American Express

Attention given to the suit of the Justice Department against Visa and MasterCard should not distract attention from American Express. It has been doing very well both in the U.S. and abroad. It's financial report for the first quarter of this year shows that its total charge volume worldwide reached $51.0 billion, up 26.9 percent from the same quarter of 1999. The number of credit cards in force worldwide rose 12 percent to 47.9 million, while average spending per cardholder rose 11 percent to $1,980.

James C. Allen has an insightful article on American Express in the June issue of Specialty Lender. He examines the fortunes of American Express and its banking competitors from an economic standpoint. For example, he cites a study by the Federal Reserve Bank of New York showing that the top 25 banks in the U.S. "generate as much as 41 percent of their total operating revenues from payment-related activities." To the extent that the Internet diverts revenues from these functions, the banks may face declining revenues. In contrast, American Express has largely operated outside of the payment system, in part because of its inability to issue its cards through U.S. banks. This limitation does not apply to ventures with foreign banks, however. A sample of some of these relationships may be found in the accompanying table.

A major advantage of American Express has proved to be its reliance on fee income. Annual fees amounted to $4.7 billion in 1999, or 31.7 percent of total revenues. Of course, the prime example of capitalizing on fee income has been American Express' Centurion Card, available by invitation only for an annual fee of $1,000. In contrast, competition has forced most banks to abandon annual fees on their credit cards.

In addition to gaining a major source of steady income from its annual fees, American Express is also able to charge its retailers a discount higher than those levied by banks. Whereas the two major bank card brands charge retailers 1.65 percent of credit volume if they use a point-of-sale terminal, American Express charges them 2.93 percent. This rate is significantly lower than its five percent charged in earlier years and has increased retailers' acceptance of the American Express card.

However, American Express has been less successful in controlling bad debt costs, which are currently almost as high as the firm's cost of funds. In the first quarter of this year, charge-offs amounted to 4.6 percent of managed credit card receivables.

At the end of the first quarter of 2000, American Express ranked sixth among the top ten in terms of billions of dollars in managed card receivables.