on the
Cardmembers' billings. GNS also receives revenue from currency conversion and
licensing fees paid by the partner, and in some cases, royalties on net spread
revenue.
Third, we have joint ventures in Switzerland, Belgium and a handful of other
countries. In these markets, we've joined with a third party to set up a
separate business and taken a significant ownership interest in the entity.
Unlike the other two constructs, with JVs we share management, risk, and P&L
responsibility. Income is generated by discount revenues, card fees and net
spread revenues.
The details for each of the three models vary. What they have in common,
though, is the ability to generate very attractive revenue streams from the
volumes they process through the American Express network.
Some of these revenue streams may sound familiar to those of you who know the
MasterCard model. There are a number of similarities between MasterCard and
GNS.
The network is one of the strongest assets of American Express. And it's one
that's becoming more appreciated by those who have analyzed the payments
industry, and have focused on the relative value of the different components.
-24-
But I don't want to spend too much time on the similarities. Because, really,
it's the differences that represent such a compelling, competitive advantage
for us.
While we provide fundamentally consistent support across each of our
partnership constructs, we also provide customized support that goes above and
beyond what Visa and MasterCard provide. Support that varies from market to
market, and partner to partner. And support that allows us to earn broader,
and more attractive revenue streams than either Visa or MasterCard can collect
from their issuers.
The GNS model provides the added benefit of net discount revenue, at premium
rates, which we earn from both the issuers, and the merchant acquiring part of
the network. This accounts for about a third of total GNS revenues, and
underscores our sharp focus on the high-spend segment.
In fact, GNS is a key component of what Ken referred to earlier as the
"Processor Plus" model. American Express, through the closed-loop and spend
centric model, is unique in that it touches every element of the card payments
chain - issuing, acquiring, processing, and network.
But why is this important? Because it means the Company overall, and GNS in
particular, earns revenues from every aspect of the value chain.
The economics of the GNS model are very compelling. Our capital requirements
are modest compared to an issuing business. Significant costs, such as card
marketing & acquisition, Cardmember risk & fraud, servicing and rewards, are
borne by our bank partners. As a result, we operate with an extremely high
return on equity.
And, here's a point, I'm sure you have not missed. The majority of GNS costs,
roughly 85%, are fixed. Because most of the upfront investments have already
been made, little incremental expense is needed to bring on additional volume.
We know from experience that GNS is a highly scalable business.
As we continue to add incremental billings, the cost-to-billings ratio, as you
would expect, declines measurably. And more of the top line growth flows to
the bottom line.
As this chart illustrates, since 2004, GNS billed business has steadily
increased every year. In fact, our billings in the first half of this year
alone are almost equal to our full-year billings for 2005. At the same time,
our cost-to-billings ratio has decreased dramatically - by some 65%.
-25-
GNS will continue to become even more profitable as the business gains
additional scale, especially as our business in the U.S. and major markets
around the world continues to grow rapidly.
So that's how we operate, and how we make money. So how then does GNS fit into
the larger picture, and support American Express' growth strategy?
We've been one of American Express' fastest growing divisions for some time
now.
Let me try to put that into perspective. Last year, worldwide purchase volume
for Visa and MasterCard grew by more than 12%. By comparison, American Express
as a whole continues to consistently outpace the industry, growing in 2006 by
nearly 16%. And GNS has grown even faster still. As you can see, we grew last
year by 48%.
More importantly, as Ken mentioned, GNS allows American Express the
flexibility to tailor our business model to each market, and to determine a
construct that can generate maximum value for our partners, our partners'
customers, and our shareholders.
I think the best way to explain that flexibility is by example. Let's look at
a number of international markets - Brazil, Central & Eastern Europe, and
China.
Brazil is a good illustration of how we're leveraging both the Independent
Operator and licensing models.
Last year, we sold our issuing, acquiring and travel businesses and signed an
IO agreement with Banco Bradesco.
We see tremendous opportunity in this market. And in Bradesco, we have a
strong partner to help us maximize these opportunities.
Just 12 months later, with Bradesco as well as our NCL partners HSBC and Banco
Itau, we're extremely pleased with the results.
As you can see, year over year, Billed Business has grown by 22%. New Cards
Acquired has grown by 62%. And, as you can see, the partner is signing up new
merchants at an accelerated rate.
-26-
More importantly, we've reengineered the bulk of our costs out of the
business. As you'd expect, we've dramatically decreased American Express's
cost-to-income ratio, and greatly enhanced our profitability.
Let's take a look at the numbers:
o Our cost-to-income ratio has improved by 82%.
o And given the minimal capital requirements, ROE for the business
is now well in excess of 100%.
o Therefore, not surprisingly, our profitability has increased by an
impressive 124%.
Let me repeat that last point. Our profitability has increased by 124%. This
is a strong testament to the strength of our partnerships with Bradesco, HSBC
and Banco Itau, the creativity of our teams, the strength of the products, and
the flexibility of our model.
This is strong initial performance, and clearly exceeded our expectations. And
the opportunity is even greater than we had anticipated. One of the clear
lessons we've learned in Brazil is that even in markets where we've licensed
both the proprietary issuing and acquiring business, there's a compelling case
for additional banks to issue on our network. And we will be applying what
we've learned to other key markets around the world.
Across the Atlantic, in Central and Eastern Europe, we've utilized an IO
strategy to essentially go from a standing start to a thriving business in
just three years.
Before 2004, American Express had almost no presence in this region. Since
then, we've signed nine IO partnerships. Most notably, in 2005 our partner
Russian Standard Bank, one of the market's leading consumer banks, launched
the first local currency American Express-branded cards in that market.
This is a region in which consumers are just beginning to use plastic. And we
now have a solid distribution capability to grow with these developing
markets. We're capitalizing on their significant economic growth, as well as
increased inbound travel and tourism.
-27-
And we're already seeing solid results. Our partners have added hundreds of
thousands of new, loyal, affluent Cardmembers. For the twelve months ending
June 2007, Cards in Force grew by a healthy 43%.
We're also seeing strong gains in billed business, which also grew by 43%.
To help ensure we maintain this momentum, our partners have made considerable
gains in signing additional merchants to our network. As you can see,
locations in force increased by 27% in 2006.
Of course, no tour of our GNS international business would be complete without
commenting on China. By some measures, it's now considered the second largest
economy in the world. China is also another good example of our model
flexibility.
In March 2004, we announced our partnership with one of the country's leading
financial institutions, and one of the world's largest banks, the Industrial
and Commercial Bank of China, or ICBC.
With ICBC, we've secured a strong foothold in this important, emerging market.
Our partnership is an effective way to build widespread brand recognition and
increase card acceptance.
Building this recognition and acceptance is critical for American Express. Not
least, because Cardmembers are increasingly traveling to China for business
and pleasure, and Chinese consumers themselves are increasingly using plastic
for their spending needs.
In fact, in a country traditionally focused on cash, and to a lesser extent
debit cards, ICBC and American Express are making measurable gains in meeting
the growing need for credit products among Chinese consumers.
ICBC began issuing cards in just the last two years, leveraging its extensive
branch network to target the most affluent of their 170 million customers.
Since then, they have introduced an innovative suite of products. These
include a corporate card to better serve multinational corporations in China,
and most recently, a Staples co-brand card.
We are very pleased with the results so far.
-28-
For the 12 months ending June 2007, year over year, Cards in Force have grown
by 177%. Billings have grown by an impressive 286%. Even more important, our
average spend is 82% above the average spend on credit and charge products.
And we expect continued strong performance as we add additional partners in
China to further drive volume and share.
Of course, our growth story would not be complete without including the U.S.
I'm particularly pleased to update you on our business here. As you'll recall,
Visa and MasterCard's illegal restrictions shut us out of the U.S. for many
years. These restrictions were finally struck down by the courts in late 2004.
Although it's been frustrating to have been denied access to this market,
we're delighted to finally be able to offer both our partners, and their
customers, more choice in networks and products. We're already seeing many
opportunities emerge, and we're making solid progress with our partners.
As Ken mentioned, we've launched products with seven of the top financial
institutions in the U.S. Combined, these companies represent nearly 50% of
U.S. spend volume.
To drive growth in this market, we're using a two-pronged approach. We're
working to move more volume from their existing business to the American
Express network. And we're growing new business through compelling, new
products.
Before I get into the details, allow me just a word on disclosures. Because of
the confidential nature of our partners' businesses, and the fact that we've
only been in this market for a short time, I'm fairly limited in the
information I can provide. Still, I intend to draw you a clear picture of our
progress so far, which I think you'll find quite compelling.
We're already seeing solid growth across all critical business metrics.
Let's look at Cards in Force. As you can see, with our partners we are
steadily growing the business, month over month. For the 12 months ending June
2007, cards in force have grown by 83%.
We're pleased with this progress. Few metrics give us more confidence in the
future of this business than the expansion of our franchise through millions
of new partner Cardmembers.
-29-
And as you know, we're not helping our partners target just any Cardmember. We
continue to work with our partners to target the high-spending, affluent
customer. As a result, billings grew by triple digits over the last 12 months.
In fact, we track billings on a daily basis, to constantly measure the health
of our business. And I like what I see. Average daily billings are on a solid
upward trajectory, growing by 319% from 2005 through the first half of 2007.
Our partners, too, are enjoying the benefits of this growth. If you compare
their overall card growth to their American Express portfolios, the comparison
is striking. As you can see, last year, in aggregate, our seven U.S. partners
grew their American Express purchase volumes by more than 100%. In comparison,
their overall U.S. volumes grew by 9%.
But we know we must continue to earn this business, day after day. We know our
partners have a choice. Certainly, dedication agreements with Visa and
MasterCard have constrained that choice. So we're working that much harder to
deliver exceptional value to our partners, to make sure they choose our
network for their best customers.
In fact, at this point in our U.S. strategy, we look at it as if we're
building our business brick by brick. The strategies, the tactics, the
products, the partners - they're all the "bricks" to lay a strong foundation
for future growth.
One brick in our foundation is the wide range of portfolios we're penetrating.
Our U.S. partners have launched numerous products, giving their customers more
choice across a range of segments, including wealth management, rewards,
airline co-brands, retail co-brands, and affinity cards.
Notably, this includes portfolios we couldn't otherwise access, including the
thousands of Bank of America affinity groups. For instance, the World Wildlife
Fund, and universities such as Penn State.
Another brick is our focus on ensuring that American Express-branded products
are among the best the banks have to offer. We work closely with our partners
to develop products that have a superior value proposition to their Visa and
MasterCard options.
-30-
For example, Bank of America launched its American Express branded-card with
double points on travel and dining. Citi has launched a suite of Cards which,
through selected channels, offers superior value propositions. For example,
their new Platinum American Express-branded Card initially offers triple
points on all spend, and five times the points on everyday spend. And, the
American Airlines AAdvantage Card on our network initially offers a 20% higher
earn rate to existing cardholders.
Third, we're successfully working with our partners to help them enhance their
wealth management and private banking portfolios. I don't have to tell you
that these products target the banks' most affluent clients, with the highest
disposable income.
Three of the world's top financial institutions have made American Express the
lead product, and in some cases the only product, in their wealth management
or private banking portfolios.
For instance, UBS has made the Barclays-issued American Express-branded card
the core product in their wealth management program. Bank of America recently
launched Accolades, their most premium range of cards to date, on the American
Express network. And Citi recently re-launched their elite Chairman's Card,
also on the American Express network.
And fourth, our U.S. partners have opened up powerful new distribution
channels for American Express-branded Cards. These include our partners' Web
sites and direct mail capabilities, and most notably, the banks' retail branch
networks.
For example, Bank of America recently began promoting their American
Express-branded Card in its 5,700 retail banking centers.
Of course, our U.S. partners have only been issuing GNS cards for two years.
Despite this, we've made extremely good progress and continue to grow the
business day by day, month by month. Given the foundation we've built and the
growth we're seeing, we're confident about our future in this critical market.
One point I want to stress is that our growth, both in the U.S. and globally,
will not just come from signing new partners. Granted, we're always looking to
sign new partners who are a good strategic fit for the American Express
network.
But just as important is the growth we anticipate by deepening relationships
with our existing partners, further penetrating attractive portfolios, and
driving more volume.
-31-
We've only just begun to skim the surface with many of our partners. For
example, as I said, our U.S. partners account for nearly 50% of the overall
credit and charge volume in the U.S., or roughly 550 billion dollars. Each 1%
shift of this business to the American Express network would be equivalent to
more than 5 billion dollars. That's what I call opportunity, and we see plenty
of similar opportunities throughout the world.
So clearly GNS benefits American Express. But to be a truly sustainable model,
we must deliver value that goes above and beyond what the other networks
provide. Which brings me to the third question: How does GNS bring value to
our partners?
Traditionally, when people think of the value of a GNS partnership, they often
point to our premium discount rate and more favorable economics. But as I'm
sure you're aware, Visa and MasterCard are attempting to compete in the
affluent space and have introduced new products with higher interchange rates.
As a result, the gap is narrowing in some markets, particularly here in the
U.S.
Nevertheless, American Express still offers superior economics, and certainly
that's a strong competitive advantage. But let me emphasize that one of our
strongest advantages is our ability to drive additional spending. We've
demonstrated again and again that we're helping our partners capture
additional volume.
How is American Express helping partners drive additional spend? We're doing
so through four key assets, which I believe differentiate ourselves from Visa
and MasterCard:
o superior economics and the spend centric model
o our leadership in premium products
o our expertise in superior marketing programs
o and our focus on world-class relationships
First, we work with GNS partners to build new products designed to drive
customer spending. This is a major break from traditional bank strategies that
rely heavily on high revolving credit balances to drive profits.
With increased competition, banks need to maximize opportunities with ALL of
their customers. They need to be more focused on "transactors," or people who
pay off their monthly balances. Transactors don't generate spread income, and
haven't been the group that banks usually focus on. But there's a lot of
opportunity with this segment, because they tend to be high-spenders.
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Through our spend-centric model, many of our partners are increasing the value
proposition for their transactors, through richer rewards, special offers, and
other incentives. As a result, spending goes up. And banks are able to build
an attractive revenue stream.
With enhanced rewards and increased spending, our partner's American Express
Card gets moved to the front of the wallet.
Switzerland is an excellent example. Our partner Credit Suisse introduced a
SwissAir companion card proposition, in which their Visa and MasterCard
cardholders are offered a superior American Express option.
The proposition is simple but compelling - "Earn Miles Faster with American
Express." What does that mean? It means that Cardmembers earn between 25 and
50% more miles when they use their American Express Card.
The results are striking. In just over a year, we've seen significant
increases in transactions, and a significant shift of business from the
competition to American Express. For Credit Suisse, this has translated into a
lift in spend of 28% across the companion card portfolio.
And we're seeing similar results around the world. Take, for example, Westpac,
one of our partners in Australia. They introduced the Altitude companion card
suite, where their Cardmembers can earn up to three times as many reward
points when using the American Express option.
Not surprisingly, the results are very compelling. The accounts with the
American Express companion have 63% higher spend compared to the companion
accounts without the American Express option, substantially enhancing
Westpac's profitability and deepening loyalty with their customers.
These are just a couple of examples of our partners driving additional spend
and profitability - and providing more value and choice to their customers -
with their American Express-branded network products.
Our second competitive advantage is our outstanding expertise in premium
products. By leveraging our expertise and our world-renowned premium brand,
banks can better target and serve their affluent clients.
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Banks are making a determined effort to capture all of the financial needs of
their most affluent, high-spending customers. New premium cards are a key
component of their strategy.
We know banks have a choice. And more and more, they're looking to American
Express to help them develop their most premium products.
I've already talked about our success in wealth management and private banking
portfolios.
Another key pillar of our premium card strategy is airline cobrand cards.
American Express has a successful track record in developing compelling
airline cobrand products. This uniquely positions GNS to support our partners
in developing these highly profitable products.
To date, GNS partners have signed 22 airline co-brand card deals, featuring
prominent airlines such as Virgin Atlantic, Korean Air, and LAN in multiple
markets, to name just a few. Our partners have signed deals with additional
marquee airlines as well, which will be announced shortly.
One of the areas where we differ most strongly from Visa and MasterCard is our
marketing expertise. This includes our team's exceptional know-how in
developing spend and card acquisition programs, as well as our strong
relationships with merchants.
Because of our merchant relationships, we can develop exclusive incentive
programs to help our partners drive spend and provide more value to their
customers.
American Express Selects is an excellent example.
Selects is a global platform available to anyone carrying an American
Express-branded product. The program capitalizes on our closed-loop model and
offers Cardmembers high quality, unique merchant offers in 54 countries,
designed to drive more spend and enhance the Cardmember experience.
Selects features attractive discounts at hotels and restaurants, unique
experiences, and hundreds of additional offers around the world.
Try as they might, Visa and MasterCard cannot copy this program. They don't
have the global merchant relationships necessary to do so.
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Building on the Selects model, we've taken it one step further through entre.
Entre is our new premium marketing platform created just for our GNS partners.
It includes high-end merchant offers, a luxury lifestyle magazine, and a
comprehensive benefits Web site.
Our partners can customize all of these elements. They can mix and match the
offers, and embed their brand into the lifestyle magazine and Web site.
Partners can differentiate their program from other issuers. They can tailor
it to specific customer segments as well.
Conversely, Visa Signature and MasterCard WorldElite are off the shelf
platforms, providing every issuer essentially the same program.
Our partners are also leveraging our expertise to implement innovative and
effective marketing campaigns of their own.
Last year, IO partners alone spent well in excess of 100 million dollars
promoting their American Express products and the American Express brand. Some
partners have been very creative in the way they have done so.
For instance, in South Africa, Nedbank invested in a highly creative campaign
for their cobrand card with South African Airways.
You can't get much better than this - a South African Airways 737 branded with
the American Express card.
Our partners are also creating highly effective television advertisements. We
continue to be impressed with the smart, creative ways our partners are
promoting our brand in their local markets. Here are a few from our partners
in Israel, Brazil and Colombia, which I think you'll enjoy.
So there's one customer who made the right choice. And one smart dog who
understands the essence of our brand.
And by the way, Bradesco is seeing tremendous success with the Cirque du
Soleil promotion in Brazil. So far, our partner has seen more than 20 million
dollars in additional spend from this one promotion.
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All of this leads to our focus on becoming the world's best relationship
managers. We're partnering with the leading banks and financial services
companies in the world, then maniacally focusing on meeting their needs, and
the needs of their customers.
We have no intention of being like Visa and MasterCard, with thousands of
issuers.
Instead, we have a very personalized style. We have an outstanding team around
the world with rich experience across all aspects of card issuing, acquiring,
marketing, brand and risk management. We have strong relationships with our
bank partners, and work extremely closely with them to help them develop
superior value propositions.
Our commitment to building world-class relationships sets us apart from the
industry. We believe that no one else can match our skill, our expertise, nor
our commitment to our partners.
You can see how we're helping our bank partners reach additional elements of
their business. And clearly, they're helping us extend the reach of our
business. But there are a few areas where we still hear some skepticism. That
brings me to the fourth question I posed earlier, What are the misconceptions
about GNS?
I want to address four areas: cannibalization, brand dilution, weaker average
spend, and a reluctance to move to American Express.
One of the concerns we hear is that GNS is cannibalizing our proprietary
business. The fact is, GNS has served to complement our proprietary business,
not erode it.
In markets with a GNS and proprietary business, both are increasing Cards in
Force. This includes major markets around the world, such as Argentina,
Australia, Japan, Singapore, and the United Kingdom, to name a few.
And we're seeing the same in the U.S. As we ramp up our network business, both
our proprietary and GNS businesses continue to enjoy healthy gains in cards in
force and billed business.
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Our GNS strategy is designed to accelerate this trend.
Again, our aim is to gain share from our partners' existing businesses.
Reaching a broad new audience has been a keystone of our GNS strategy from the
start. We'll continue to focus on bringing additional high-spending
Cardmembers onto our network.
Second, as GNS works with more than 110 partners around the world, we continue
to hear questions about "brand dilution."
In the annual Business Week/Interbrand ranking of the 100 best global brands,
published only last week, American Express again ranked in the top 15.
We consider the brand to be one of our greatest assets. So do our bank
partners. They have proved to be strong stewards of the brand. They recognize
its power and appreciate its attributes. And as you just saw, clearly, they
are aggressively promoting our brand around the world.
Over the past ten years, we've successfully dealt with potential brand risk
across all of our partnerships. We've addressed this through a series of
rigorous guidelines that require partners to adhere to strict brand, product
and service standards.
And in the rare instance where a partner is not living up to our standards, we
will, and we have, terminated the partnership. We will not risk our brand for
the sake of market share.
We also hear skepticism that GNS partners' Cardmembers do not spend as much as
our proprietary Cardmembers. As you know, on average, consumers spend
considerably more on their American Express cards as they do on Visa or
MasterCard. We're seeing the same with network cards.
GNS remains focused on high-spending Cardmembers, helping to ensure our
partners target their best customers in a number of ways. For example, a
number of NCL partners receive financial incentives for higher average spend.
And many of our contracts require that the banks' American Express products
offer superior value propositions.
Not surprisingly, this is driving significant increases in spend.
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As a result, average spend on GNS partner cards is measurably higher than
average spend on credit and charge products in most markets.
In Switzerland, for example, average spend is 133% higher than the market. In
South Africa, average spend is 218% higher. We're seeing this trend even in
the early stages of our business in emerging markets, such as Poland, the
Czech Republic and China.
As you know, average spend generally increases with tenure. So we'll continue
to leverage the strengths of American Express, and build our partners'
businesses and Cardmember spending around the world.
Finally, there's a concern out there that banks may be hesitant to move their
Visa and MasterCard customers to an American Express card.
We continue to work closely with our partners. We deliver exceptional value.
And our partners see that value.
Ultimately, I believe there is no better proof of that value than the numbers
themselves. In the first six months of 2007, with our partners we've already
grown the business significantly. New Cards Acquired are up by 70%. Cards in
force are up by 34%. And billings are up by 61%.
The last question I posed at the outset was, How do we view GNS's potential?
We're seeing solid growth across all metrics. But as I said earlier, this is a
journey. And we're confident that we're well positioned to sustain this strong
performance.
Why am I so confident?
It's because we have solid strategies in place to grow the business and drive
spend. We're leveraging the core strengths of American Express, including our
spend-centric model, unique merchant relationships, and expertise in the
premium segment.
We've partnered with an exceptional group of institutions in the U.S. and
throughout the world. Our partners bring their local market knowledge,
exceptional brands, and extensive distribution networks.
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We've opened up sizable new growth opportunities through attractive portfolios
we could not previously access.
We continue to sign new partners, and have a number of marquee bank partners
in the immediate pipeline.
These opportunities are considerable in themselves. And they're even greater
when you consider the global conversion of cash and check to plastic and the
potential volume that represents.
And certainly, we're ready to take on additional volume. We have a highly
efficient network. So we can significantly ramp up volume without
corresponding increases in costs.
And we have a highly skilled and dedicated team around the world, poised to
take advantage of these opportunities.
This is why we at American Express are very optimistic about the tremendous
potential of our network business, over the short, medium and long term.
Thank you.
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