American Express Company - Analyst - Investor Day

American Express
Company NYSE:AXP
Analyst/Investor Day
Wednesday, March 25, 2015 5:30 PM GMT
CALL PARTICIPANTS
PRESENTATION
QUESTION AND ANSWER
30
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COPYRIGHT 2015, S&P CAPITAL IQ, A PART OF MCGRAW HILL FINANCIAL.
AMERICAN EXPRESS COMPANY ANALYST/INVESTOR DAY MAR 25, 2015
Call Participants
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EXECUTIVES
Anre D. Williams
President of Global Merchant
Services
Edward P. Gilligan
President and Head of Global
Consumer & Small Business Card
Issuing, Network & Merchant
Businesses
Jeffrey C. Campbell
Chief Financial Officer, Executive
Vice President and Member of
Operating Committee
Jeffrey Campbell
Kenneth I. Chenault
Chairman, Chief Executive Officer,
Chairman of American Express
Travel Related Services Company
Inc and Chief Executive Officer of
American Express Travel Related
Services Company Inc
Laureen E. Seeger
Executive Vice President and
General Counsel
Richard Petrino
Senior Vice President of Investor
Relations
Cheryl M. Pate
Morgan Stanley, Research Division
Christopher C. Brendler
Stifel, Nicolaus & Company,
Incorporated, Research Division
Christopher R. Donat
Sandler O'Neill + Partners, L.P.,
Research Division
Craig J. Maurer
Autonomous Research LLP
David Ho
Deutsche Bank AG, Research
Division
Mark C. DeVries
Barclays Capital, Research Division
Robert P. Napoli
William Blair & Company L.L.C.,
Research Division
Sanjay Sakhrani
Keefe, Bruyette, & Woods, Inc.,
Research Division
Stephen Martin
ATTENDEES
Unknown Attendee
Stephen J. Squeri
Group President of Global
Corporate Services
ANALYSTS
Bill Carcache
Nomura Securities Co. Ltd.,
Research Division
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Copyright 2014, S&P Capital IQ, a part of McGraw Hill Financial.
Presentation
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Kenneth I. Chenault
Chairman, Chief Executive Officer, Chairman of American Express Travel Related Services Company Inc
and Chief Executive Officer of American Express Travel Related Services Company Inc
Good afternoon, and welcome to Investor Day. Let me start by sharing our agenda. I'm going to begin
with my perspective on our growth opportunities and why I'm confident we can compete successfully over
the short, moderate and long term.
I'll also discuss the latest on the Department of Justice lawsuit in the co-brand marketplace, along with our
recent financial performance. Ed Gilligan and Steve Squeri will provide greater detail on their businesses
and Steve will also provide an update on our operating expense objectives.
Jeff Campbell will then cover our capital position, including our CCAR results and will also discuss our
financial outlook. We'll close, as always, with time for Q&A, and because this is a longer day, we'll also
have a break. As you can see, we're covering a number of important topics. Our objective is to give you
a sense of the actions we'll be taking to deal with our short-term headwinds. How, why and where we're
allocating our investments to capitalize on our growth opportunities, the strength of our overall financial
position and the ability to further improve our operating efficiencies. And also why we're confident we can
be in a position to return to EPS growth in 2016 and the targeted EPS growth in 2017.
Now I'll admit this is a lot of material to cover. But before we move into the tactics and details, I want
to first take a moment to give you my perspective on the foundation all of this rest upon, our business
model. Why it makes us different in the marketplace, why it represents such an important competitive
advantage and why it puts us in a position to capitalize on the transformation of payments and services
that's being accelerated by digital technology.
As I've mentioned to you before, we've been very focused on the digital transformation of our company.
The opportunities it presents and the challenges as well. As part of this, we meet frequently with
customers, clients, merchants, partners and tech companies in the U.S. and around the world. When I
speak with potential new partners, the conversations are not just about what they can do for us, but what
American Express is about and what we can offer them.
It's clear from these conversations that at times, we're viewed too narrowly because of the success of our
iconic charge card that sometimes how we are perceived, as a payments company focused on the affluent.
But to put our company in perspective, it's important to recognize that we were in business for 108 years
before the launch of the card. And over that extended period, we successfully innovated, we reinvented
ourselves time and time again, we've generated profitable growth, all objectives we remain focused on
today.
Our modern era of payments began in 1958, but it was built upon a foundation of values and a track
record of success that began decades before. As I talk about our company with potential partners, I want
them to understand the answers to some basic questions. What drives American Express' success? What
makes us unique in the industry? How can we partner? And I find that visuals always help. So here's how
I start. First is the fact that we have the largest integrated payments platform in the world. We're an
issuer, a network and a merchant acquirer. We're an end-to-end provider. Having this breadth provides
us with direct relationships with millions of card members and merchants and also provides us with very
rich data from both sides of the commerce equation. This platform is the foundation of our core payments
businesses.
In fact, the idea behind the launch of our first card product in 1958 was to build a platform to provide
services to frequent business travelers. This was a time well before apps and even before toll-free phone
numbers. Travelers were out there on their own, carrying around cash for hotel bills and their meals on
the road. It was envisioned at the time that our charge card and the infrastructure built around it could
be used by airlines, hotels and restaurants to connect business people as they travel, providing them
with services to make their trips easier. From that start, our card business evolved and the payment
industry evolved into the model we have today with issuers, networks and merchant acquirers, linking the
payments between customers and merchants.
Today, key competitors play in specific areas of this model, for example, Citi is a card issuer, Visa and
MasterCard as networks, First Data as a merchant acquirer, but the breadth and depth of an integrated
payments model at significant scale is ours alone.
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Now, Discover, of course, maintains a model similar to ours as an issuer, network and acquirer, but
their scale and geographic footprint are significantly smaller. Evolving our model over 50-plus years and
expanding it substantially over that time has allowed us to develop and leverage many resources that in
combination, are unique to us. This slide to me is the core of what makes us different, and it's foundation
of our growth potential. Because of our integrated payments model, we've built a wide range of resources
over time, assets, capabilities and relationships, that we've used to expand and grow. For example,
operating an integrated model has made it easier for us to expand into new geographies. It's helped us
move from charge to lending to merchant financing products, and now into alternative payments.
Our model provided advantages as we opened our network to bank issuers. It's helped us develop new
products for untapped customer needs. First, into segments such as small businesses and corporations
and now into underserved consumers. Our model continues to provide advantages today as we move
ahead with our digital transformation.
All of the assets, capabilities and relationships that we currently have become even more valuable as the
offline and online marketplaces converge. Take for example, our brand. Our brand is globally recognized.
It's viewed as aspirational. As the online and offline marketplaces converge, consumers and businesses
can be overwhelmed with a flood of choices. And in the midst of this flood, our brand stands out as clearly
and as strongly as ever because it's trusted, because it stands for service, integrity and security and
because it represents consistency.
Our goal has been to ensure that our brand is able to evolve and remain relevant to new segments. And
we've been successful to date in making it more welcoming and inclusive for several reasons. First, we
understand our brand's core values and we're very careful not to compromise them. We operate on the
principle that everything we do as a business should enhance the brand.
Second, as we're seeing with Serve or Amex EveryDay or Apple Pay, our brand is even more relevant in a
digital and social world. Trust, security and service are tremendous assets in an economy that increasingly
revolves around protecting financial data and personal information.
Third, when we put our brand into new segments, it evolves and updates. Its values and history are
refreshed and strengthened as we become more relevant to more people. Our brand is an important
asset among many assets and capabilities such as customer servicing, rewards and risk management
and relationships with cardmembers and clients, merchants and partners, all provide us with significant
competitive advantages.
All of these resources power our existing core businesses today and I believe they'll continue to do so.
They also provide the foundation for our newer adjacent opportunities such as loyalty coalition or Serve,
which leverage many of the resources shown here, making these businesses more efficient from the start.
In combination, these assets, our brand, our closed-loop end-to-end data, our millions of relationships
with card members, merchants and partners and our integrated payments model provide us with a robust
platform that we've evolved over time.
We've used these assets to connect our card members and merchants across the commerce cycle, and
we're bringing them to bear against the range of existing and new growth opportunities. Driving profitable
scale through the use of platforms isn't new to us. It's an approach we've taken across many aspects
of our businesses. For example, we've used our rewards and offer platforms to enable merchants to
incentivize buyer spending or as white label infrastructure for our key partners. Our reloadable prepaid
products use our Serve platform, which enables us to create and provide alternative to banking services,
to help meet the needs of a broad group of customers, including the financially underserved.
Our loyalty coalition rewards business is a platform that combines data from consumers and merchant
partners to help make the marketing spend of our partners more effective. This platform will run our
newly announced Plenti program in the U.S., and it powers our coalition reward programs in 5 other
countries.
We believe that by using the accelerating capabilities of technology and big data, we can evolve our
integrated platform even further. By expanding its scope to a wider range of new and existing partners, we
believe we can open up even more opportunities for growth.
Now one advantage of our platform is the breadth and depth of the information we have on our customers
and merchants. Not just the basics on who they are, but also the billions of transactions that represents
what, when and how they spend.
We know, for example, the category of goods or services they buy. Where they buy, the time of day
they buy it, whether they bought it online or off. Analyzing the data from our unique platform allows
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us to make connections, not just between buyers and sellers, but also between any partner company
and the customers or prospects they want to reach. Now given our history of connecting buyers and
sellers, applying new technologies and evolving our platform further is a natural step for us. Using our
proprietary assets to benefit partners all with extensive controls to ensure appropriate levels of privacy
and security can enhance their business and at the same time, increase our own scale and help diversify
our growth opportunities. Consistently driving growth over the short, moderate and long term is key to
driving shareholder value.
By effectively leveraging our assets, capabilities and relationships within our integrated payments model,
I believe we can drive growth in our existing businesses as well as open up new options for profitable
growth.
Now business growth is just one element of generating EPS. Along with business growth, we also have 2
other levers: the leverage we generate from our operating expense base and the strength of our capital
position, which allows us to return significant capital back to our shareholders.
We use all 3 levers to generate our EPS performance and profitable EPS growth over the moderate to long
term is our key goal. Within each of these categories, our position is quite strong and you'll hear about
each of them in detail over the course of our presentations.
Let me start with an overview of the growth opportunities that continue to exist across our core and newer
businesses. Whether it's plastic penetration opportunities in key customer segments and countries or
our continued penetration of a wide range of merchants and consumers, we believe our core businesses
continue to offer many opportunities for profitable growth. Through innovation such as OptBlue within
Merchant Services, or new products such as Amex EveryDay or through expanded digital engagement with
new and existing customers, we're continuing to grow our core businesses across a range of axes.
As you'll hear from Ed and Steve, we're successfully using multiple channels to grow our businesses,
acquiring new customers, including within new segments of prospects. Increasing our engagement of
existing customers by focusing on opportunities to increase our share of their spending and borrowing.
Offering differentiated value propositions within our premium base of Gold, Platinum and Centurion as
well as across mass affluent segments. And leveraging partners to help us across a range of activities
from merchant acquisition to digital engagement. At the same time that we're making substantial growth
investments across our core businesses, we're continuing to develop select newer businesses such as
loyalty coalition and Serve.
Since we have such a full agenda today, Enterprise Growth is not separately presenting, so let me quickly
cover some of the progress we're making across of these businesses.
We're continuing to see solid and growing momentum in Enterprise Growth and with our Serve software
platform, albeit, off of a small base. Along with Walmart, we're working with partners such as Target,
Intuit and Barclays Center to develop products and services that leverage our platform. For our alternative
to banking products, Bluebird and Serve, load volume from 2012 to 2014 increased over 300%, reaching
over $7 billion in aggregate to date. 40% of these funds came from customers directly depositing their
paychecks on these products. At the same time that our load volumes have climbed, we've also seen
merchant spend increase from 2012 to 2014 by more than 300%.
Now most of the merchant spend we're seeing is EveryDay spend, with customers using Bluebird and
Serve to shop at retailers, buy gas and pay bills. Again, this growth is off a small base, but directionally,
we're headed the right way. These products also continue to attract new customers to our franchise. 90%
of Serve and Bluebird customers are either new to the company or returning card members, 44% are
under the age of 35 and 53% are female, helping to further diversify our customer base.
The majority of our customers use Bluebird and Serve to do everything from pay their bills, set aside
money for future purchases, withdraw money from ATMs and spend both offline and on.
As we've talked about before, there is $25 trillion spending outside of credit and charge cards. So it's
encouraging to see that our customers are living their financial lives on the Serve platform. And that our
products, not only appeal to the underserved, but also more broadly, to consumers who are using Bluebird
and Serve as an alternative to banking.
The high levels of engagement we're seeing give us a clear advantage as we aggressively pursue this
opportunity. Now the material I've covered and the insights you'll gain from Ed, Steve and Jeff, all
reinforce my belief in our moderate to long-term growth potential. Our core payments businesses remains
strong with significant growth opportunities in the U.S. and globally, across multiple customer segments,
consumers, small businesses and corporations. Our digital transformation has opened up new avenues
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for growth, whether it's seamlessly connecting merchant offers to card members, meeting the needs of
underserved consumers, building sales and loyalty for merchants through the digital infrastructure of
our loyalty coalition business or leveraging our big data and analytic capabilities to benefit our partners
and our own company, while maintaining our strong commitments to privacy and data security. And
importantly, we have the capabilities, people and leadership to successfully execute against these
opportunities.
Clearly, we face some challenges over the next 2 years, but I'm confident in our ability to deliver against
the objectives we've set. So let me take a few minutes to revisit 2 significant developments that happened
last month.
Let me start with the Department of Justice lawsuit. Since the announcement last month of the judge's
ruling in favor of the DOJ, the legal process has continued. As required by the court, we filed potential
remedies on Monday as did the DOJ. Once the remedy is determined by the judge, we'll begin the appeal
process. As part of the appeal process, we'll ask for a stay so that our current merchant processes and
customer experience stay in effect, pending the outcome of the appeal.
Regardless of who won at this stage of the trial, it was highly likely that the outcome would be appealed
and we were always expecting a lengthy process. Fighting this suit was the right call in 2010 and
continuing to fight is the right call now.
Agreeing to the same settlement terms as Visa and MasterCard 4.5 years ago would have been
tantamount to a loss. We continue to believe the ruling last month was incorrect. We believe it will harm
competition by strengthening the 2 dominant networks. We believe consumers will not benefit and we
believe we should ultimately prevail.
Now let me turn to the co-brand marketplace, a topic that's also of interest to many of you. Last year, we
proactively chose to open renegotiations with a number of our existing Co-brand Partners well before the
end of our contracts. We took this action for several reasons. First was the competitive the state of play
in the co-brand space, which certainly wasn't going to become more benign in 15 to 18 months, the time
period when most of our contracts would have been renegotiated.
And second, we wanted clear visibility into our investment options over the moderate term. Renewing
early meant that we'd have lower economics in the short term, but we trade that off against more
consistent and sustainable growth in the out years. We considered all of this and concluded we wanted
clarity and commitment on our partnerships sooner rather than later. We wanted to be clear on our short
and moderate term economics. So we could plan accordingly, so that we could make appropriate growth
choices with a clear line of sight into the moderate term. We were able to come to terms with Delta,
Starwood, Cathay Pacific, British Airways and Iberia. But with Costco, the numbers didn't add up. We
couldn't accept their financial terms nor their contract terms, some of which would have meant taking on
more risk than we were comfortable with. And a renewal under the retired -- under the required terms
would have meant committing funds to lower investment returns at the expense of higher return options
on other products.
Now we did a great job for Costco during our 16-year partnership. We developed this business with them,
essentially from the ground, up. We built an innovative partnership and we consistently generated good
results for both companies. Our strength has always been to drive value by using our unique assets to
innovate and develop differentiated products and services, and we did so successfully. Costco's needs
evolve over time, and their current priority is to provide a credit utility for their customers. Because we
each had different objectives for the partnership and because we are a disciplined buyer with a focus on
the moderate to long term, we could not come to terms that were satisfactory to both of us.
I believe going forward, with early negotiations with Costco and now knowing the outcome, gives us a
benefit over the moderate to long term. We'll now be able to reallocate investment dollars into higher
expected return options to help drive our growth over the next several years. And while we don't expect to
replace Costco's volume in total over the short term, our priority will be on replacing the profitability from
this partnership.
In the short term, first and foremost, we'll work hard to continue a relationship with these customers to
capture their future spend and lend. These are not just Costco customers, they are American Express
customers with a great affinity for our brand, products and services.
Ed will discuss in this effort during his remarks. But I will mention now for competitive reasons, we won't
be going into detail on our tactics. As you'll see, our intent is to provide these customers with high-value
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proprietary products that meet their spending needs while providing them with high levels of benefits and
service they expect of us.
In this regard, we've learned a lot from our colleagues in Canada, who are going through a similar
transition with Costco with a 12-month head start. The end of our Costco relationship in Canada has led
to innovative product and marketing ideas and while very preliminary, we're encouraged so far about the
spending we're retaining in the franchise.
Now given the circumstances related to Costco, we could have chosen to reduce our overall growth
investments in 2015 to sustain our bottom line. But given our focus on the moderate to long-term, we've
opted to accelerate our investment spending across a range of growth opportunities within our U.S. and
international payment businesses as well as other growth areas. We believe this is the best option when it
comes to building momentum over the moderate term.
This was one of the drivers behind the lower EPS outlook we gave as part of our February investor call,
and which Jeff will discuss later on. As you know, we take our on average and over time EPS targets very
seriously. And while we always have to make trade-offs as we prioritize, our objective is to take actions
that are consistent with the long-term interest of our company and our shareholders.
Despite ending our Co-brand Partnerships with Costco and JetBlue, I continue to be very positive about
co-brand opportunities and our ability to compete. We continue to believe that profitable growth can be
generated from the right partnerships when there are aligned objectives. Our renewals of Delta, Starwood,
BA and Cathay are all evidence of the strength of our value proposition within the context of partnerships
that seek to focus on widespread customer value. And our new co-brand relationship with Charles Schwab,
which we announced last week, is also a good example of a partnership that can provide value to our
partner, to American Express and to our joint customers.
Now a number of significant co-brands in the airline, hotel and retail industries will be coming up for
renewal over the next 18 months. And our intent is to pursue those that meet our criteria. The end of our
Costco partnership also gives us the opportunity to expand our relationships with a number of other retail
partners. We've shown that we can compete and win in this space and will continue to do so.
So that's the context on Costco. It's a challenge. It will have a short-term impact on our growth trajectory,
but I believe it's a challenge that we can transform into an opportunity.
As I've told you before, I continue to have a great deal of confidence in our ability to grow and to generate
EPS growth that leads to long-term value for our shareholders. 2014 was a good example of how we
overcame some headwinds and still achieved EPS growth within our targeted range.
So let me start with our metrics. In 2014, we continue to see generally strong results across our core
business metrics. FX adjusted billed business grew by 9%, card member loans grew by 5%, up from
our pace in 2013 and ahead of many large card issuers, as you'll hear later on. And our write-off rates
improved again to 1.5%, the best across large U.S. issuers.
Now as I've mentioned before, our objective is not to always have the lowest write-off rate in the industry.
Our objective is to manage our risk appropriately as we take advantage of the many growth opportunities
we have across lending, both in the U.S. and across international.
Our goal is to prudently grow our profitability not to minimize our risk. And as you'll hear from Ed, we've
got a number of strong opportunities across the lending space. These business metrics led to good
financial performance in 2014. Our adjusted revenue growth was 5%, our adjusted EPS growth was 12%
and our return on average equity was 29%.
Now given the continued slow growth in the global economy, our revenue growth was below our on
average and over time target of 8%, but we were still able to achieve our EPS growth and ROE targets.
This performance is consistent with the potential growth scenarios I laid out for you at one of our earlier
meetings.
Some of you may recall this slide from 2 years ago. I took you through several hypothetical scenarios of
how we could potentially achieve EPS growth within our on average and over time targeted range of 12%
to 15%, even with revenue growth below our 8% objective. Depending on the results we achieved in the
areas of OpEx, provision, M&P and rewards, along with share buybacks we made, we showed that there
were several scenarios that had us achieving our EPS growth targets even with revenue growth below 8%.
While, these were hypothetical scenarios at the time, our actual performance has ended up very much
in line. From 2012 to 2014, our compounded annual adjusted revenue growth has been 4%. We picked
up 700 basis points from operating expense control and 400 basis points from share buybacks. Other
expenses, including taxes, provision and rewards outgrew revenues, which depressed EPS growth by 300
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basis points. This performance, achieving 12% compounded annual adjusted EPS growth with only 4%
revenue growth shows the flexibility we have within our business model. This flexibility continued even
when looking over a longer period, over 4 years. From 2010 to 2014, you can see that our performance
continued to be strong even though we were also challenged by the loss of our settlement payments from
Visa and MasterCard.
During this period, 6% adjusted revenue, generated EPS growth of 14%. This time, with favorable
performance from provision and M&P. Against the backdrop of a slow growth economic environment and
its negative impact on our billings and revenue growth, we've shown we can still generate strong EPS
growth.
And another important point here, we've done so while continuing to invest substantially in growth
opportunities across both our core and newer businesses. In fact, helped by the additional investments
made possible by the gains from our business travel joint venture and the sale of Concur in 2014, we had
a very high level of investment spending, which was allocated among opportunities with short, moderate
and long-term time frames.
Our performance over the last 4 years reinforces the importance of the 3 growth drivers I mentioned
earlier. While we've clearly faced challenges over this time, the flexibility of our model allowed us to offset
our headwinds and still generate strong EPS growth. We'll continue to use this flexibility over the next
several years, but we'll have other factors impacting our reported EPS growth, which Jeff will discuss.
We've also done well over this time frame on a relative basis. Our 6% revenue growth put us at the top
of our issuing peers, along with Discover and Capital One while many large issuers saw revenue declines
over this period. If we were to look at this comparison from the network side of the business, we'd see
that Visa and MasterCard's revenue growth rate has, in aggregate, outpaced us. Though their aggregate
growth did slow as did ours in 2014.
In terms of core earnings growth, we were at the top of the pack. Growth in our pre-provisioned PTI,
which excludes the impact of credit and reserve terms was 9% in the global basis and 7% for our U.S.
businesses. Except for Discover, all other large issuers were flat to substantially down. Contributing to
this performance since 2010 has been the gains we made in both billing volumes and loan business. With
general purpose charge and credit volumes, we saw share gain of 60 basis points from 2010 to 2014,
reflecting the increasing relevance of our card products and the growth of our merchant base.
Now as you know, we have a spend-base model rather than the lend-base model of most issuers. We do
generate balances, but they're an outcome of our spend-base approach. While lending is not the primary
driver of our economics, it is an important element of our growth and our investments here are driving
good results.
Our share of U.S. revolving credit grew from 6.1% to 7% at a time when a number of large issuers saw
contractions in balances, a key driver of the revenue declines I showed you earlier. The overall strength of
our performance from 2010 through 2014 can also be seen in a number of key profitability metrics.
Our return on equity improved from 27.5% in 2010 to over 29% last year. Our net income-to-revenue
ratio improved from 14.7% to 17.2%, while our PTI-to-billings ratio increased from 84 basis points to
88 basis points. Now it's noteworthy that we've driven this consistent upward trend even against the
backdrop of relatively modest economic growth, both in the U.S. and around the world.
And we've also achieved this performance in the midst of an aggressive competitive environment. Whether
it's new products issued by traditional competitors or potential new entrants into payments such as Bitcoin
or MCX, the marketplace has seen rapid significant change. Over the last 4 years, we've advanced a
number of these changes ourselves through innovations such as Amex EveryDay digital offers, Bluebird
and the use of pay-with-points at offline points of sale such as in New York City taxis or at McDonald's.
The competitive space has intensified, but our focus investment spending and thought leadership have
allowed us to continue to impact the marketplace, while also generating strong financial results. Because
of the overall flexibility of our business model, I continue to believe we're well positioned to deal with a
range of economic conditions.
As all of you know, I take a long-term view when it comes to leading this company. I think it comes
with the territory when you're heading up a company that's 165 years old. I do, of course, focus on our
quarterly and annual performance, but the trade-offs I make are done to strengthen our position for a 3-,
5- or 10-year plus horizon.
As you know, our company objectives are to generate on average and over time, revenue growth of 8% or
more, EPS growth of 12% to 15% and ROE of at least 25%.
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Now as I mentioned earlier, the most important priority is our EPS target. We also remain committed
to our 8% revenue growth target for the long term. While we won't be in this range in the short term, I
believe this objective is still appropriate and will drive hard to position ourselves to generate this level of
growth. I believe these targets remain appropriate for our business model and appropriate for generating
sustainable value for our shareholders. As you'll hear, our intent is to generate performance that returns
us to EPS growth next year while also positioning us for the longer term by remaining focused on the
transformation of our company.
So I've covered a lot and you'll be getting much more over the rest of this afternoon. At the end of the
day, I hope you take several points away with you.
First, that I feel good about the strength of our current position and the growth potential we have, that
our integrated payments platform is a competitive advantage. It's broad, deep and flexible. It drives the
growth of our current businesses. It's the foundation for our newer businesses. And by further leveraging
our assets, capabilities and relationships with new technologies, it can open up new opportunities for
growth.
And that while we're dealing with a number of headwinds, we haven't lost our focus. We remain on
offense, as you've seen over the last month with the announcement of Plenti and its roster of firstrate partners, the signing of a Charles Schwab co-brand, the signing of British Airways and Iberia and
generating exceptionally strong CCAR results.
We're focused on winning in the marketplace. And by effectively executing against our growth
opportunities, I believe that is exactly what we can to.
As I've said, driving growth is key. So to get a better sense of many of the growth opportunities and our
consumer, small business and merchant businesses, I'd now like to turn the stage over to Ed.
Edward P. Gilligan
President and Head of Global Consumer & Small Business Card Issuing, Network & Merchant Businesses
Good job. Good afternoon. Thank you, Ken. I'm delighted to be here today to discuss the growth
performance and potential of the core businesses of American Express.
As Ken said, we are the largest integrated payments platform in the world, processing over $1 trillion in ecommerce by connecting card members and merchants globally. We have a differentiated business model
that sets us apart, and one of the most admired brands in the world. We've had strong growth in revenue
and profits and our investments continue.
Our growth themes have remained consistent and our strategies are evolving. We're competing effectively
for premium U.S. consumers, and that customer base offers continued growth potential.
Small-business momentum is real and its opportunity is expanding for us. Small merchant acceptance is
accelerating as is our progress in international markets. Our announcement of a loyalty coalition in the
U.S. is a tangible example of us taking some of our core capabilities and applying them in an important
adjacency and creating new revenue for the company. And our digital transformation is engaging our most
savvy, younger customers, while offering our merchants new ways of working with us.
I'll quickly review each business and touch on our growth potential. All of our businesses have further
room to grow profitably, and it's for this reason that we decided to stop pursuing the renewal of the Costco
co-branded card. Renewing would have resulted in much lower returns and a very restrictive contract over
10-plus years. And renewal would have required more time, money and technology in a co-brand that had
a much lower returns than each of the growth opportunities I'm about to review.
The opportunity cost, therefore, of retaining Costco was too high and the continued growth of our core
businesses is a much better way to create sustainable shareholder value over the moderate to longer
term.
So over the next 30 minutes or so, I'll talk to you about our core business performance, our global
growth strategies and how we're transforming each of our businesses. I'll start by talking about how our
businesses have been performing. Just to remind you, we operate across multiple established businesses
like U.S. consumer, U.S. small business, also known as OPEN, international, which includes our proprietary
consumer and small-business issuing businesses and global network services, global merchant services
and global commercial services, which Steve will talk about later today.
And we're developing some new businesses that include Enterprise Growth and loyalty coalitions. Let
me first show you the size of the opportunity in the consumer and small business segments globally. As
you can see on the chart, there is a large amount of volume that remains on cash and checks, about $20
trillion.
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The entire pie has been growing coming out of the financial crisis and there are factors that are pushing
more of this spending towards plastic.
Timing is perfect. It's only a test, people. So I'll keep going.
The electronification of the global payment system and significant growth in both e-commerce and mobile
commerce means that more of that volume will move towards plastic and the associated networks, and we
should be able to capture more of that cash and check spending on our network.
This evolution -- this continued evolution gives us confidence that as we execute our strategies, we'll have
a continued runway for growth around the world in all of our businesses. Now looking now at American
Express. Today, we have a strong position in these segments. We're the #1 issuer in the U.S. based on
billed business. We're also the #1 U.S.-based issuer in international. Our merchant acquiring business is
#1 in terms of the global billed business on credit and charge cards, and we're first in global commercial
payments.
Each of our businesses plays a different role for the company. For example, Loyalty Partner, our new
business, and Global Network Services, deliver customers at scale while our issuing businesses have much
higher revenue per customer.
Looking now at how our reporting segments are performing, you can see that return on average tangible
capital is very healthy. If you consider this as a metric -- this metric a reasonable proxy for return on
equity, all segments are performing well.
Now how do our economic stack up against those of our principal competitors? To be sure, there are card
issuers who have more customers than we have. When you look at revenue per customer, among 6 of
the top issuers, it's clear we're doing well. One of the factors behind our strong performance is that our
average spend per card member remains well above that of our competition. Amex card members spend 3
to 4x more on average than do consumer spending on Visa or MasterCard.
The data here we're showing is based on our competitors' annual reports and other public data. So it's
not a precise comparison of American Express versus the competition. Some of our competitors include
nonissuing revenue. So for example, Bank of America's numbers include more than their credit card
revenue. It includes revenue from personal loans, car loans, aircraft loans. And JPMorgan Chase includes
revenue from their merchant-acquiring business as well. But the comparison should be enough to give you
a good insight into the value of our customers and the actual strength of our business.
So to sum up, the business segments we operate in, we have very strong growth fundamentals and we
have a strong position in each of them. Our various lines of business bring different sources of value to
the franchise, large numbers of high-spending customers, strong revenue per customer and very good
returns. These strong fundamentals in each of the businesses present opportunities for growth, and we
intend to continue to invest to get that growth.
Against that backdrop, I'd now like to go into more detail about how we plan to drive growth in each of our
main business lines. I'll begin with a look at the environment and how our particular assets are deployed
against these challenges. There are headwinds, we all know that. The macroeconomic environment is
still uncertain with the strong U.S. dollar and a potential increase in interest rates later this year. There
is increased regulatory activity in many parts of the world. There certainly is intense competition, and
technology is changing, is evolving, and as is consumer behavior. These challenges are real, but our
differentiated assets give us confidence we can continue to drive growth. Each one of these assets is
important on its own. But together, we believe they form an advantage that sets us apart from our
competition and helps us grow despite the challenging environment. And of course, if the economy does
grow faster, so will our growth prospects.
Our strategy is simple, and it's one that we execute across each of our businesses. Our investments
largely focus on 3 goals: first, to attract more new customers into the franchise; then get a greater share
of all our customers' wallets when they spend; and also to get a greater share of their lending when they
borrow. The foundation for these strategies is our global network of partners and our ongoing digital
transformation initiatives.
Each of these global strategies has a different investment profile. Our new customer acquisition strategy
has higher upfront investment costs, but it creates long-term relationships with very strong returns.
Increasing share of spend among current customers carries lower marketing investments than acquiring
new customers, and we have proven marketing techniques that have very high returns.
With our share of lend strategy, we incur higher capital requirements when we grow loans, but again, we
get good returns. And this strategy complements our spend-centric model. It also helps us diversify our
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revenue streams and deepen relationships with customers by meeting more of their borrowing needs. Our
investments in acquiring new customers is certainly paying off.
On the left, you can see that our global investment in attracting new customers over the past year has
grown by 12%. This was a key focus of our investments last year, and it's working. These new customers
are expected to produce 16% growth in billed business, which is the measurement of that amount of
spending on an account in the first 12 months of membership.
Acquisition of new customers is the single biggest investment the company makes and returns are
very good. The lifetime value to us of a card member acquired in 2014 is expected to be 4x the cost of
acquiring them, thus, the average 400% return on investment. Of course, this is an average and doesn't
reflect the return on every dollar, but I think you get the point.
Now let's shift to a view of the credit card issuing industry in the U.S. Here are the top 6 issuers. In terms
of purchase volume, while Chase is growing faster at the moment, we continue to grow at a very good
rate and we remain the clear leader. And our revenue growth from lending shown on the chart on the right
is also performing well.
As a result of these trends, we're growing revenue faster than the other 5 big issuers. We're very pleased
with our performance, which reflects the strength of our spend-centric model in an uneven economic
environment.
I just showed you our global acquisition results, now let's focus on U.S. consumers. Let me remind
you that when we evaluate the success of our programs to acquire new customers, the important early
indicator of profitability is the new billings they bring in during their first year with us. Over the past 2
years, the expected billed business generated from newly acquired customers is up an average of 11%
each year, and we had a particularly good year in 2014 when we increased our investments.
We have multiple channels for acquiring new customers, including traditional ones like direct marketing
and newer channels like digital. I can tell you that digital is now the largest channel we have, both in the
U.S. and globally. On the left, you can see that first-year expected billings from new customers acquired
through all digital channels increased at a compound annual growth rate of 14% since 2012. And on the
right, thanks in part to our Closed Loop and data-modeling capabilities, you can see the efficiency of
this channel is improving as well. This measure looks at the level of spending we're getting for each $1
invested in acquiring a new customer. So in 2014, every $1 we invested is expected to yield 24% more
first-year spending than a $1 was expected to yield in 2012. We feel very good about this channel because
it's growing and efficiency continues to improve, and we would expect these trends to continue.
Clearly, bringing on new card members is critical to accelerating our billings growth. Much of our
acquisition is built on existing products, but we also launched an important new product that is expanding
our customer base, the Amex EveryDay Card. This product broke new ground by attracting a new segment
that didn't think we were very relevant to them. They are busy multi-taskers who like the ability to earn
points by making everyday purchases and who value a no-fee credit card. It was launched just last April
and is already a success, bringing in more than 10% of the new accounts in the U.S. last year. Many of
them are people who like to revolve. They are twice as likely to carry balances versus other card members
in the U.S. And when existing card members added an EveryDay Card to their wallet, we saw an increase
in their total spending with us.
We're pleased with EveryDay's performance. It shows we can create growth by expanding our base to
attract segments that not -- that have not been traditional American Express customers but who meet our
credit standards. You can expect more of this fine-tuned segmentation in the coming years.
And I'd like to take a broader look for a moment at the U.S. premium segment. Here, we're showing
our estimated share of the premium spend of our card members and prospects alike relative to all other
issuers. We wanted you to see that despite some well-publicized efforts by some of our competitors to
go after these valuable customers, American Express has maintained our leadership in U.S. premium
spending.
Now I'll discuss some of the reasons behind our success. Our Platinum and Gold cards are 2 of the
important products in our premium portfolio, and I'd like to make a couple of points. Over the past 2
years, both products had maintained their average shares of customer wallets according to our estimates,
and spend attrition has remained stable at a very low level.
Our share of wallet with our Platinum Card members is 70%, and with Gold Card members, is at 55%.
Spend attrition in both products has held stable over this time frame in the very low single digits. We're
continuing to invest in these premium products to strengthen our relationship with higher spending card
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members. For example, by mid-2015, we will have opened 19 Amex-branded airport lounges around
world and we'll be adding new benefits to the Gold Card soon. We believe all our premium customers will
continue to be a profitable source of revenue for us and that there's plenty of room for growth as well.
This chart illustrates what I mean. When we create offers and services for card members who are less
engaged, we can move them up the engagement scale to capture more of their spending.
This will be a greater focus of our investments going forward. And we believe we have a very effective
and well-developed assets that we deploy in encouraging card members to place more of their spending
with us. Our Closed Loop data and our enhanced stability to analyze and use it has always provided us
with better information that we use to underwrite risk, reduce fraud and segment our customers to better
serve them. Now with the addition of Big Data and faster, better performing models, we have refined our
customer segmentation even further.
The result is that we can offer relevant products and services at a customer level that have good
probabilities of increasing spend per customer. These offers include, among numerous other techniques,
upgrading to another product or adding supplemental cards for example. And we use the multiple
channels at our disposal to reach our customers to make these offers, from mobile to email, websites to
call centers. Increasing our share of wallet with existing customers is an important source of growth, and
we feel very confident this strategy will play a bigger role for us going forward.
Now let's look at lending, another key avenue of growth. We have already started to accelerate growth in
our lending business. And as you can see here, our loan book has been growing at an average of 6% since
2012, outpacing the industry which grew at 2%. And we're growing faster while maintaining the lowest
write-off rates in the industry. And we know there's room for growth. On the left, this chart shows that our
U.S. card members are only placing in estimated 1/3 of their credit card borrowing on Amex cards and 2/3
of their credit card borrowing on competing cards.
We're going after this opportunity by enhancing our lending value proposition with a broadened array of
lending products and Lending On Charge features, by developing some innovative new products that will
appeal to these premium customers, by doing this all in a way that's consistent with our brand attributes
and at a appropriate level of risk, while producing good economic returns for us.
Now I'd like to build on what Ken said about Costco for just a few more moments. I'll start with our
Costco co-brand customers. Over 70% of their spending is on the Amex network outside of the Costco
warehouses. And as you may know, this out-of-warehouse spending is much more profitable than the
spending inside of Costco.
I know many of you have questions about our plans for these customers. And I hope you understand,
we're going to go into specific plans that we have to capture a meaningful amount of the non-Costco
spending and loans, but I would make a few points. First, we fully intend to offer any customer who
wants to remain an Amex customer the opportunity to do so. The fact that we went early to Costco for
renewal discussions has given us a full year now to plan for this transition. Second, our research over the
years has shown that these customers have a very high level of satisfaction with American Express. And
importantly, many Costco co-brand card members also have another Amex card, so they already have the
means to continue spending in our network. And for those who don't, we want to ensure that we make
products available to them so they can keep spending with us.
Many of these customers own small businesses, and as we'll discuss in a few minutes, we know how to
effectively serve their needs. And of course, we'll continue to explore new partnerships, co-brand and
others, that are true partnerships, that bring value to the customer and make economic sense for the
shareholders at both sides of the equation.
You probably also have questions about the sale of the portfolio. This is an important element in the
transition, for sure, but it's far too early to talk about it now. You'll be hearing more from us on this
subject whenever it's appropriate.
So let me summarize the headlines on our U.S. consumer business. We have maintained our premium
position in the U.S. and are growing revenue faster than any other large U.S. issuer. We've done this
by executing our 3 growth strategies I mentioned earlier, attracting new card members, getting more
incremental spend and getting more of their borrowing without compromising our risk standards. Despite
a highly competitive environment, our results demonstrate we are performing well and more importantly,
we have room for continued growth.
Now let's look at OPEN, our business designed to serve small businesses in the U.S. As you can see on the
chart, this is an important business for us and has been a very strong performer especially coming out of
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the recession. Our billed business has more than doubled since 2005, and now represents nearly 20% of
global billings. And we're maintaining our leadership in a very competitive space. This chart gives you an
idea of how the proportion of small business card spending in the U.S. that's on American Express small
business products. It's clear, our strategy of tailoring products to the specific needs of small businesses
and continuing to innovate has earned us a leading position in spending on these card products among our
competitors.
Looking forward, we're even more excited about the potential for growth in the small business segment.
It's estimated that nearly $5 trillion were spent by small businesses in the U.S. in 2014. And only about
10% of that spending is on small business plastic. The rest is mostly on checks and other forms of
payment.
On the right, you can see some of the categories where there's more potential to move small business
spending onto American Express cards. We've had good success with this strategy, and there's more to be
done.
Our strategies to accelerate growth in the small business sector are similar to our consumer strategy but
with a B2B focus. This is about attracting more businesses, capturing more of their spend, offering lending
in a selective way, and we are certainly pleased with the results. As you can see, our acquiring engine is
performing well. Over the past 2 years, billed business generated by newly acquired customers grew at a
compounded growth rate of 10%. We have invested more in acquisition, and results are good, particularly
in 2014.
The key to our success is our differentiated value proposition. On the left, you see that our small business
card members spend 2.7x more on our small business cards than small business customers of our
competitors do on theirs. Much of this higher spending is driven by our value proposition, a key element of
which is getting the right merchant signed up to enable B2B spending. Many of those merchants had not
previously accepted plastic at all. We also provide higher spend capacity via our charge cards and through
our service reps who are dedicated to small businesses, offering relevant rewards, giving them additional
value like our Small Business Saturday campaign, also play a role in growing their business and ours.
So to recap small business. We're the leader in servicing small businesses in the U.S. Acquisition is driving
strong growth. We have a proven approach to growing share of wallet by shifting spending from cash and
checks to our products. A new lending product constructs can help us grow this business. The opportunity
here is large and will be a focus for future investment as you might imagine.
Next, I'll talk about our Merchant business. Our most important focus in this business this year is to get
more small merchants into the franchise. We talked with you last year about OptBlue, our new initiative to
increase our small merchant network by working through partners. We have signed partnership deals with
14 acquirers in the U.S. and 11 of those have already launched. We're very pleased with the success of
this program so far. In many of our key international markets like the U.K. and Mexico, we're also adding
partnerships with acquirers to expand our merchant network.
Signing merchants where our card members want to shop helps drive billed business growth. And when
we sign well-known mainstream names, it reinforces coverage perception among customers and prospects
alike. Here is just some of the larger merchants we've added in the past few years, Menards, Dollar
General, In-N-Out Burger in the U.S., OXXO in Mexico, Ryanair in Europe, Tim Hortons in Canada.
The number of merchant locations continues to increase, growing an average of 10% annually over
the past 2 years. In the U.S., our OptBlue program is delivering solid growth among the base of small
merchants. Last year, when Anre Williams introduced the new program to you, he said that we expect to
increase our small merchant acquisition by 50% or more for the next several years starting in 2015. And
while it's early, we've signed more than 400,000 new small merchants at the end of last year, so we're off
to a good start.
We also have a lending strategy for merchants. While there are several players in this space, we offer
competitive products and we believe we can grow profitably over the next few years. Our Closed Loop
model gives us a competitive advantage because we already have a lot of information on these merchants.
This presents a growth opportunity and gives us another way to strengthen our relationship with them.
We've seen a measurable difference in satisfaction levels among small merchants who participate in this
program versus those who don't. The Net Promoter Scores of those who do participate are significantly
higher.
So here's how it works. We lend qualified merchants working capital based on their historical billions -billings volume with us. Essentially, it's an acceleration of their future American Express transactions.
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Since we went into this business, we've seen strong growth, particularly in 2014, where we funded nearly
$1 billion in loans and ended the year with more than $500 million in outstandings. This is a new business.
It's small, but it is growing. Now for comparison purposes, if you look at our performance versus one other
player in this field, OnDeck, which is a public company and they are a leading player in small business
lending, you can see that we ended the year with more outstandings than OnDeck, and they've been in
this business for more years than we have.
So to sum up this section. We have a growing global merchant network. OptBlue in the U.S. is accelerating
network growth among small merchants. And we're using similar strategies outside the U.S. We're signing
key merchants around the world, and our new Merchant financing business shows promise.
So if you step back and you look at our relationships with small businesses in general, you see we have
comprehensive relationships that cut across OPEN and the merchant-acquiring business. This growing
collection of small businesses is a very valuable asset for this company.
Now we'll shift gears to look at our international business, which is another source of continued growth.
We've been operating in international markets for a very long time and have a well-established and
respected brand. I'll point out that our international markets are facing some headwinds, a stronger dollar
and new EU legislation, that is starting to come into force this year, will present challenges. But we've
dealt with similar factors like these before, and we still feel confident about the prospects to grow in
international.
Here are some of the facts to help give you a picture of our international businesses. Our billings last year
reached almost $335 billion. We have approximately $57 million cards-in-force in 2014 outside of the
U.S. We operate in more than 130 countries, and we have partnerships with over 150 card issuers and
merchant acquirers around the world.
Our international markets fall into 2 categories, established and growth. Established markets like those on
the left drive most of our revenue and profits in international. We generally offer a full range of products
and service in these markets. The 7 we're showing here are the largest in international in terms of
revenue.
In growth markets like those on the right, we operate largely through network partnerships. These 4
markets here will play an increasingly important role in our future growth.
So how are we doing in international? Let's look at our billings growth in our priority markets, and you can
see that business is growing in all of them. And when we overlay industry billings in each market, we're
growing faster than the industry in 8 of the 11 markets. And I'll point out that in Mexico, our growth is
behind the rate of total card billings, but that trend is reversing itself this year.
I'll also point out, Canada's numbers only partially reflect the termination of our Costco co-brand. So we
expect a drop in volume in Canada this year.
We're particularly pleased with Japan, the U.K., France, Italy, China, where we're growing at least
double the rate of card billings growth in those markets. Our global growth strategy is well at work in
international, and we need to continue to invest in these businesses. We are still relatively small in many
of these markets and we need to achieve greater scale to capitalize on our full potential.
In the established markets, our focus is on digital acquisition, enhancing our premium value propositions,
driving lending growth and expanding small business products. In the growth markets where we operate
predominantly through franchise partners, we will continue to work to expand our partner network and to
capture a higher share of our partners' card businesses. I'll give you a quick look at how this is playing out
in the established market and in the growth market.
In the U.K., in established market, our billings growth was more than 3x that of the credit card segment
last year. Much of that growth has come from digital acquisition, and in the U.K., over 90% of billings we
acquire come through digital channels.
The U.K. has also successfully launched lending products, and Barclays recently became a new network
partner. We offer a full range of premium cards and promote small business spending with campaigns like
Small Business Saturday in the U.K.
China, on the other side, is a growth market where we operate through network relationships with 6 of the
largest Chinese banks. We have launched premium cards there to attract the growing number of affluent
consumers and are exploring more relationships.
So to close on this section. We're growing faster than the credit card segment in most of our priority
international markets. In established markets, we have a full range of products, and our business model
can be adjusted to respond to local conditions. We believe growth markets present a good long-term
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opportunity and offer strong returns on capital. We have an extensive list of partnerships that play a vital
role for us. We do recognize that Visa and MasterCard, however, have been growing faster than we have
outside the U.S. But for us, international is an attractive growth opportunity and we plan to continue
investing in these businesses and in these international markets.
One of our newest businesses, loyalty coalition, has continued to grow. Let me remind you how the model
operates. First, we assemble a group of industry-leading sponsors in the everyday spend categories.
Second, we enrolled consumers called collectors, who earn and burn points on purchases at sponsors.
And then the coalition captures valuable shopping data which is used to create personalized offers for
collectors. The sponsors in turn get measurable results and gain rich customer insight.
American Express runs the platform and also does the marketing for which we get paid a fee for the
results we deliver to sponsors. This is what we call performance marketing. We entered this business in
2011 when it operated in Germany, India and Poland through an acquisition then of a company called
Loyalty Partner. Since then, we've launched new loyalty coalitions in Mexico and Italy. And here, you can
see some of the sponsors in each of the programs. This is a whole new way for us to work with merchants
who see this as a great way to get mutual benefit from our loyalty platform.
Today, our coalition program is in almost half the households in Germany, and we continue to grow in
all these countries. We ended last year with more than 60 million active collectors in these international
markets.
Last week, we announced the formation of our latest coalition here in the U.S. called Plenti. On the right
side, you can see the coalition members. We think the time is right for this program in the U.S. We have
a critical mass of powerful brands, and there will be more brands to come. With our strong brand and
our long experience in rewards programs, we believe we have an excellent recipe for success. By this
time next year, we believe we will have more than 100 million active collectors in our loyalty coalitions
worldwide.
Partnerships, as you just saw on loyalty coalition, are another underpinning of our growth strategy. We
have almost 50 co-brands worldwide in our proprietary network and many more through bank partners.
We're particularly proud of our co-brand partnerships with Delta, Starwood, British Air, Iberia and Cathay
Pacific, which as Ken told you, all renewed early with American Express. And just last week, we announced
our newest co-brand in the U.S. with Charles Schwab.
There are also over 150 bank partners driving growth in our network. Last year, we achieved some major
milestones with U.S. bank partners when we launched issuing deals with both Wells Fargo and U.S. Bank.
And while we're still in the early phase of these partnerships, we're pleased with the progress so far.
I just talked about our coalition and merchant-acquiring partners. Now the list of our digital partners
continue to grow. We're very proud of this global network of unique partners with American Express. And I
do expect this list to grow as well.
Now let's move on to the last part of today's discussion with me, transforming the core. Digital
transformation is a key element in the foundation of our growth strategy. Digital is proving to be a
successful way to increase levels of engagement among our card members, particularly the younger,
affluent, high-spending consumer. It also gives us new ways of doing marketing with merchants.
Digital drives growth in a variety of related ways. Digital offers present new value to card members and
new marketing opportunities for merchants. Digital increases card members' use of Pay with Points and
brings new value to their Membership Reward program. We integrate Amex value into online commerce
and into new devices and form factors as they evolve. And our brand attributes of trust and security are
a critical advantage for us in the digital environment. And what's more, digital servicing is proving to
be an excellent service experience for our card members, and as I noted, digital customer acquisition is
expanding.
Let me give you some specific examples. Today, card members have received approximately $140 million
in savings through digital offers, and we have done digital marketing with hundreds of merchants. This has
proven to be a great way to drive more business to merchants and strengthen our relationship with them.
New Pay with Point partners like Uber, McDonald's, New York taxis, combined with existing ones we have
like Amazon and in our own app, have extended our brand and provided another engagement channel for
our customers, and it gives them more choices to get value from their reward points and we know our
customers value having options. Integrating seamlessly into one, looks like Apple Pay makes using our
card easier and will drive more billings.
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Security and service have always been hallmarks of American Express, and they're even more relevant in
the digital world. One of the applications of our Closed Loop data has been early detection and stopping
fraud. As a result, our fraud rates continue to be half that of Visa and MasterCard, and that creates a more
secure environment for consumers and merchants alike to engage in digital and now mobile commerce.
As Ken explained, American Express is a platform that enables commerce, connecting buyers and sellers.
And as partnerships are a key strength for us, they are also proving to be a very effective way to extend
our platform via our proprietary technologies and APIs we have built over the past few years. We have
formed partnerships with companies we have never worked with before but which are part of our card
members' lives.
We're transforming the core of our business. Our multi-pronged approach is increasing our relevance with
digitally savvy card members, who are, as a result, more engaged with us. This bodes well for growth
as these card members will become the core of our franchise in the future. We are the world's largest
integrated payments platform. We processed $1 trillion in volume last year, and we plan to keep extending
that platform even further through connections with some of the world's largest digital brands.
And I'll close now with a few thoughts. Despite the challenges I mentioned earlier, we are confident in
our growth plans. Our opportunities and strength far outweigh the challenges we're facing. We have
maintained our leadership position with premium consumers, offering benefits and services best suited to
their needs and preferences. Our U.S. consumer business continues to offer strong growth opportunities.
Small businesses have been an important part of our success and will, we believe, play an even larger role
in fueling future growth. Our international businesses are growing faster than total credit card spending
in their respective markets in most cases, and they will continue to be a focus for investment for us. Our
merchant network is growing, and loyalty coalition businesses are off to a very good start and promises to
be another profitable source of revenue for the company.
So I am confident about the future growth potential. Innovation is creating new ways to engage customers
and grow revenue. Our enviable portfolio of businesses, our premium customer base, our Closed Loop
platforms, that bring together buyers and sellers, are clearly significant advantages for us.
I hope I've demonstrated that we can get good returns from our investments, and we do, and that
we have flexibility in how and where we invest at a time of rapid change in the industry. And we have
a multitude of choices. We optimize our investment decisions based on what will bring sustainable
shareholder value over the moderate to long term. Our confidence is founded in our experience, our track
record of success, the assets we deploy and the opportunities that we see ahead of us in each of our
businesses. And as I look around at our competitors, both traditional and new, I believe we have a great
hand to play. So thank you very much.
Now I'd like to turn it over to Steve Squeri.
Stephen J. Squeri
Group President of Global Corporate Services
Thanks, Ed, and good afternoon, everybody. I'm going to cover 2 topics today. First, I'll talk about the
growth opportunities in corporate payments, and second, I'll discuss our operating expense objectives for
the company, which as Ken mentioned, continue to significantly add to our EPS growth.
Let me start by giving you a little background about our corporate payments business. We invented the
corporate card and began issuing them nearly 50 years ago. Today, we are the industry leader, and Global
Corporate payments represents 18% of the company's total charge volume. 63% of the Fortune Global
500, including many of the biggest names in the business world, are American Express clients. We have
nearly 7 million cards-in-force, almost 200,000 clients, and over 1/3 of our spend volume comes from
international.
The average spend per card is the highest of all our card products, with 52% of spend in T&E, which is
twice the average of the rest of the American Express card portfolio. This spend helps drive merchant
acceptance and demonstrates our value story by delivering higher-spending card members to our
merchants.
We've been quite successful growing our corporate payments business. In fact, billed business has more
than doubled since 2005 by growing at a CAGR of 9%.
A big part of our growth story is our demonstrated ability to bring new clients into the franchise. Spend
from new signings has increased by a CAGR of 14% since 2009. Our charge volume is becoming
increasingly more diversified as well. Our ability to provide more control around spending is why more of
our clients are choosing to put their B2B spending on our products. B2B spending has grown at a CAGR of
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19% since 2009. This diversification is important because it represents a great opportunity to significantly
expand our relationships with clients, which aids in client retention.
We believe we are well positioned to sustain growth in this business globally because of our unique assets.
We have a global footprint that gives us scale. We issue cards in over 200 countries and territories around
the world and have a local on-the-ground presence in many of them to serve clients where they do
business. We have a track record of innovation. We have a diverse product set, giving us the ability to
meet a large portion of our clients' total expense management needs, from payment products for business
travelers and procurement managers, to B2B purchasing solutions to consulting services.
American Express' unique Closed Loop provides our clients with actionable insights through our rich data,
enabling them to make better decisions.
Finally, our award-winning American Express customer service, powered by relationship care, gives our
clients and their employees peace of mind wherever they are in the world.
While we already have a strong position in this business, the opportunity for further growth is quite large.
According to McKinsey, corporate payments is the fastest-growing card segment in the payments industry
globally. Ed spoke earlier about the success we've had with small businesses. But that's only 1 piece of our
overall commercial payments business. We are, in fact, the leading issuer across commercial segments
on a global basis. And we can provide solutions to businesses at any point in their life cycle, from their
beginning as a small business, up to becoming a global enterprise. Middle market is the largest segment of
our corporate business globally, and the potential for future growth is significant.
We are leveraging our commercial platform to help mid-sized companies grow. Let's look at our middle
market growth trends. Since 2011, middle market billed business has grown at a 10% CAGR and revenues
have grown at a 9% CAGR. Not only is this our fastest-growing corporate segment, it is also the most
profitable. Variable margins in our middle market business are 33% higher than the margins in our large
and global account segments.
Growth in our middle-market business has been strong, and given the scale of spending done by this
segment globally, there's a lot more opportunity to go after. Over the past year, we've launched a renewed
strategy to accelerate growth, focusing on leveraging our unique assets to achieve 3 goals: First, to
acquire new clients; second, to increase share of spend with current clients; and third, to continue to
innovate to enhance our value propositions for both new and existing clients.
The universe of middle-market companies around the world is very large and growing rapidly, so in terms
of acquiring new clients, we're targeting our efforts on those geographies that represent the highest
potential for growth, and we're increasing our acquisition efforts in those areas. For example, we're
significantly increasing our sales resources in the U.K., Germany, Mexico and Japan.
Given that we have a global footprint and large scale, there is significant opportunity to further penetrate
our client base. To increase share of spend with current clients, we're cross-selling additional products and
services, expanding spend in B2B categories and we're using our close loop capabilities to provide insights
that help our clients make better management decisions.
In the U.S., we have our largest middle-market client base. We're using our big data capabilities to identify
those clients with the highest spend potential and have reallocated resources to increase share of spend.
Finally, we are continuing our track record of innovation by investing in the development of new products
and services that are particularly relevant to both existing and new middle-market clients. In Germany,
we've introduced the very successful e-invoicing product that can be used as a tax receipt. In Italy,
we have launched vPayment, a single-use virtual product that can be used to improve reconciliation
and control. And in Japan, where high-speed trains are the predominant form of domestic travel, we've
launched a co-branded corporate card with Central Japan Railway Company.
Our early results in pursuing this strategy are very encouraging. To give you a sense of our progress,
in 2014, our middle-market build business grew 12% globally and proprietary markets grew 26% in
Italy, 22% in Japan, 21% in the U.K., 18% in Mexico and 11% in the U.S., where we are building off a
substantial base. Moving forward, we'll accelerate this middle-market strategy by focusing on the highest
potential geographies globally.
In summary, commercial payments is forecasted to be the fastest-growing segment in the payments
industry. We are the leader in corporate payments globally. Middle-market is our most profitable and
largest global growth opportunity. We are increasing investments to further enhance our global corporate
payments platform so we can increase share of spend with our current clients and attract new ones.
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That completes our growth strategy discussion, both the businesses that Ed talked about and the business
that I run. And now what I'd like to do is turn to our plans for sustaining operating expense leverage.
Ken spoke earlier about the impact OpEx control has had an EPS growth. In fact, in 2014, 700 basis points
of our 2-year compounded annual EPS growth rate was driven by OpEx control. I will now review how
we've created this operating expense leverage to help drive EPS growth.
Let's look at the operating expenses by first taking a step back to review what we've done over the past
few years. In February of 2012, we told you that operating expense growth would be less than revenue
growth for the following 2 to 3 years. At the following years financial community meeting in February of
2013, we refined that statement, committing to annual operating expense growth at less than 3% for
2013 and for 2014.
As you can see, we more than met the targets we set in 2012, 2013 and 2014. While we've held adjusted
OpEx flat over the past 2 years, there is more to the story. As not all OpEx is the same, in fact, when we
dig deeper, you'll see a fundamental shift in operating expenditures. As you know, we completed the joint
venture of our global business travel unit in the second quarter of last year, so before we look closer at the
OpEx performance over the past 3 years, let's exclude GBT expenses to establish a baseline going forward.
In doing this, it is important to note that the GBT's operating expense performance was better than
Amex's OpEx performance overall.
Overall, adjusted operating expenses, excluding GBT, grew at a CAGR of 0.6% since 2011. I'll break out
the operating expense detail, excluding GBT, into the same 4 buckets I showed with you in February 2012
and February 2013.
I'll start with global services OpEx. This category includes all nondevelopment technology costs as well as
costs associated with customer service, credit and collections, global security and support functions like
procurement and real estate. Adjusted expenses in global services have gone down by a CAGR of 2.2%
and are 6.5% lower than 2011.
Adjusted all other OpEx, which consists of staff and support groups as well as business unit OpEx,
decreased at a CAGR of 2% and is 6% lower than 2011. Part of the decrease in this category was driven
by the sale of our publishing business in 2013.
Together, global services and other OpEx comprise what we call run the business operating expenses.
These adjusted expenses accounted for 71% of total adjusted OpEx in 2011, dropping to 66% in 2014.
Our reengineering efforts over the past 3 years have enabled us to reduce our run the business cost while
absorbing higher business volumes and salary increases.
Let's now look at 1 of our 2 investment OpEx buckets, technology development, which covers expenses
related to building and enhancing platforms and developing products and services. Since 2011, our
adjusted technology development spending has grown by a CAGR of 3.1%, as dollars, which may have
been targeted to traditional marketing and promotion, have moved to technology. Going forward, we
expect to increase our reliance on technology development. However, we expect overall technology
development spending to increase only modestly as our platform focus and delivery transformation efforts
to help us become more efficient will enable us to keep cost lower, and I'll speak to these initiatives in a
bit.
Now let's look at adjusted investment OpEx, which has grown by a CAGR of 9.5%. This increase reflects
deliberate decisions we've made in several areas. We've invested in new business initiatives such as
Serve and our loyalty coalition business. We've increased investments related to acquiring and retaining
our customers, including sales force and client management resources. We have made infrastructure
investments, including control and compliance, global banking, operational risk and Basel. Together,
technology development spending and investment OpEx spending make up total investment OpEx. These
adjusted expenses accounted for 29% of total adjusted OpEx in 2011, increasing to 34% in 2014.
Now that we've categorized our operating expenses into 2 categories, run the business OpEx and total
investment OpEx, let's take a look at how these components have behaved since 2011.
Since 2011, we have decreased our overall run the business OpEx by 6% while increasing total
investment OpEx by 22%. As you can clearly see, we have not taken a one-size-fits-all approach to OpEx
management. The sustainable leverage we've creative in reducing run the business OpEx has enabled us
to increase investment OpEx while still meeting our overall invest -- expense targets.
Let's dig a little deeper into the dynamics of total investment OpEx. The first dynamic is the ongoing
digitization of our business, which, as I mentioned earlier, can cause us to shift investment dollars from
traditional marketing and promotion into technology development. The second dynamic is that investment
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OpEx has a life cycle to it. It starts with initial spending and moves to a quick and steep ramp up before
leveling off. For example, while we've significantly ramped up spending to launch our Serve and loyalty
coalition businesses as well as strengthening control and compliance, global banking, operational risk and
Basel, we expect this spending to level off. We can then replace their significant growth rates with new
investment opportunities that are ready to ramp up.
As Ken mentioned earlier, given the business challenges we face, we need to continue our sharp focus on
containing operating expenses while at the same time, continuing to invest in growing our businesses.
With that in mind, today, we're extending our commitment to keep adjusted operating expense growth
below 3% in 2015, with the intent of continuing to grow investment OpEx while reducing OpEx associated
with running the business. This target does not take into consideration any restructuring charge we may
take.
This leads to 2 key questions. First, can we continue to create sustainable leverage from operating
expenses to fund investments for growth? And second, at the same time, can we also continue to have
OpEx control drive EPS growth? The answer to both questions is yes. There are 2 ways we can do this.
First, given the life cycle investment -- given the life cycle of investment OpEx, we have an opportunity to
reposition some of our investment OpEx to new initiatives. Second, we can continue to generate savings
from run the business OpEx. Both of these will result in sustainable leverage from operating expenses that
will enable us to continue to invest in our business and drive EPS growth.
To achieve sustainable OpEx leverage while creating platforms for growth across the company, we've taken
a 5-step
[Audio Gap]
Becoming more global in nature and enables greater speed to market. And fourth, we've evolved with
superior service means, both philosophically and by building capabilities to serve our customers where and
how they want to be served. Going forward, we're looking to use our service platform to drive growth. And
finally, we'll continue to empower our employees with the tools, processes and facilities that make it easier
for them to do their jobs.
This 5-step approach has enabled us to reduce costs, absorb incremental business volumes and build new
capabilities while enhancing customer satisfaction. Going forward, we will continue to deploy these tactics
across the company.
Let's start with the internal mindset. To date, we made great progress in identifying and eliminating waste
from our processes. By waste, we mean expense or effort resulting from unnecessary demand, over
customization, duplication, rework and the underutilization of resources. Here are just a few examples
since 2010. We've reduced the American Express supplier base by 75%, creating economies of scale as
well as improving our control environment. We've decommission an average of 1,500 servers a year, while
also reducing average image cost by 29%. And we've taken actions to optimize our use of real estate by
increasing workstation capacity in our facilities by 38%.
Across the enterprise, we are taking a more holistic end-to-end view of our business processes from
how we design and market products to how we service them, in order to better identify opportunities to
make them more efficient and more effective. Let me talk about 2 initiatives underway, which are prime
examples of this end-to-end mindset.
The first is reducing unnecessary call volume. We receive millions of calls from customers every year, and
while we are delighted to speak with each and every individual, we know that in this digital age, many
of our customers would rather answer -- have their questions answered and resolve their issues without
having to make a phone call. So in approaching this from an end-to-end perspective, we're looking at the
drivers behind the calls to determine how best to reduce and redirect as many calls as possible.
The second companywide end-to-end initiative currently underway is increasing customer enrollment in
electronic statements. Over the last 4 years, the number of customers who receive electronic statements
has increased by 9 percentage points. But we still have a big opportunity to drive adoption higher, which
would significantly reduce paper and postage cost. Making improvements in these 2 areas would provide
significant operating leverage for the company. In fact, we estimate that for every 10% reduction in paper
statements and calls handled by our customer care professionals, we could save over $70 million.
We've created global networks by consolidating organizations, globalizing key processes, optimizing our
footprint and enhancing capabilities. In 2009, we combined our U.S. and international customer service
organizations to create World Service. Since then, we've integrated our new businesses, including Serve,
loyalty coalition and personal savings into World Service. Additionally, we have globalized and created
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centers of excellence for several of our key internal functions, including real estate, procurement and
financial operations. On an ongoing basis, we are reevaluating our footprint across the various networks
to ensure we have the right number of resources in the right places at the right cost. For example, since
2010, we've reduced the cost per employee in World Service by 13%.
We have also introduced new and enhanced tools to help our people be more efficient and effective.
One example is the command centers we've created on our global credit administration group, which
enabled us to continuously monitors staffing, service and inventory levels to maximize productivity. To
date, we've gained significant operating efficiencies by creating scale through the globalization of key
businesses and processes, but there's more we can do here. We're evolving our networks from being
global on an organization chart to being truly integrated global networks. What do I mean by that? A
global-integrated network is one that operates with a global strategy that is executed through integrated
platforms, processes and capabilities, thereby enabling volume to easily move throughout the network.
For example, through the creation of specific language hubs in both our customer service and credit
networks, we can service certain calls regardless of geography. In our credit and collections network,
we have now begun to service Spanish-speaking calls from around the globe out of Mexico City and can
handle calls from Australia, New Zealand -- and New Zealand, in Phoenix, Canada and the U.K. The end
goal is to be able to route any call to the next available agent regardless of geography. This will give us
the ability to balance volumes and gives us greater cost flexibility in how we service our customers around
the world.
Ken talked about how Amex has been a platform company since we launched our first card product in
1958. As a platform company, the outside world interfaces with multiple American Express technology
platforms, each of which is made up of a combination of applications and infrastructure. Successful
platform companies not only need to have products and services that customers want, but they also need
to be able to easily connect and add value to other platform companies and partners.
To continue our evolution as a platform company, we've put together a companywide blueprint which links
our technology systems to the business processes they support, informed by our platform blueprint, we
will continue to rationalize and consolidate technology systems, which will ultimately enable us to be more
cost-effective and more approachable. In addition, we will enhance and create new technology platforms
as business needs change.
Having a suite of global platforms gives us the ability to capitalize more quickly on the opportunities
that drive sustainable value for our customers, for business partners and for American Express. Let me
give you an example of how a global technology platform with a clear strategy can help drive growth as
business needs change.
Let's look at our authorizations platform. When we launched our first card product in 1958, we produced
a booklet that was sent to merchants so that they could look up invalid and fraudulent card numbers prior
to accepting a charge. By the 1960s, merchants called one of our many regional operating centers to
speak with an authorizer, who used our newly computerized authorization platform to improve charges.
With the introduction of magnetic stripe in 1972, we enabled merchants to integrate directly with us via
an Amex terminal. Our authorizations platform has always been at the epicenter of the close loop. As the
technology powering this platform evolved, so did its capabilities. Today, it enables the majority of the
digital capabilities and partnerships we've introduced, including Apple Pay, fraud alerts, Amex Offers and
pay with points.
Underpinning everything we do is service. Delivering superior service is the hallmark of our heritage and
is a key differentiator. Our service ethos in American Express is called relationship care, which at its core
is about serving customers not processing transactions. Our global integrated servicing network creates
millions of brand ambassadors, customers who tell their friends and families about how much they like
the products and services we offer. So how do we know? We use Recommend to a Friend to measure
satisfaction, and as of December, this measure reached an all-time global high and was 25 percentage
points higher than in 2009. Superior service not only makes our customers happy, it also drives business
growth. Highly satisfied customers are more engaged, they spend more and they attrite less. Based on
our most recent global analysis, promoters spend approximately 16% more annually on average than
nonpromoters. And promoters attrite from the franchise approximately 4x less than nonpromoters.
The relationship care delivered by our frontline customer care professionals is a competitive advantage,
but service is not static. We're committed to evolving relationship care to bring it to the next level by
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expanding our use of digital channels for servicing customers and using our service platform to drive
growth.
Starting with digital. We need to go where customers are and where they want to be served. One example
is the digital servicing strategy we've been implementing in our global fraud network. Results to date
have been excellent. Through the introduction of text and e-mail alerts, we've been able to resolve fraud
concerns faster and have improved the customer service experience.
Since 2012, the number of customers who use digital self-service tools to address fraud concerns is
up 11 percentage points. Also since that time, Recommend to a Friend score have improved by over 7
percentage points, and today, 75% of card member fraud concerns are resolved within 24 hours. As we
expand this digital approach to more countries, we expect to see similar improvements in efficiency,
effectiveness and customer satisfaction. Looking ahead, we want to leverage our service platform to
accelerate growth. Our customer care professionals can help acquire new customers and provide cross-sell
opportunities that drive incremental revenue growth.
We've talked about cross-sell before, but why is it different now? First, our evolving big data capabilities
will enable us to more easily identify the products and services that best suit our customers. Second,
we're empowering our employees with tools to better serve our customers such as our online service
portal, that puts all the information our customer care professionals need at their fingertips. And third,
because of our relationship care service orientation, our customer care professionals have established a
rapport with our customers to facilitate the cross-sell process.
As a service company, our people are our most important asset, and through a number of initiatives,
we are empowering our employees to be as effective and as efficient as possible. One way we're doing
this is by transforming where we work by creating new state-of-the-art facilities. We've introduced new
work styles, including an open flexible on-site configuration we call BlueWork and we're increasing homebased servicing. We're also transforming how we work, including providing our employees new digital and
mobile-enhanced tools.
One of the largest workforce transformations we've undertaken involves the way we deliver technology.
We've been changing our technology development approach to focus more on the technology platform
than the project at hand. To transform our technology delivery capabilities, we're co-locating technologists
with product owners and creating new collaborative workspaces, and we're changing the process for how
teams work together using an iterative test and learn development technique called Agile. As a result of
these changes, we expect faster time-to-market, less rework and better use of technology development
spending. In other words, getting more for less or getting more for the same dollars.
In closing, OpEx control has contributed 700 basis points to the company's 2-year compounded annual
EPS growth rate. In 2015, we are committing to total adjusted OpEx growth of less than 3%. In seeking
to hit this target, we intend to continue to reduce run the business OpEx while increasing total investment
OpEx. We will continue to follow our 5-step approach to OpEx management, which has delivered flat OpEx
growth over the past 2 years. By doing so, we plan to create sustainable OpEx leverage that will positively
impact EPS growth.
Now before turning it over to Jeff Campbell, we invite everyone to take a short 15-minute break before
today's final section and the Q&A section that will follow. Thank you.
[Break]
Jeffrey C. Campbell
Chief Financial Officer, Executive Vice President and Member of Operating Committee
Okay. So we're on the homestretch. For those of you I haven't met, I'm Jeff Campbell, and I guess my job
today to clean up and to bring us home to probably the part of the day you're most anxious to hear, and
that's the Q&A. Just so you can plan a little bit, we're going to try to end the Q&A around 5:15, give or
take a few minutes either way to make sure that everybody has time to ask questions about whatever you
would like.
So I have 2 roles to play today. First, I'm going to talk a little bit about capital strength and how it's a key
driver of our performance in recent years. And then I'm going to spend most of my time trying to bring
together what you've heard over the last couple of hours with our financial outlook and give you a little
better sense of how it all fits together.
So let's get started, and I'm going to start by talking a little bit about capital strength and this is really
the third, if you will, of our financial growth drivers. Hopefully, you have a good sense from Ken and Ed
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and Steve about the range of growth opportunities we have and our belief in our sustainable ability to get
operating expense leverage.
So let's talk about capital strength. Clearly, our track record here over the last couple of years is really
strong. If you look at our payout ratios for the last few years, they've been in the top tier of the 31 CCAR
banks. Those kind of payout ratios have led to steady decreases in our shares outstanding, and we've
done all of that while steadily improving our capital ratios.
And so we look at this track record and see it as a real testament to the strength of our business model,
to the strength of our balance sheet, and I think it's also a commentary on the commitment we have as a
management team and as a company to using our capital strength to create value to our shareholders.
If we turn to the most recent results, I'd have to say we're pleased with the results of our latest CCAR
2015 process. And I'd say we're pleased from both a quantitative and a qualitative perspective. When you
look at the left-hand side of this chart, you see that of the 31 CCAR banks, we actually had the highest
ratio in the Fed's modeling of pretax income to average assets. That's a real commentary on the strength
of our business model, highest ratios of any bank.
When you go to the right-hand side of this chart, you see that our capital ratios are in the top tiers of the
31 CCAR banks, as you would expect, because we had about the highest capital distribution plan, our
post-capital distribution ratios are a little bit above the median and our pre-capital ratios are much higher
above the median.
So these strong results certainly led to the non-objection of the Federal Reserve to our capital plan. And so
as a result, we have approval beginning next quarter to raise our dividend by 12% to $0.29 per quarter.
I point out that, that will bring us to a 60% cumulative increase in our dividend since 2011. And we have
approval to, over the next 5 quarters, distribute up to $6.6 billion to shareholders in share repurchases.
And I would remind you, as you all know, that as on this chart, I'm comparing 2015 and 2014 CCAR. This
year, you have a 5-quarter process. Last year, you had a 4-quarter process.
So those results certainly tell you that as we think about 2015, you should expect another year of very
high payout ratios. The exact timing and size of the payout ratio in 2015 will be the function of a couple
things, exactly what the quarterly progression is for our financial earnings, question of exact timing we
want to use. This year's CCAR process gives all participants a little bit more flexibility in terms of when
during the 5-quarter period we choose to execute the share repurchase. And of course, I would remind
you that on average and overtime longer-term target is to return 50% of capital to shareholders. We
have not been very acquisitive in recent years. It does remain in our toolkit and were we to make any
acquisitions, that could have an impact on the timing and size of share repurchases.
To think beyond 2015, I'd probably make 3 comments: We remain very confident in this company's
continued ability to generate capital and to maintain its financial strength; two, we will remain very
committed to using that capital strength to create value for shareholders; three, I would make the
comment when you think about the next several years is we are a Basel-advanced approach bank. We
operate in a very complex and still-evolving capital ratio regulatory environment. So depending on how
those things evolve and intersect in recent years, there could be periods where our payout ratios vary, but
we remain very committed to the use of this lever and this financial growth driver.
Now I'd probably be remiss if I didn't touch briefly, as I talked about, capital, one of our funding
strategies. Our strategies has been fairly consistent in recent years. We really believe we get the best
mixture of cost and access across a variety of economic environments by remaining active in 3 different
funding markets. And so we work hard in making sure we are continually active in each of our markets,
deposits, asset-backed securities, unsecured debt and you should expect that to continue. So that's the
capital story.
Let me turn now to trying to pull together what you've heard for the last few hours with our financial
outlook. Now back on February 12, Ken and I held a conference call, and we provided some very specific
comments in terms of our 3-year financial outlook, and let me very specific. In 2015, we said we expect
EPS growth to be flat to down modestly. 2016, we said we expect to return to positive EPS growth. And in
2017 and beyond, we said we expect a return to 12% to 15% EPS growth within our target range.
I'm going to spend the rest of my presentation trying to help you understand what are the key
assumptions that we made in giving you this outlook, give you a little bit better sense of the ins and outs
and a little bit better sense of some of the opportunities and risks. We probably need to start by helping
you understand what kind of assumptions we were making about the macroeconomic environment.
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So Ken showed you this exact chart in his slide, which just demonstrates and reminds you that we've
actually done pretty well over the last few years at hitting our EPS growth targets, even though the
global economy has been operating at a pretty moderate growth pace. But when you look at the current
consensus for the next 3 years, the consensus economic forecast actually has both U.S. and global
economic growth picking up.
Now I would tell you, we're a little cautious when we look at this chart. As all of you know, the consensus
has overestimated what has actually happened for the last few years. That has taught us to prepare in our
own planning to hope that perhaps this consensus is right, but in fact, prepare to operate and succeed if
the world turns out to look more like it has the last few years as oppose to the consensus you see on this
slide.
The next macroeconomic assumption we have to make is around interest rates. We focus here on U.S.
interest rates because we predominantly fund the company in the U.S. Now we don't pretend to have
any particular insights into interest rates. We have to run the company assuming a range of interest rate
outcomes. What we plan around, what is built into our outlook is essentially the forward curve as it existed
a few weeks ago, which is what you see on this slide.
Now in isolation, I'd remind you that our spend-centric model means that a increasing interest rate
environment is a headwind for us in isolation. If you look at our 10-K, you see the disclosure that 100
basis point movement in interest rates, all else being equal, will, over the course of the subsequent 12
months, drive about $212 million in incremental expenses.
If you think about the interest rate environment though, generally, rising rates are accompanied by
strengthening economies. And so historically, what you have seen in our results is there's a bit of a natural
hedge as interest rates go up, you see volumes and revenues in our business overall go up as well.
The third macroeconomic assumption we have to make is around unemployment. Again, we look at the
U.S. predominantly here, because when you look at our loan portfolio, it's mostly in the U.S. And the
consensus here is also actually pretty positive. As you see, the consensus for U.S. unemployment shows a
steady decline, modest but steady decline in the next couple of years.
Now as I'll touch on a little bit more in a few minutes, built into our outlook is actually a modest rise in
write-off rates in the next couple of years and some modest build in reserves. If this consensus turns out
to be right, it would say that the credit environment overall should actually be pretty positive for the next
few years.
So those are the macro assumptions we've made as we thought about our outlook. Let me turn now to the
American Express specific assumptions. And as I do so, let me make 2 points. The specific line items I'm
about to take you through are unlikely to turn out in every case exactly like what we have in our plan. And
in fact, that's why we've given you sort of sizing estimates in the pages I'm about to take you through as
opposed to specific numbers. What we have confidence in though is the flexibility of our business model,
as demonstrated by our results the last few years, which gives us the ability to use different levers to get
to the bottom line EPS outlook that we provided in a variety of ways.
Let me start this section by actually showing you a slide that Ken showed you. So this is the one that just
looks at the last 3 years where our results, on a compound annual growth rate basis, are right with in
our EPS growth target range. And there's really 3 financial growth drivers that did that: Steady revenue
growth from our growth businesses, operating expense leverage and use of our capital strength and
share repurchase. And those 3 financial growth drivers have to outweigh what is always a challenge in
our business, there's always some headwinds in every business. If you look at the last 3 years, it's been a
little bit higher than revenue growth than rewards and provision and taxes. And in fact, I might call those,
and we do on the slide, the underlying business headwinds. So the 3 financial growth drivers outweigh the
underlying business headwinds and that's the model that's steadily taken us into our EPS growth target
range.
So the framework I'm going to walk you through for the next 3 years really builds upon this same
framework of what's happened the last couple of years. And in fact, we're going to use the term core
underlying performance to reflect exactly the model that's been in place for the last few years, and it's
exactly the model that before you consider some of the discrete impacts that are hitting us in '15 and
'16, which I'll come to in a minute, that model remains in place in '15, '16 and '17. And it's really why if
we just look at recent trends, ignoring the discrete impacts, we remain confident in the core underlying
performance of the company. And once you get to 2017 and beyond, the impact of the various discrete
things hitting us, you're back into our EPS target growth range, and I'm going to go through each of
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these line items in a little bit more detail in a minute, but let me keep walking you through how it all fits
together.
So what are the discrete impacts in 2015 and 2016? Well, over the last number of months, in multiple
investor calls, earnings calls, we've talked about a couple of unusual headwinds that we face. The first
is frankly the same headwind that many companies are facing and that's the strength of the U.S. dollar,
FX. The second is around our co-brand relationships, and there's really 3 categories I'm going to put
them into as I talk about them. There's the early renewals we've done with a variety of partners, there's
the termination of our agreement with Costco in Canada at the end of 2014 and there's the pending
termination in 2016 of our relationship with Costco in the U.S.
The last category is a very conscious decision we made thinking about the pending termination of our
agreement with Costco in the U.S. to do some things around incremental growth initiatives in 2015 to
position us for that termination. And that decision to do incremental spending in 2015, along with the
other 2 impacts, is what drives us in 2015 to an outlook that says our EPS is going to be flat to down.
As you get into 2016, the assumption we've made as foreign exchange becomes mutual, while we've
lapped to the impact of most of the co-brand challenges in terms of Costco in the U.S., see that mostly in
2016. And in terms of the spending on incremental growth initiatives, you begin to see benefits from what
we spend in 2015 and you begin to see an easing of the spending. Those things collectively allow you to
see a return to positive EPS growth in 2016. And then as you get to 2017, you've really lapped and moved
past all of the discrete impacts and you're really back to the core underlying performance of the company,
which we believe, in fact, remains unchanged throughout this entire period.
That's how it all fits together. Let me now walk you through a little bit more discussion on each of these
line items. And I'm going to start by just talking about the core underlying performance drivers.
Now Ken and Ed and Steve talked to you about the range of growth opportunities we have in U.S.
consumer, in our small business segment, international businesses, and with merchants, commercial
services and in our renewal businesses. If you look at how these businesses have really performed and
you look at our segment results, in fact, we've seen good growth in all of our businesses in recent years.
Interestingly, you see a convergence at 5% to 6% across all of the different segments that we operate in.
And so these trends are what give us confidence as we think about the next 3 years to say, excluding the
discrete impacts, we have confidence, and this is what you see on the top right, and the continued ability
of the many growth opportunities we have to be a steady contributor to revenue growth, even in a modest
economic growth environment.
Now the actual rate here is certainly going to be influenced by whether the consensus economic forecast
is right or whether you see a continuation of the kind of economic growth we've seen in the last few years.
We are clearly very focused as a management team on accelerating growth. You heard Ken and Ed and
Steve talk a lot about that. And clearly, we are in an industry where there's an evolving regulatory climate
and we've built assumptions about that into our outlook. But we feel good about the core underlying
revenue performance of the company.
One other point I would make about revenue is one of the opportunities you heard both Ken and Ed talk
about is getting more of our customers' share of lend. That's a tremendous opportunity for the company.
You've seen us in the last couple of years grow lending well above industry rates. I do want to put that in
some context though, because our overall P&L as a company is very spend-centric. Net interest income,
as you see on this chart, has grown from 15% to 17% as a percentage of our overall revenues. We can
continue to grow revenues a little faster than the industry, getting more of our share of lend from our
customers without materially changing this ratio, as you've seen the last few years. We think it's a really
exciting opportunity for us.
The second financial growth driver, if you think about core underlying performance, is operating expense
leverage. I think Steve did a great job, hopefully, of helping you understand both what we've done and
why we believe this is a sustainable lever for us to use just given the nature of our business, the nature
of evolving technology, the nature of evolving our merchants and our card members want to interact with
us. The only 2 comments I would probably add beyond what Steve said is we have set for 2015 a target of
making sure we're under 3%. Clearly, we've done much better than that the last few years.
If you go beyond 2015, we're going to have to see how a couple of different things play out. We've talked
back on the February 12 investor call about the fact that we're doing lots of things focused on replacing
the profits, not necessarily all the volumes, the profits that we gleaned from our relationship with Costco
in the U.S. Depending on how some of the volumes ramp up from some of the newer things we're working
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on and exactly how some of those Costco volumes ramp down, there may be some kind of restructuring
that we do to keep our infrastructure in line with the overall needs of the company. I think we've had a
track record of being pretty disciplined in this area. That will impact exactly what trajectory we think is the
right trajectory beyond 2015. And I'd just reiterate, as Steve said, we have not, in our outlook, included
any restructuring charge that may come from that.
The third financial growth driver in the core underlying performance is just capital strength, and I don't
think I need to say a lot more here. We have a great track record. We're very committed to it. I would
add the minor point that in the second quarter of 2015 this year, you will, for the first time, begin to see
some modest offset from the preferred issuance that we did in 2014 and earlier this year in response to
the evolving Basel capital ratio environment.
Those are the 3 financial growth drivers. If you think about the last few years and as we think about
the next couple of years, we also assume that they will need to offset what we've called the underlying
business headwinds, and I'll call out 3 things here, first, what we've assumed on provision.
As I said earlier, despite the consensus, which shows unemployment, which probably most closely tracks
provision ticking down, and despite our goal of continuing to drive along growth above industry rates,
we've assumed some steady upward tick in write-off rates. We've also assumed some modest build in
reserves. Provision has been a bit of a headwind for us the last few years. Ken said our goal, though, is
always to make good economic trade-offs for our shareholders and, in fact, we're very excited and see
really good economic trade-offs to make some very really good economic opportunities as we grow lending
a little bit.
Second headwind is our rewards expense. The last few years has tended to go roughly in line with billings.
Billings grow a little bit faster than revenue. That puts a little bit of pressure on margins. We would expect
that to continue. We always balance our views in this area, however, with the fact that rewards are one of
our most powerful tools for creating engagement with our cardmembers and an engaged card member is
our most profitable cardmember. And so when we look at this chart, we always balance the fact that while
it is a financial headwind looked at in isolation, we spent a lot of time thinking about how we drive more
engagement with our rewards programs.
The third headwind the last couple of years has actually been our tax rate. Our tax rate has drifted
upwards the last couple of years. As we've thought about what the next few years might look like, we've
actually truly assumed that the tax rate stays roughly in line with what you see in 2014. The final rate
will be a function of exactly what happens with the geographic mix of our businesses and profits whether
there's further changes in the tax loss and, of course, there's always some discrete items that tend to
influence the tax rate.
So you put these things together, and as we think about our outlook for the next few years, we'd say the
underlying business headwinds here look about, in our outlook, like they have the last few years. They're
modest headwinds, but they're things that we believe the 3 financial growth drivers can overcome.
So you put that all together, and that's why we, when we think about the core underlying performance
of the company, continue to believe that as you get past the discrete impacts, which I'm going to turn to
next, in 2017, we're well positioned to continue to grow at our target growth rate of 12% to 15%.
So let's talk about the 3 discrete impacts in 2015 and 2016, and let's start by talking about foreign
change. So I don't think I need to tell anybody in this room that the movement in the dollar in the last 6
to 12 months has been almost unprecedented. You actually have to go back several decades to find a time
period when the U.S. dollar has moved so fast, so far, against so many currencies all at once. And like all
U.S. companies with a significant global footprint, that has had a very significant impact on us. You see on
this chart the currencies that we're most exposed to outside the U.S. And as a general matter, they've all
moved 10% to 20% against us from a P&L perspective in recent months.
If you look at our 10-K, we point out just to size this for people that a 10% movement in every single
currency in which we do business against the U.S. dollar over the course of the ensuing 12 months, all
else being equal, will drive about $182 million swing in our P&L. So what we've built into our outlook is
that this is clearly a headwind in 2015. That's why you see a red arrow down in 2015. We've assumed that
rates, as they exist today on average across all the different currencies, stay in place in 2016 and 2017.
Now let's go to probably the more complicated headwind to talk about, co-brands. So let me start by
just trying to ground you. Ken and I talked about some numbers on February 12. Ed gave some useful
numbers in his presentation. Let me just try to remind you of all the things we've said to put all of this in a
little bit of context.
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In 2014, we had a little over $1 trillion in billings as a company. 61% of that comes from the proprietary
products that we offer on our own networks; 16% came from our GNS business, our partnership
business; and then 23% came from co-brand products on our proprietary network. When you look at
that 23% we've pointed out to you back on February 12, Costco in the U.S. represented 8% of that. The
combination of delta and the other early renewals we've done, Delta, Starwood, BA, Iberia, Cathay, they
collectively represent another 9%. And then as Ed pointed out, we have over 50 other co-brands, and they
collectively are just 6% of our billings. Our network partnership business is also very fragmented with over
150 partners, no one of whom is more than 1% of total billings. So you really have 2 larger relationships:
Delta and Costco. And when you move beyond that, you have a very diversified -- well-diversified and
profitable and growing set of partners.
So with that as context, let's first turn to the impact of the early co-brand renewals and the termination
of Costco in Canada. Let me put aside for just a second any discussion of Costco in the U.S. Let me start
by reminding you, these are great partnerships for us, right? We have a track record of generating great
value for our shareholders, our cardmembers and our partners in these co-brand relationships. We are
excited about the early renewals we've done. These early renewal partnerships, along with our other 50plus co-brand partnerships, will be continued engines of growth for us in the future. But you've also heard
us, in many forms in recent months, point out that when you have these long-term partnerships and you
only renew them every number of years, there's often an initial reset to the economics. And what we see
in 2015 is we put a goodly number of those resets into onetime period, 2015.
You combine that across the Delta, Starwood, Cathay, BA, Iberia relationships with the termination of the
Costco Canada relationship on 12/31/14 where we are pleased with the early returns of the new products
we've launched and our ability to retain the spend and lend of those Costco customers in Canada. But
there is a time period where those will ramp up over time, and the Costco volumes are ramping down or
quickly. So you put all those things together, and it's why in 2015, from all of those co-brand relationships,
you have a significant financial headwind. But once you lap them all in 2016 and 2017, they become key
platforms for us to grow the company.
Now let's turn to Costco in the U.S., and let me start here by reminding you of many of the metrics we've
talked about with Costco. So I said a minute ago, Costco in the U.S. represented in 2014 8% of our
billings. It's 20% of our loans. Of our billings on this card, this is a very important point, both Ken and Ed
pointed out 70% of those billings come from outside the store. Very important point, which I'll come back
to in a second.
Our agreement with Costco will terminate on March 31, 2016. There is a complex process we will go
through around any potential portfolio sale. As I'd said, we really don't have any further comments to
make other than I will point out to you that in the outlook that we gave you on February 12 and are
reaffirming today, we have not assumed any gain on any potential portfolio sale in that outlook.
Those are the facts, and I'd remind you that we have many growth opportunities. We made the decision to
negotiate early, and we made the decision to back away from the negotiations because we firmly believe,
in the long run, we will generate more value for our shareholders by pursuing other opportunities. But
we do have a hole to fill in 2016 as the Costco contract terminates. And just to help you think, order
of magnitude, about the size of that challenge, we've given you the volume metrics. If you think about
profitability, for the portion of Costco spend that was outside of the store and for the lend portfolio of
Costco, you can presume that it was within the range of the average profitability we see for products
across the company.
As we've repeatedly said, the in-store spend is at much, much lower economics. So when you look overall
at the profitability of Costco, it was a very nice economic proposition for us, our cardmembers and for
Costco. But the profit margins are a little bit below, overall, the company average, and you should think
about that as you think about the volume metrics we've given you. Our goal is clearly to, with the rampup in spending that you're seeing in 2015 or you will see, to replace the spend and lend and to retain the
spend and lend of the Costco cardmembers and to find other growth avenues to replace the profitability of
this as it goes away.
Those are the co-brands. The other key decision we made is that as we thought about the pending
termination of the Costco agreement in 2016, we did have a choice, and we could have said, "Well, we
know we have this headwind from FX and from the other co-brand renewals. We could trim a little bit
around some of the spending we do on growth initiatives to get to a reasonable growth rate, but we run
the company for the long term." And as we thought about what is going to generate the most value for
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the company, for our shareholders over moderate to long-term period, we said we actually should use the
tremendous amount of time we have in advance of that termination to really position the company, the
best way possible for that termination. And that's why we made the decision to, in fact, not trim a little
bit around some of our spending on growth initiatives in 2015 but, in fact, to increase to best position the
company. And that's why you see, as you think about the impact, financial impact of that decision, 2 red
arrows down in 2015. As I said earlier, as you get into 2016, you begin to see both the benefits, some of
that incremental spending, and we can begin to ease off some of the incremental spending. As you get
into 2017, you're really back into the world in which we live every day and the way we run the company,
which is we're always making decisions balancing the short, moderate and long term as we think about
investments.
That's the model overall. Core underlying performance really stays in place through this period. We have
to get past the discrete impacts in 2015 and 2016. We think we're making decisions that best position us
for 2017 and beyond.
So back to where I started a few minutes ago. These are the comments I made broadly about our financial
outlook. As you'll also recall, there is one other comment we made back on February 12. We said as all
of these items play out over the next few years, we will likely have more unevenness in our performance
from quarter-to-quarter than has been typical of our business. So with that in mind, it is March 25. So we
are 6 days from the end of the quarter. In a few weeks, we'll be reporting Q1 results. Let me just make a
few comments about Q1.
As we sit here today, we would expect our EPS for Q1, for the growth, to be modestly better than our
full year outlook, which was flat to modestly down. And as we think flat to modestly down for the year,
we do think of that in the context of our GAAP EPS in 2014 of $5.56. Although as many of you in this
room pointed out to me, there were 2 big gains in the 2014 results around Concur and around the Global
Business Travel transaction that added about $0.10. Very importantly, the fact that Q1, we now expect
to be a little bit better in terms of its year-over-year EPS outcome than that full year outlook, does not
in any way change our outlook for the full year. Because what's really happening is that the incremental
spending around growth initiatives that you've heard all of us talk about really won't ramp until we get
into the second, third and fourth quarters of the year.
I'd also remind you that when you first see reported revenues in Q1, similar to what you saw in Q4, if you
pulled out the Concur gain, which was in revenues, I'd remind you, in Q4, because of FX and because of
the lapping of the Global Business Travel transaction, our reported revenues were down a little bit. FX was
also a headwind. You'll see that again in Q1.
From a volumes perspective, certainly, we probably all know that gas prices have continued to go up.
They're up about 30% now year-over-year. We've pointed out to you in January that gas for us is about
2% to 3% of the business. That's a little headwind on volumes. And then I'd also point out that the full FX
impact that you heard me talk about is hitting us in Q1, and the 2015 impacts from the various co-brand
changes that I talked about will also be in full force in Q1 and hit us in a variety of lines: discount revenue,
also in card -- cost of cardmember services and in rewards.
Perhaps the one other comment I'll make about Q1 is that when you see our share repurchase total for
Q1, you will see it a little bit below the CCAR amount of $1 billion. We'll probably end up at about $750
million. That will have to do with some nuances around the 2014 CCAR process. And the way the rules
work around employee plans, I won't bore you with all the details. Suffice to say that the rules have
evolved, and in 2015, companies are given a little bit more flexibility.
Last comment I'd make is that we will, given that we've made the comment that we expect more
quarterly unevenness as we go forward, try to give you a little bit of commentary periodically to help you
understand the quarterly progression of the company.
Kenneth I. Chenault
30% down rather than 30% up.
Jeffrey Campbell
Did I say 30% up?
Kenneth I. Chenault
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Yes.
Jeffrey C. Campbell
Wow. Thank you. It's 30% down. Gas prices are not 30% up. They're 30% down. See no one else -- Ken
was brave enough to interject. That's why everybody needs a boss. So I've been with the company, as
most of you know, a little under 2 years now. It's my third round as a CFO. And I joined the company 2
years ago really thinking about, I'd say, 3 key things. I became convinced that this is a company with a
really healthy core business, with really stable growth prospects. Second, I saw a company with really
exciting new growth opportunities because of the evolving digital mobile world. Third, I saw a company
with tremendous assets to attack those growth opportunities and a management team really committed
to using those assets to focus on those growth opportunities, despite the fact there's always challenges.
There's always headwinds in every business. Those things are very appealing to me.
As Ken said, we take very seriously our on-average and over-time long-term targets. We don't lightly
make the changes we made to our outlook for 2015 and 2016, but we run the company for the long term,
and we are confident that the decisions we've made best position the company to create the most value
for our shareholders in the long term.
So I hope, as you reflect on the last couple of hours, that you think about the American Express
shareholder story from a couple of perspectives. And I tried to sort of summarize it on one slide. We
are in a great industry space, right? Payments had secular trends that work for us. Digital and big
data are creating new opportunities. It's a strong and profitable sector. We have a range of great
growth opportunities and an ability to attack them with a great brand and a closed-loop integrated
payments platform that gives us a tremendous competitive advantage. We have a consistent and flexible
financial model, and you have of a very tenured management team with a track record of using all these
advantages to produce steady value for our shareholders.
So with that, I'm going to stop, and I'm going to invite Ken and my colleagues back on the stage, and
we're going to take whatever questions all of you would like to ask. I hope so.
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Question and Answer
....................................................................................................................................................................
Kenneth I. Chenault
So we're all set to start. Someone just needs to go first.
Unknown Attendee
Sure, I'll do that, Ken. So Ken, I was wondering if you could just talk a little bit about the competitive
framework in the affluent space, what you're seeing from the big banks. Is it continuing to get more
intense? And then also, you highlighted the corporate business, and it looks like the returns, potential
equity are one of your higher. Can you talk about the competitive dynamics in that business as well?
Kenneth I. Chenault
Yes. So let me just open up and then pass it on to Ed and Steve and Jeff, if you want to jump in. I think
the reality is, if we look at the last 20 years, every meeting, I'm asked the question about the intensity
of competition in the premium space. And I'm sure a number of you have said, "Can they really keep
this up?" The reality is we're more than keeping it up because of the innovation that we put out in the
marketplace with different products and services. But also, very importantly, as Steve went through,
is how we have really transformed our service that we provide these customers. So the level of overall
service, the personalized service has been tremendous, the variety of value propositions that we put
together. And then, frankly, you look at the slide that Ed went through of share of revenue, and you see
some of these same companies that have been investing for years in this space, their share of revenues
are going down, and the profitability picture has not looked very attractive. So what I would say is
competition is intense. It has always been intense, but I think what we've demonstrated is that we've
continued to be a leader because we have taken advantage of what I emphasize in the beginning as this
integrated payments platform and the ability to really use our closed-loop data to help manage our risk,
to manage our fraud, to manage our marketing, to help us target more efficiently, to do offers had been
substantial. And then going to the diversity of our product and business portfolio is what we've been able
to do with OPEN, Small Business, middle market and corporate. And so with middle market, as Steve was
emphasizing, we've got long runway for growth, and so we're going to invest very substantially there. So
those would be some of my top-level comments. And Ed, Steve, feel free to join in.
Stephen J. Squeri
Let me just pick up on the corporate space. The corporate space is an interesting space. And as I put that
chart up before, there's really 3 segments, right? It's the global accounts, it's the large market accounts,
and it's the middle market. And when you look from a competitive perspective, there are really only
2 global players, which is ourselves and Citi, but the motivation for each player is a little bit different.
Our motivation is we're in a payment space. And when you look at Citi, it's really more about an overall
banking relationship. When you look across the United States and you look in the individual markets
across the world, we run into different players in different countries because they all have, again, different
objectives with their banking business. The huge advantage we have and the opportunity that I highlight
is from the middle market space, you're able to take that global platform, that global service, all the global
insights and apply that on basically a local level. So your middle market competition is you're competing
with a global offering versus competing against regional and -- or national banks in those markets. So
while the competition is very tough because it's -- they're looking at an integrated play, we believe we
have the assets and the platform to go up very well against them. And as I pointed out in the slide, 63%
of the Global Fortune 500 have our core [ph] product and our middle market business just continues to
grow. And we're going to continue to invest in that business because it is a huge opportunity for us to
continue to grow.
Edward P. Gilligan
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Looking at consumer and small businesses, it's certainly an intense competitive marketplace and has
been for a number of years in the U.S. and in many countries around the world. And a couple of points
I'll reiterate is that I believe we're more than holding our own here in the U.S. with premium consumers,
with small businesses and in all the -- most of the major markets we're competing in outside the U.S.
where we're growing faster than the market. And there's a couple of points that I try to give evidence
of why I feel very confident about that we're holding our own. If you look at the biggest investment we
make is acquiring new customers. That's the biggest investment the company makes. And I showed
some numbers for our global acquisition, I showed it for U.S. consumer, I showed it for small business in
the U.S. that we're increasing our investment, and we're getting increasing returns. We're getting more
spending. We're getting lending from new customers, and the average return on investment for our total
global acquisition in consumer and small business globally was over 400%, which means we're acquiring
customers very effectively in a very competitive field. So it is competitive, but we're winning. And we also
-- now when we look forward, and we look at this customer base we have of U.S. consumers, affluent
consumers, small businesses, we see there's more room for growth, share of spending, share of lending
and finding new segments who we didn't have a relevant product to and meeting those needs. And that's
the Amex EveryDay example where there are a number of prospects in the U.S. who don't think -- who
may respect American Express, like our brand, think well of us but don't think we have a relevant product,
mostly a free credit card that has some kind of rewards or cash-back on it, and we do have that. And so
it's breaking through with these segments, designing products that meet their needs, talking to them in
channels that are relevant to them and bringing them on as customers. So I think last year, we were able
to make that point, right, continue to acquire at scale very effectively, be relevant to new segment, find
new spending for our existing customers and grow our lending business. So it gives us great confidence
that we can continue those -- this growth path by doing that going forward despite intense competition.
Kenneth I. Chenault
Anything else, Jeff, on your side?
Stephen Martin
Steve Martin, JPMorgan. So -- and analysts put our report the other day that showed that from '08 to '14,
you've had 2 of 7x where you've grown your revenues greater than the 8% target, and yet you had, I
believe, 4 of 7 where you've grown your EPS greater than the 12% target. So you've been very successful
on the operating expense side in the face of difficult revenue environment, but it does start to beg the
question, do you risk cutting into the muscle if you keep this up? Because I think as you showed, you had
0% OpEx growth over the last couple of years. 3% is the goal, but then you've got these other things
you'd classify as investment expenses, including controls cost, which I find a little bit odd. But can you just
address that? Because I think what people are worried about is it's great that you're sticking to your 12%
to 15% on-average and over-time target for '17 and beyond, but you risk because you're dogmatic on that
in a difficult revenue environment, which may persist because of the competition cutting into the muscle
and then later regretting it.
Kenneth I. Chenault
Right. So let me just give sort of a top-line comment on that and then have Steve and Jeff talk about
it. First of all, from my standpoint, I don't think you run a company being dogmatic in saying, "I don't
care what happens. Just give me this target. I don't care." That's not the way I operate. What I try to
do is be very thoughtful about what the impacts are going to be on the business and managing it for the
moderate to long term because if we took that type of position, that's a short-term strategy. And then it
becomes, "Well, just give me something that is across the 4 targets. I just want to hit it, and I'll move
on." The reality is, what Steve took you through, is that we believe we have a long runway, I mean, one
that's very, very important and why I've really emphasized this integrated payments platform gives us
major advantages. Our embracing of digital transformation is not because we think it's cool, although I
do think it's cool. What I believe is that because we have this integrated payments model that we have a
tremendous opportunity, which we've built on in both marketing and operations and servicing that gives us
a very, very long runway. The way we've set up our infrastructure is giving us tremendous opportunities.
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So what I want to emphasize is, and that's why we've set it up this way, is we're going to continue to
invest in the business. So if I was short-term oriented, frankly, what I would have said is, "Let me wait to
renegotiate these deals until 2017. Maybe something will happen. I'll figure it out. I'll impose some shortterm cost cuts, and we'll sort of try to get it there." That's not the way how -- that's not the way I want to
run this company. So I think what we can do is let me have Steve address why we think there's a runway
go through and then have Jeff give some overall comments.
Stephen J. Squeri
Yes. So your comments was you think we might -- potentially you cut into the muscle, and I would
actually play it the other way. I think we're actually making ourselves stronger. And if you look at sort
of the approach that we've taken, which is we've sort of changed the mindset, right, so we try and get
rid of waste. More waste is not muscle. When you look at these end-to-end processes, which makes you
more efficient, and efficiency drives savings. You we look at the platform approach that we've really taken
here, which means we invest less in duplication and repetitive efforts. You look at the globalization, which
there's still more runway on globalization and integrated networks. And what happens is, by investing
in those platforms and those integrated networks, not only you're able to do volume, but you're able
to resolve cost a little bit faster. You have more people's fingertips and so forth. And then you get into
service and the sort of, to me, the result of, are you cutting into muscle? Our satisfaction keeps going
higher, right? So when you see satisfaction going down, when you see you're not able to get products
to market as fast, I think that's when you cut into the muscle. So from my perspective, as I look at sort
of the operating infrastructure of the company, technology can continue to make us stronger. Focusing
end to end will continue to make us stronger, which means we're going to build more muscle, not cut into
the muscle. And by doing that, you take -- you'll have a better product. The second point I would make
is we had choices we could make. As you saw when I put up that slide, our operating, what I call, runthe-business OpEx, has been declining. We could have taken that and drop to the bottom line if we were
really -- what we decided to do was to reinvest that in some of the growth initiatives. Now some of that
was control and compliance, but others was things like Loyalty Partner, Serve and then sales force and
client management, which helps to grow the business. So I would take a different approach on this and
say we're really looking at build the muscle by doing what we're doing.
Jeffrey C. Campbell
And I guess, I'd like to make 3 quick points. One, another thing inherent in your question is really around
our 8% revenue target, and I'd point out we've been growing 4% to 6%, depending on which time period
you want to look at in a moderate-growth environment. The 8% is also an internal target, and we think
it's the right aspirational target for our company to strive towards because we think it's achievable.
You also hear us say over and over again, and Ken, you pointed this out in your remarks, but the most
important target is the EPS target. And we have multiple levers to get there. The second point I'd make is
4% to 6% revenue growth in the kind of economic environment we're seeing is actually pretty darn good
by the standards of the S&P 500, the Dow companies, any large global company you want to look at. And
if you're growing your revenues 4% to 6%, you darn well should be able to get some operating expense
leverage even if you're growing them a couple of points.
Kenneth I. Chenault
Yes. In fact, one of the things, I think we did this probably years ago, is look at the list of companies that,
in fact, had our targets. It was a handful. And we said at the time, "Look, this is -- we know this is a tough
standard. This is operational. But if we can manage in this frame, we believe that we should be able to
achieve our 12% to 15% earnings-per-share growth." So I think what's also important is it's not like you
got hundreds of companies. I mean, literally, it's a handful as we look out over a 10- or 15-year period of
who consistently was able to hit those targets. And my view is I think it's good to push the organization
for growth, but I also think, at the same time, you want to have enough flexibility and optionality in your
model that you achieve your ultimate objective, which is the ultimate objective is 12% to 15% earningsper-share growth.
Jeffrey C. Campbell
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And then just one other quick comment I have to comment on your point about control and compliance
being part of investment. We absolutely think that being best in class from a regulatory perspective is
important and is part of our investment. It's part of why you see the CCAR results. I would point out to
you we've done the math that I believe our P/E [ph] ratio was probably about the highest ever approved,
and that's a function of both quantitative strength as well as qualitative strength. And we think there's
a variety of other ways we benefit from making sure we're best in class in this area. All that said, it's an
investment we need to manage.
Kenneth I. Chenault
Yes, in the middle right here, and then we'll go to the back, and then we'll make sure we get over here.
Robert P. Napoli
William Blair & Company L.L.C., Research Division
Bob Napoli from William Blair. Just -- you didn't really comment too much on your return on equity
targets, and I think there were some speculation that you might bring those down. You're competing with
some banks that are happy with much lower return on equity. They're suggesting is that Citigroup took a
single-digit ROE to get the Costco business, and their NOLs made it a low double-digit. So I mean, what
are your -- you're generating close to 30% ROE. Your target is 25%. You're grossly over capitalized. But I
mean, you are trying to correct that. And is that return on equity sustainable over the long run -- the 25%
target? How confident are you in that number? I mean, your fastest-growing business, TNS, does have
high ROE, so maybe...
Kenneth I. Chenault
Yes. So I'll just comment briefly because at the end of the day, I know Jeff wants to answer most of it.
But -- and you will. Yes, the reality is, I look at this as a terrific situation. We've got a range of businesses
in the company that are generating terrific returns. Now the reality is people then have concluded that
the floor for us is 30% ROE in co-branded deals. Do you really think that? I mean, come on. I mean,
obviously, that gives us the optionality to, in fact, say, "We can accept lower returns at a certain level."
Now I'm not going to be in a situation where I'm just going to hit the floor because I do want to have
returns. Well, we can balance all of that out. So I think what's terrific is we have a collection of businesses
that are generating growth, generating very good returns that give us flexibility, and that's why I have
confidence that we can compete with the right criteria in the co-branded space. But I also have confidence
in our 25% ROE target because we have a range of businesses that we've demonstrated consistently that
we've been able to do that. So I think that's really speaks to the financial strength and the flexibility and
optionality that we have in the marketplace.
Jeffrey C. Campbell
So the only thing I would add is it is a real commentary on the strength of our business model that we
have the kind of ROEs we do, but we have lots of different businesses with different levels of ROEs. And
you would want us and you should expect us, as a shareholder, to pursue business when we can earn
more than our cost of equity before generating value per shareholders. We're not going to go down,
though, into the single digits. And we have many opportunities across the businesses that Steve and Ed
talked about where we can deploy our capital at rates higher than anything that would ever require us to
get into the single digits.
Stephen J. Squeri
That's the key point. I don't know nor would I comment on what Citi's other alternatives were, right? But
it wasn't the low ROE that worried us about Costco. I mean, it is what it is. It was all the other better
returns. So the point is the opportunity cost of winning Costco at that lower return would probably would
have damaged the moderate to long-term health of everything else we're doing because it was going to
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require more investments, more people, more technology build, and then that would have dragged our
returns down. So it's because we had confidence in all the other strong returns of our business that the
decision not to renew Costco, at the end of the day, was an easy one.
Kenneth I. Chenault
Yes. And I just make one other point because I use the term in a very purposeful way. What we don't
operate is a utility. So when someone tells me they want a credit utility, that is not a good sign to me that
we're going to have a differentiated business model because I believe that differentiation is key to the
future of this company.
Yes? And then we'll go over there. You'll be next.
Bill Carcache
Nomura Securities Co. Ltd., Research Division
Ken, just -- Bill Carcache from Nomura. Ken, just dovetailing off of the last comment that you made.
You've spoken in the past about how the -- one of the things that you most want to avoid is being reduced
to nothing more than a processor of payments and avoid the commoditization of the business. Can you
speak to what gives you comfort that, that's not what we're seeing with Costco, and that perhaps maybe
speak a little bit more to the partnerships that you have elsewhere, are ones where they value you beyond
just the cost of the services you're providing. And then, if I may, a separate question. You guys touched
a little bit on the closed loop, but I was hoping that you could maybe give a little bit more on how you're
thinking about that going forward, and the monetization of that given that we're an environment where
you have others who are trying to replicate it, in particular, the example of Chase with Visa comes to
mind, and you guys have this tremendous, I guess, lead relative to others who are trying to replicate what
you already have. Can you just speak a little bit more to what you're doing to effectively try to monetize
that from a big data perspective? You touched on it a little bit, but maybe a bit more.
Kenneth I. Chenault
Okay. So we'll spread this all around. I mean, I really can't speak fully to all of Costco's objectives or
all of Citi's objectives. But what I can speak to again is the point to that Ed made, is at the end of the
day, when I -- when we looked at the opportunities that the company has, both to grow and the returns,
the trade-off was real clear. And what I couldn't see is reallocating or continuing to put our dollars into
a partnership that was changing. The dynamics of the partnership had changed, based on the financial
terms and the contractual terms. We were very clear, those were terms that I just did not think the
numbers added up, and it didn't make sense for us. Fortunately, we have a broad array of opportunities
that can drive growth for us and give us better returns. For our other co-branded relationships, the reality
is, I think we have very good partnership alignments. So whether it's Starwood or Delta, I'll let Ed talk
about both Delta and Starwood, but I think those are examples where we have a very comprehensive
relationship that covers card, that covers rewards, it covers lounges, it covers travel, and they have had
strong interest in the different marketing initiatives that we were putting down in the table. Starwood
clearly understands the value of the closed loop and some of the offers that we can bring to customers.
Now I'm not going to detail what those offers are that we're planning, but rest assured, we're going to
take advantages of the platform strategy, the integrated payments platform, the closed loop end-toend data to improve and personalize what we can do for the customers of Delta and Starwood. And so
that's frankly how I look at all the partnerships. Now the reality is we've talked about the Chase situation.
What's challenging there is, it doesn't cover the entire customer base. So we're really -- when I talk about
scale, that's really critical that you can have an integrated platform across everything, and it's global. That
gives us a major advantage. And so what you're seeing with the use of big data and analytics is frankly
what's fundamentally changed over the last 3 or 4 years, is our ability to target for our partners and also
for ourselves, the runtime has been reduced from months to days to hours. And so when you have that
breadth and richness of data in a very dynamic way, and so Steve talked about our credit authorization
system, CAS. People looked at it, very technical, that just authorizes the charge. Now that tells me what
time the charge was made. That gives me some very valuable information. So I can make just in time
offers to the customer. So I think we're just scratching the surface. But let me just turn it over to Ed to
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talk a little bit about what's different, relative to other co-brand relationships. And Ed also, some of the
digital things that we've done. And Steve, you may want to do the same thing with corporate.
Edward P. Gilligan
So we're incredibly proud of the partnerships we have with our co-brand partners around the world,
merchant acquiring partners, loyalty coalition partners. As I mentioned, it touches every part of our
business, our digital partners. And it was interesting, just to add color commentary to what Ken was
saying, we were negotiating Costco, Starwood, and Delta and British Air, all at the same time. Various
stages of negotiation. And at this meeting, we did announce that we did re-sign British Air and Iberia. And
British Air and Delta were great examples where it's -- when we're going through all these negotiations,
Costco was always about the lowest cost. Delta, British Air, obviously want better rates, the market had
changed. But it was about business building, and what could we do together to add value to each. And
when we signed the deal with Delta, it is a co-brand deal extension for 7 years, it's a card acceptance
deal. It's a membership rewards. It's consumer travel and it's business travel. With -- working with the
joint venture. BA was exactly the same thing. That's a mark of a partnership. And we were committed to
creating value together and grow faster as a result of our renewed partnership. That's what a partnership
is all about. And feel -- we feel great about that.
And our list of partners are expanding. So I don't think Costco's a sign of anything other than what Costco
is, and what they wanted. And I think what's more of a sign of American Express is the partnerships we've
extended and we'll continue to build over time. We don't look at this as a setback in any way, or there's
a flaw in what we're doing, that would get in the way of bringing new partners into the fold, whether it's
more co-brands, like Charles Schwab, whether it's more merchant acquirers or loyalty coalition partners,
which we'll continue to expand. So we feel great about our ability to partner and to find ways to help each
other. And on the big data front. Just -- with building on [indiscernible]. The closed loop data touches
every part of our business, from credit underwriting to fraud detection, to marketing, to prospecting,
segmentation. And it's embedded in how we do business, and it gives us an advantage. The better
segmentation of customers means better service to them, a higher refer to a friend scores, higher net
promoter scores, winning J.D. Power 8 years in a row, which behind that is a better understanding of
our customers and giving us capabilities to serve them more effectively. And increasingly, it's becoming
an opportunity to create new revenue, and example of loyalty coalition isn't -- could not be better. That
is, performance marketing merchants, brands paying us to run their loyalty programs, to do marketing
with them, to target marketing, run the platform and use our data capabilities to improve their own
marketing, right? So that's one application of monetization of a closed loop going forward. And I think
there'll be more. We're constantly looking to see what else can we do to improve the way we run the
company with information, to enhance what we do, but also then to enhance partnerships we have with
the information that we have available because we know a lot. Our big brands we work with know a lot
about their customers, but they don't know where the customers are spending before they go into their
store or after they leave. We do. So there's lots of potential going forwards, for us to find ways to add
value to partners through the application of closed loop. But in the running of our business day to day, it
touches every part of the company.
Stephen J. Squeri
Yes, I'd say one more thing, before I pass it on to Steve, that I would focus on. And this is this
convergence that I've talked about at the online/off-line world. Go outside of payments. Look at what
almost every digital company is trying to do, is to figure out how they get information elements that will
help them in the off-line world because of this convergence of online/off-line, that is sweeping every major
industry. And we, in fact, have an integrated platform. And we know if the transactions are online and offline. You go out and talk to a range of digital companies and they will tell you, I need to have more offline information. All right. Why does Google want to get into payments? Because they want more data,
and they want to know if the transaction took place off-line, as well as online. That's very critical. We have
that information. So what I would say broadly, is we're trying to go where the puck is going, not where
the payments industry is going, all right? So I think some people are stuck in a traditional paradigm of
payments. We're defining ourselves more broadly.
Stephen J. Squeri
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Yes, I mean, just to sum up what Ed said. I think we think about big data and the closed loop, and
everybody looks about what is -- what's the headline and what can you see out there and what can you
sell? But Ed hit it right on the head. It's really embedded within our system, and how we run everything
that we do today, whether it's share of spend, underwriting, it just keeps going on and on. And when you
think about the Corporate Card business. The Corporate Card business, especially when you get into large
clients, is very interesting because you have 2 types of points. If clients, they really wanting to control
their T&E spending and understand what their B2B spending is and so forth, and others that want to make
money off their spending. And so to your point about -- it's just sort of -- are you just -- is it a commodity
or you're not adding value, we're interested with working with Corporate Card clients that really want a
partnership. And that partnership involves getting control around overall T&E spending, understanding
where the opportunities are to control B2B spending. How do we use our data capabilities to show them
where they can save money. The most powerful conversation you can have with a CFO is not how much
incentive we're going to pay you, but how much are we going to reduce your T&E cost? How are we
going to get your rates better on an airline or in hotel? How do you consolidate your hotel spend? How
do we consolidate your airline spend. And that's true partnership, in how they looked to run their overall
business. So we can do the same for B2B. So we're not out there just trying to buy business, if you will.
What we're out there trying to do is really develop a partnership based upon the capabilities that we have,
and a lot of those capabilities are built on our closed loop and built on the big data that we can apply to
that closed loop.
Richard Petrino
Senior Vice President of Investor Relations
So back here. I just want to -- there was someone who's waiting patiently -- I guess over here, and then
I promised some person who was here, I don't know if it's -- was it you? You're honest? You're going to
be honest about it. Okay, all right, you'll be next. So we'll go to these 2, and then I'll come back to the
middle, okay?
Christopher R. Donat
Sandler O'Neill + Partners, L.P., Research Division
Chris Donat from Sandler O'Neill. I had one question about the restrictive nature of the Costco relationship
in the United States. You had commented about it being restrictive. I'm wondering if Plenti becomes the
first example of something that you could -- that you can do now, that you couldn't do beforehand, since
Plenti includes partnerships with a large pharmacy and a large gasoline seller that those are businesses
that Costco is large in also. I know if you could comment on that.
Stephen J. Squeri
Yes, I can't really comment on the contract. What I would say is that Plenti, we were going with.
Obviously, you can't put something like Plenti together 60 days ago. This was several years in the process.
A lot of people on the Amex management team worked on this. So I think that's just an example of how
we're using our platform. Now what I would say is that we have an opportunity and a broader opportunity
to work with a range of retailers. And so forgetting about the contract, there are just certain things, when
you have a very big relationship that you've got to be a little bit more careful on. Now frankly, we have an
opportunity that I'm really looking forward to, to work with a range of retailers that might clearly be very
competitive with Costco. But that's the world we live in. And I think it provides a set of experiences for our
card members that's great. And if we can add value to those retailers, that's also very, very important. So
I think it does open up more opportunities for us as a result.
Richard Petrino
So there was one other person here, and then I'm going to go back to the middle.
Mark C. DeVries
Barclays Capital, Research Division
Mark DeVries from Barclays. It's my understanding that the EPS guidance for '15 and '16 holds, regardless
of whether you sell the Costco receivables. So with that in mind, in a scenario in which you do, could
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you give us a sense of how hard you have to pull on that OpEx lever to offset which should be a pretty
substantial revenue headwind? And then, if you can, give us a sense of what type of charge you might
have to take and how might that compare to any gain you might realize?
Jeffrey C. Campbell
Well, to be very precise, what we've said is that our outlook for 2016, which is a return to positive EPS
growth, does not include any potential gain on any potential sale of the portfolio. We just can't go into all
the complexities and mechanics of what we will go through in the coming months with Costco and Citi.
But suffice it to say, we wouldn't have provided that outlook unless we were comfortable, that going back
to the flexibility of our business model that we have enough levers to pull to get to that bottom line EPS
outlook, regardless or under a number of assumptions about what might happen to the portfolio.
Richard Petrino
Okay. In the middle. And then we're going to -- I'm going to go back here, and I promise I'll come back to
the other side.
David Ho
Deutsche Bank AG, Research Division
It's David Ho from Deutsche Bank. There's a lot of skepticism about your notion of whether or not the
Costco customer is ultimately an Amex customer. Can you give us a sense of, given that you're seeing
good progress in Canada, without giving specific numbers, but your sense of customer attrition and
systems levels and loyalty that you're seeing there. And as we move through 2015, does Costco Canada
become a good barometer for your progress with Costco USA, and how does that impact or using as like a
test bed for what you're going to do with retention in the U.S.?
Kenneth I. Chenault
What I would say is, at the end of the day, I made the comment on Canada and I'm going to stick with
that comment. That's what you'll have to digest, which I think emphasized that this was early. It was
preliminary, but we were encouraged. And I would just leave it at that. Second, what I would absolutely
emphasize, and this is the whole point. This is one of the reasons why I opened up with the brand. We're
going to have these arguments for decades, but the reality is, we've been able to demonstrate that our
customers have a very strong affinity for our brand. That's why we've done very well. And then one of the
reasons why they have a very strong affinity for our brand is because we have very strong rational value,
the customer service that we provide has really developed an emotional connection with our customers.
So I was very, very clear that I believe that these are our customers as well as Costco. I think what's
very important are the points that Jeff and Ed made that outside spend presents some very substantial
opportunities to us. As Jeff said, spend inside Costco, the profitability is substantially lower. But someone
who is using a product outside Costco, I think what you would say the rationale would be, you would
have a better chance working hard to capture a share of that spend and lend. And at the end of the day,
Canada's real life. That's not a test bed. We're very focused on doing all we can to continue a customer
relationship and capture a meaningful amount of that customer spend and lend. I don't know, Ed, if you
want to say anything else?
Edward P. Gilligan
No, I would just reiterate that, that these are both our customers, it's not necessarily an either/or
situation, right? But we know at 70% of the U.S. co-brand, Costco co-brand is spending on the Amex
network outside the warehouse, that there -- those customers like using Amex cards at these merchants.
Now why were they? There's a value proposition on that Costco card that says you can get cash back
credit to use in the Costco warehouse. So yes, there is a connection. But they're also using the Amex
network and they have very high -- we measure their customer satisfaction. They're part of our J.D. Power
survey, part of our Net Promoter Scores. And their satisfaction with American Express is very high. And
I'm sure they love shopping at Costco. And that's not the point, but the point is, we want to give them an
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option to keep their spending on the Amex network with the same or better value propositions that we can
construct. We have value proposition to date, to meet most of their needs. And we're going to continue
to look at this, to say what can we do, right, to ensure they have an option with a relevant offer, right,
so that they can remain being customers of American Express, and they can still shop at Costco. We will
look to expand our partnerships that Ken alluded to, right, that might with other players who might be
in the warehouse business or that might be part of that. That's normal course of business. But I do think
it's incumbent upon us to make sure they have an offer of another Amex product they can use outside of
Costco, and that we make sure that we offer great value to them, so that we can keep their satisfaction
and Net Promoter Scores very high. And I believe we can do that. And Canada is a good example of that
right now.
Richard Petrino
So we'll take one more question from the middle, and then I'll go over this side and then back.
Cheryl M. Pate
Morgan Stanley, Research Division
Cheryl Pate from Morgan Stanley. So you talked a little bit about increasing share of spend wallet
throughout the presentation today. And I think a higher merchant acceptance would be a piece of that.
Maybe in 2 parts, we can talk about the OptBlue experience in the U.S., where we've seen clearly, some
very good traction. And maybe thinking about the spend opportunity versus, I know there's been concern
on discount rate, and how that all runs through. But maybe spending a little bit of time also on sort of the
lower cost of service, that particular customer or merchant, sorry. And from the international side, maybe
we could just spend a little bit more time on specifically where some of the best opportunities are.
Kenneth I. Chenault
Good. Why don't you handle that Ed, and Steve, chime in, you may want to get on rate, I'm talking about
OptBlue.
Edward P. Gilligan
Yes, I think we should. So I'll give on, I'll give you a 2-minute warning. So we do -- but OptBlue is off to a
good start. 14 of the top 15 acquirers in the U.S. have now signed on with the program. We said it would
increase our signings of small merchants by 50% starting this year, well it actually started last year. By the
end of last year, we had brought on more than 400,000 new merchants through the OptBlue program. We
said a couple of other things a year ago. Actually, Anre gave the presentation, so I will let him update you.
But we feel very good about that and the economics of this new program. When you bring new merchants
on, you just said, we're going to get more spending, it comes at a lower rate, it but eliminate a lot of the
cost, we had to acquire them under the old model and the NPV of this program, we feel very good about.
So -- but Anre, do you want to give an update?
Anre D. Williams
President of Global Merchant Services
So what we should make sure is we'll cover also some of the servicing cost of how we're handling that. So
that can get flipped back between Anre and Steve, and also to come back to international.
Stephen J. Squeri
Okay. So just a couple of things to mention. We do have 14 acquires who have signed on to the program
in the United States that covers the lion's share of the merchant acquiring landscape in the United States,
11 of the partners are active, all of the partners that are active are listed in the presentation. We did say
that we would increase acquisition by 50% or more per year, starting in 2015 and going forward. We feel
very confident in that statement. We're pleased with the early progress, and the program is delivering
upon expectation. A couple of things that we should also mention: We measure merchant satisfaction
very closely in all segments; small merchants, mid-size merchants and large merchants. And what we're
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a satisfied merchant will warmly accept the American Express Card. So we believe this program is great
for a number of reasons. The other thing I would say is, don't just focus on the discount rate alone in this
segment, because the merchant acquirers that sign on to this program, we no longer will be paying them
for the acquisition cost for acquiring merchants, that will be the cost that they will bear going forward. So
it actually changes our cost base for our small merchant acquiring in the United States.
Stephen J. Squeri
Again, I mean, just from a servicing perspective, we're no longer serving, we're not servicing that
merchant anymore, right? I mean, so you don't -- you're not really servicing that merchant. You're
servicing that acquirer. And so you're knocking out all of those merchants that you serve. It's not the -that's a buildup from sort of the one point program that we had. But it reduces our cost to service a lot of
small merchants. But I think, to Andre's point about merchant satisfaction, it's again, just hitting on that
one place to go to handle all their processing needs, and that works in that small segment.
Kenneth I. Chenault
So this construct is working well, but there's also international markets. So Anre, do you want to just do a
quick update on that?
Anre D. Williams
President of Global Merchant Services
Sure. So the OptBlue program, as mentioned, is a U.S.-based program, we also are taking the OptBlue
model to other markets, so one would be India. Another one would be Canada, those are 2 markets
we're going to. But also, a list on the slide, we have had our bank partnerships, our merchant acquiring
partnerships we struck in other markets, including the U.K., France, Spain, Mexico, where we have
merchants -- I mean, acquirers that are acquiring small merchants for us in a very aggressive way, but
also servicing them, like Steve said, taking the servicing out of the American Express' hand, servicing
them right along with Visa and MasterCard, Discover or other networks and that's something that raises
the merchant satisfaction level with American Express, it makes them more likely to warmly accept the
American Express card.
Kenneth I. Chenault
So the U.S. small merchant acquisition program is probably a year ahead of where some of these
international markets are. We've been planning for OptBlue for 2 years. It's now really starting to kick in.
And about a year ago, we then set the bar high for international markets, where we know have to sign
more small merchants as well. And market-by-market, it's striking the right deals, different constructs
with the right partners. So we're very pleased with where we are, and we know we have a lot of work to
go -- a lot more work to do here. But it's a good opportunity for us to bring more spending onto network,
change perceptions, have more value to merchants than we have today, particularly for small merchants.
Richard Petrino
So did that answer? Okay. We'll do 1 back there, on the right...Okay. So we'll do around 3 or 4 more
questions. I got you, you, and you. All right?
Sanjay Sakhrani
Keefe, Bruyette, & Woods, Inc., Research Division
Sanjay Sakhrani from KBW. I have a timing question. I have 2 timing questions and one other one. Just
as far as the retention strategies on Costco, how soon will we know if they're working? And will you guys
give us updates? Same thing on the portfolio selling process, like, will we find out kind of when that
happens and how much? And I guess, the second question is on Europe. Obviously, the regulation that
you guys touched on it. Could you just talk about what you guys are doing to get ahead of it? Are banks
engaging with you? Because I think you guys have like a 3-year exemption there on the network side of
the business, that could serve as an offset, so maybe you could talk about that as well.
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Kenneth I. Chenault
So why don't we talk a little bit about the portfolio, which is not going to be a lot. But we're going to try
to be responsive. We'll talk a little bit about what signposts are there, and then Ed, you should talk about
how we're dealing with some of the legislation in Europe. So Jeff, why don't you go first?
Jeffrey C. Campbell
Well, all I can say is, look, we understand that the portfolio outcome has the potential, material financial
event. I do want to come back to my response to the earlier question, which is our EPS outlook for
2016. We're comfortable with under a range of outcomes. All that said, we can't tell you anything until
contractually, we've reached the conclusion, and all sides are comfortable making it public. We will do that
the second we can, but it's hard to predict when that will be.
Kenneth I. Chenault
And I'm sure, Sanjay, you and others will ask us as we go, how are we doing with the retention of spend?
So we'll cross that bridge when we come to it. But you heard from -- you heard about Canada. We're
early, but pleased with the results. On the EU, the regulations will start to kick in across the market later
this year. And we've had a lot of time to prepare. And as you've said, there are some differences for
American Express versus others. But clearly, were going to be impacted because the market equilibrium is
changing. And maybe this goes back to your question about, are we cutting into the muscle? We are trying
to get ahead of it. So one signpost is today, we said we announced the re-signing of British Air, Iberia and
Dwelling we didn't say, but that's part of all that same airline family, a low-cost airline in Spain. We did
some re-sign today for long-term contracts, right. We do think there are opportunities going forward, and
there are risks that we're going to have to mitigate. One thing we announced about, now 3 or 4 weeks
ago, we changed our organization structure in Europe. We were able to get more synergies from our
businesses in Europe. We took cost out, but it was not for the sake of taking cost out. It was to create a
more flexible, nimble organization that we believed had too much overhead between the various lines of
businesses, and we started streamlining that organization so they could optimize, on their own, and they
could move faster to take care of the opportunities and mitigate the risk as they manifest themselves. So
it is going to be a challenge, there's no doubt. But every time we faced this before, we see the challenge.
We try to identify and mitigate the risk, and try to find the opportunity there. And we did use that as
an opportunity to take operating expense out. But I do believe, to Steve's point, we strengthened the
organization by doing so. So again, I think it's still very early in the game, but -- and there's more to be
done here that we'll be talking to you all about during the course of the next year or 2.
Richard Petrino
Good. So right there. Yes. And then, we'll come back to you, Greg.
Christopher C. Brendler
Stifel, Nicolaus & Company, Incorporated, Research Division
Chris Brendler with Stifel. I have 2, hopefully quick questions. One on the DOJ case. I know it's difficult
to say much there. But I guess, what gives you confidence that an appeal is the right strategy? You
mentioned this is worth the fight, even today. Because merchants don't seem to be that interested in
steering, at all. So what's the big fear here? Is the fear more qualitative steering like we prefer Visa, or
is it more quantitative we're actually giving surcharging and discounts and being adversely selecting your
products? And the follow up question I had for Costco is, so I'm not clear from this meeting going forward
as you reposition for growth, is the growth strategy from here to continue to be aggressive in co-brand,
and grow that business or this the proprietary business going to offset some of the co-brand losses?
So it doesn't seem like co-brand's going to get any easier, but maybe Costco was just more of a unique
situation.
Kenneth I. Chenault
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Yes, let me answer the second one first, and then we'll go to the DOJ. There's not really a lot I can say,
because of the appeal process and where we are. But the reality is, as I said, that we believe that we
can be very competitive for co-brands if we have on alignment of objectives. And the roster of co-brands
is that we've recently signed, as I said, as Ed said, as Jeff said, this was all in a similar timeframe. And
I think that is very, very important. Where we're in a situation where the focus is money. And frankly,
I go back to the history, because I've said this publicly with Costco, when we were calling on them for
merchant acceptance, and it was just cost, this went on for 5 or 6 years. What changed the dynamic is
what we did was we entered into a partnership where they said, and we actually suggested this, we can
improve your warehouse club memberships, and we can improve retention. And we, in fact, consistently
delivered on that, all the way through. So that was an example, frankly, of aligned set of objectives, were
someones says, and you have it in some co-brand relationships, that their focus is on the financials alone,
or you're just a utility. That doesn't work for me. Because what we're about is, we're going to drive value,
I'll be held accountable for a performance. And so what I believe is, there will be enough co-branded
relationships out where, we can get an alignment of objectives. There'll be other co-branded relationships
where someone will say, "All I care about is the money." And if that's what they care about, I'll say that's
great. This is a -- you can do that. But it's not going to be with me. So that's how I handle the co-brand.
And I think what we've demonstrated, just in the last few months, is we've found a range of companies
that would do that. Relative to the DOJ, Laureen, since you're here, you can comment on that, and this is
our General Counsel, Laureen Seeger.
Laureen E. Seeger
Executive Vice President and General Counsel
Yes, hello, everybody. It's nice to meet you. I think that Ken mentioned earlier that we managed the
business for the long-term. We've had these provisions in our contracts for decades, and they served us
very well, and we believe that they comply with the law. And so whether or not steering is occurring today,
or will occur in the future, we wish to preserve our right to contract with our customers and our merchants
the way that we feel is appropriate for the long-term. And that's why we are maintaining the lawsuit.
Kenneth I. Chenault
That's all we can say.
Jeffrey C. Campbell
Back with the co-brand, all right, I would say, when you look at, just look at U.S. consumer and small
business. We don't need to sign in the co-brand to grow that business. But Ken, as you mentioned, there's
a number of competitive co-brands that will come out to bid in the next 12 to 24 months, and you would
expect there's a couple of them that we will evaluate versus the criteria that Ken just gave. And that's -- if
there's an opportunity to go after it the right way and build a partnership, we certainly will. But I think we
have great confidence in our existing portfolio of products. We will launch new products like we did with
Amex EveryDay. And if we have the right few co-brand opportunities, we certainly will pursue them, and
we'll be very competitive. And as witnessed by the re-signing of virtually all the major ones we have, other
than Costco.
Kenneth I. Chenault
Yes, I would really underline the confidence we have in the proprietary business and the opportunities.
And I think we've demonstrated, when you look at the consumers, small business and corporate, we
think we have very, very strong opportunities to continue to grow. So that's of the optionality that's very
important, that you need to focus on as you look across the company. Okay. Bring us home, Craig.
Craig J. Maurer
Autonomous Research LLP
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Craig Maurer from Autonomous. Several years ago, you gave guidance for $3 billion in new fee income
over 5 years, and part of that was LoyaltyEdge. And concerning the scope and the size of Amex's
capability, how much opportunity is there long-term for you to apply your capability to service others?
I'm thinking your data capability would go a very long way in the private label business. There are just an
enormous number of avenues that you could probably go at a very high return, considering you've already
built the infrastructure.
Kenneth I. Chenault
Yes, I think what's important, Greg, and I -- and this is one where I don't want to be super specific in
identifying the discrete opportunities. But I think you've got your hand right on it, that as a result of
this integrated payments platform, the importance of data, full adherence to privacy, security, we're not
going to give out PII data at all. But the impact and the ability, as I said, with the analytics that we've
developed, and the substantial reduction in runtimes, I think that this convergence of online, off-line is
going to provide a set of opportunities that we, in fact, are working on now. And we are excited about
the opportunities. I think it's too early for me to talk specifically about them. But the concept is there.
What I would also say is that we've seen this in our existing business, just the point of that Ed made
on offers and the ability of how we've used big data to improve our capabilities there in the targeting.
But I actually think that there are a range of partners, as we look at coalition rewards. What's exciting
about that business, is it's all about performance marketing. And what's interesting, as you know, in that
business model, is the merchant funds the reward. So it's a very different structure. And so I think more
and more, where we can demonstrate, and this is different from the selling of data, which I think runs
into a lot of issues. But when you then say the standard is, I'm going to improve your performance, which
we're doing in certain levels in the consumer merchant business right now, we're doing in the corporate
business. I actually think this is the point to where the puck's going. I think there's going to be more
opportunity in that arena.
Edward P. Gilligan
And Craig, what we learned is, you don't have to have it run the platform in order to add value through
data. So that's different from a couple of years ago, as we were learning about. All Ken has said, we don't
need to actually run a loyalty platform to be able to bring data insights, to keep partners, to improve their
marketing, and that's what the opportunity is. I think that gives us many more degrees of freedom.
Kenneth I. Chenault
And the ability to connect more seamlessly and easier, has been enhanced substantially over the last 2 or
3 years.
Richard Petrino
We're at 5:15. But I always got to be different. Yes, I want to give one more. Anybody? All right. It doesn't
look like there's any one.
Kenneth I. Chenault
There's one right there. All right, right? There. Okay. All right. You don't want to share it, Bob, the
question or what?
Robert P. Napoli
William Blair & Company L.L.C., Research Division
I guess, I -- with the opportunities you have globally, internationally, when you're a lot smaller than you'd
like to be, there's a lot of innovation, there's a lot of small growth companies around. You haven't made
an acquisition in years. With at all the capital we have, in order to accelerate growth, why have you do
not made some acquisitions? I mean, what has been the hold up? I mean, how [indiscernible] to suggest
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41
organic, love the organic growth, then focus on organic. But it just seems like there should be some things
that could accelerate the growth of your franchise.
Kenneth I. Chenault
And so a few things I would say is, one is, we've had a lot of opportunities from an organic standpoint,
that I think we've executed against. Coalition rewards is a major effort to put all that together. The
Global Business Travel joint venture. I think, was very creative. Loyalty Partner, the reality is, that was
an acquisition that I've talked about before, that lined up with the criteria. So I want to be also clear is,
we've also made smaller investments in companies, where we could do operating deals with, where I
think will play a very important strategic role for us. So we are open. Jeff said this as he went through
this part of the presentation. And given the environment that we're in, we're open to acquisitions that
meet the criteria. I've been very consistent, that I think there are -- we're blessed that we have a long
list of organic opportunities. But I do think that for -- with the appropriate criteria, from an opportunistic
standpoint, we will also look at acquisitions.
Richard Petrino
Okay. Well, thank you very much.
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42
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