American Express Buying Out Cardholders: Bad for the Economy?

It's another sign that the average American is in for a long stretch of tighter credit: On Monday, the AP reported American Express (AXP) would offer some of its members $300 in exchange for paying off their balances and closing out their accounts.

Douglas A. McIntyre of 24/7 Wall Street says that won't be a plus for the economy:

Between the lines, that means that customers who are not likely to pay their balances are being dumped. That means more people in the economy without access to credit, which means less consumer spending.

No one expects Amex to put patriotism above profit, but as banks and credit card companies cut loose a large portion of their customer bases, the time it will take for the economy to recover will be stretched further into the future.

Also, while AmEx has been shifting its customer base toward more middle-income customers for a while, it's still widely associated with a better-heeled clientele. Makes you wonder what we're in for in the rest of the credit card space where lenders extended excess credit to a larger pool of riskier borrowers.

As for AmEx shares, last week saw several analysts downgrading their outlook for the company. Standard & Poor's kept its "sell" rating on the stock and cut its price target on the company by $3 a share to $11. UBS also lowered its target from $20 a share to $13 with a "neutral" rating, and predicted "severe earnings pressure" for the credit card sector in 2009. AmEx shares are trading at $11.57 this morning.

Comments

[NightBengal:]

When I first read this yesterday, I honestly thought it was a joke. I suppose AmEx is pretty pricey and makes a good chunk more from its transaction fees than some other companies, but acutally paying people to leave and forgoing the interest spreads entirely? That's a new kind of game.

I would think they'd want to encourage new business, not make people wonder if they'll get the axe. Maybe the people they're targeting 'deserve' to get the axe anyway, but this kind of thing can give a company a reputation they don't want.

Cheers,
NightBengal

Feb 24 03:46 PM

[UserThunder...:]

On Feb 24 03:46 PM NightBengal wrote:

> When I first read this yesterday, I honestly thought it was a joke.
> I suppose AmEx is pretty pricey and makes a good chunk more from
> its transaction fees than some other companies, but acutally paying
> people to leave and forgoing the interest spreads entirely? That's
> a new kind of game.
>
> I would think they'd want to encourage new business, not make people
> wonder if they'll get the axe. Maybe the people they're targeting
> 'deserve' to get the axe anyway, but this kind of thing can give
> a company a reputation they don't want.
>
> Cheers,
> NightBengal

I concur. I thought it very strange when I first heard of this development. Clearly, the economic retrenchment we are experiencing is quite significant.

Feb 24 03:51 PM

[CoverIsBetter:]

It's total reverse psychology. Tell the customer, you are so sure they can't pay, that you will pay them to leave. The customer sees it as a challenge and stays and pays?

This is totally insane. At a minimum, the customer must feel insulted to be let go with such compassion. At a maximum, this is some kind of martyrdom for Amex to plea for government help. It was said GM should pay its workers to not produce and it would be cheaper than trying to turn a profit. Maybe AXP is following that model.

Feb 24 04:09 PM

[Scrapper:]

I called Amex yesterday to inquire as to why they had upped my interest rate, I charge every month, pay in full every month, last month is the first time in years that I charged and did not pay in full, but I paid way more than the minimum due and paid on time. They told me they raised everyone's rate and they could not offer me better. They took me from a 7.99 to a 10.98. I have another card that beats the 10.98 so I will be paying Amex in full and cancelling my card. You couldn't find a better more credit worthy person to issue a card to, yet in my opinion I am not what they are looking for, and now they want to pay to get rid of people. Maybe I should reconsider, fall in arrears and see if they will reward me too. My credit is so good it can afford to take the hit. Something to think about and then we wonder why their in the pickle they are in. HMMMMM

Feb 24 04:30 PM

[yellowhoard:]

I own a business and will not take AMEX. They want 5% per transaction! I only pay 1.75% to MC or Visa.

My advice to you all is to pay the minimum until they give you $300. Such a deal! Then switch to MC or Visa and charge wherever you like.

I fly to Tahoe every year with my American Airlines MC points, and I get back about $300 from my Discovery card.

Feb 24 06:58 PM

[tshk1221:]

Let's save as much as we could and not use American Express credit card and have all the credit card companies including banks starve to death. American Express does know how to appreciate its customers. American Express even criticizes and scolds its customers of their use of its credit through repeated letters. Its credit department assessing and reviewing personal credit must learn customer service skills first before sending out rude letters to its customers.

Is American Express worthy to be listed in Dow Index??

Feb 24 07:27 PM

[who:]

Is there something Amex sees that its not telling us? Looks like they are predicting defaults to increase significantly and willing to take in less to reduce the possibilities of defaults.

Feb 25 03:23 AM

[Conan the B...:]

YH: since AXP just increased my Cash Advance amount by 50%, I doubt whether I will be a recipient of a letter asking me to cancel my card. Member since 1972.

I use AXP strictly for Cash Advances, I usually repay within a week, sometimes the next day. Debit cards are great but I hate the Limitation on ATM withdrawals.

The latest news on AXP Credit Card default rates was almost 9%. I do not blame them at all for trying to curtail future losses. Whatever algorithm they are using to cull the herd or to use historical late payments, or whatever... is in their best interest on an economic basis.

It could also be a sign that the worst is over on a Contrarian point of view.

I am going to delay my current payment, in the hope that I receive a similar letter.

I would think that DFS could take a lot of market share here with cash on hand. They have already announced a Credit/debit card for parents to give to their kids. Interesting concept.

Feb 25 03:41 AM

[Conan the B...:]

YH: one other thing, I am currently watching the supply/demand structure in Physical Gold via the Futures vs Spot markets, live on Bloomberg.

Gold surged on the way up once it went into Contango, which I have always considered to be the normal Future Inflation risk role of gold.

The nearby Futures contract for Gold on the way Up had a $1 to a $1.50 premium. So far, Gold on the way down has seen a decrease in that spread to about a $1 or less.

I am postulating that when spot starts to trade near or above the futures again. It will be a good time to reenter.

Just a Tool I am developing.

Feb 25 03:53 AM

[KSK:]

looks like AXP is preparing itself for the worst ... by reducing the risks ... paying off to reduce the risks...

one of my friend has the AmEx Blue Cash card and had been using it as his primary card... in Dec of 2008 Amex reduced the credit limit from 13K to 2K just because he had other debt....

Paying off to let the risky customers go ... good strategy....

Feb 25 02:27 PM

[tshk1221:]

It is not a good strategy as a lender.

It is driving out valuable future customers who will contribute to AXP's income when the market comes back.

A credit card lender that does not appreciate customers with good customer service skills can't last that long.

On Feb 25 02:27 PM KSK wrote:

> looks like AXP is preparing itself for the worst ... by reducing
> the risks ... paying off to reduce the risks...
>
> one of my friend has the AmEx Blue Cash card and had been using it
> as his primary card... in Dec of 2008 Amex reduced the credit limit
> from 13K to 2K just because he had other debt....
>
> Paying off to let the risky customers go ... good strategy....

Feb 25 06:06 PM