American Express's Management Presents at 2014 Sanford C. Bernstein 30th Annual Strategic Decisions Conference (Transcript)

May.30.14 | About: American Express (AXP)

American Express Company (NYSE:AXP)

2014 Sanford C. Bernstein 30th Annual Strategic Decisions Conference Call

May 30, 2014 9:00 AM ET


Edward P. Gilligan – President


John Eamon McDonald – Sanford C. Bernstein & Co. LLC


Okay. Thank you, everyone. Thanks for coming and we’re very happy to have American Express with us today, Ed Gilligan is joining us. Ed is the President of the company. Ed’s run many of the businesses at American Express over the years and we’re happy to have him here for the first time. Thanks, Ed.

Edward P. Gilligan

My pleasure.

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

So we thought we’d maybe talk a little bit about growth opportunities that American Express is looking at in the traditional businesses. I noticed that you frequently cite international and small business as two areas you’ve made progress, but do you think there’s more growth opportunities? Maybe, we could start off with those two areas.

Edward P. Gilligan

Great, John. When you think about American Express, I know most people immediately think about our consumer business in the U.S., which really is the foundation of the company; it’s the largest business unit, we have a very strong presence with affluent consumers, and we feel like we are the leaders and the best at what we do in charge and credit cards in the U.S. And we have a strong position and yet we do believe we have a good runway to growth with consumers. But when we look for acceleration of growth from already strong positions, I think both small businesses and our international franchise present even more opportunity for growth over the next few years. And if we start with small businesses, American Express has had a dedicated business unit called OPEN for small businesses since the early 1980s.

So we have a business unit dedicated to helping small businesses grow to provide them with tools to help manage their expenses, run their company, earn rewards, put those rewards to work. And we are the largest player for charge and credit cards to small businesses by a wide margin, but yet there’s huge opportunity to do even more. And the reason I say that is we look at not just the credit card market for small businesses, we look at what small businesses spend.

And the number when you take out payroll, the number that small businesses in the U.S. spend to run their business is upwards of $4 trillion and only about 8% or 9% of that spending today is on business plastic on charge and credit cards. So there’s a big opportunity and we’ve already made progress of working with these small businesses and giving them new ways to use their American Express cards; capturing their advertising spend, raw materials, office supplies, letting them earn rewards on that spending, and then letting them use those rewards to reinvest in their business.

So with American Express; they can earn, they can put their Google advertising spend on American Express, earn rewards, and then use those rewards to pay their bills for advertising by paying with points. So, we’ve created this virtuous cycle to small businesses and believe we have a very good runway here. We have changed our business model over the years; it's really, it’s a little bit like consumer, but it’s clearly a B2B business.

So leadership position, but yet we only feel in many ways we’re scratching the surface of what this business could do over the next 5 to 10 years, so great runway for growth there. And in international…

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

I’m sorry. Just on small business so the 90% that’s not going on small business cards, it’s either going on personal cards or on cash checks?

Edward P. Gilligan

Yes. And there is a small amount on personal cards, we know that, but the vast majority is checks that companies still write checks for most of their expenditures. And in fact, we’re looking at interesting product development opportunities to help get more of that spending and recently we announced a partnership with Intuit. and Intuit as you know provides accounting software to most small businesses in the U.S. And we created something called ReceiptMatch where you can take a picture of a receipt from your American Express bill; it shows up on your AmEx bill that gets automatically uploaded into your accounting software with Intuit. We launched that a month or two ago. But with Intuit, we have a lot of visibility into what those expenditures are because these small businesses are using their software for all their general ledger work and accounting.

So, we believe Intuit will be an example of a new partnership and new product development that will help us crack into this big opportunity for spending. But the number is real and from Intuit we can see that most of those expenses are checks that are being cut to pay for it.

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

What are the barriers for getting small business to use cards more? Is it just kind of a mental thing or you just got to be used to it or is it the merchants they want to use it not taking cards or?

Edward P. Gilligan

It’s all of the above, I mean it starts with the mindset so we have a dedicated group of client managers that talk to these small businesses to educate them that they can, they can use. We have a lot of these B2B expenses already are merchants of American Express, but small businesses are not thinking that way. But when we talk to them and explain what our products can do and how they can earn more reward points and how they can use those points to invest back in their business, it works. We see dramatic expansion of spending on the AmEx card when we apply these treatments to these accounts. But there’s also a merchant issue that many of those businesses that they’re buying goods and services from don’t accept plastic or don’t accept it for business reasons.

And that’s when we put our closed-loop model to work that we have a dedicated merchant group that we can target these B2B merchants to sign them up for this group of customers. We do that in our corporate card business with large and midsized companies. We’re now doing that with small businesses where we can work across American Express to target merchants we want assigned and we can talk to those merchants about how we can bring them plus business, introduce them to whole new customer sets who were not using those merchants today. And that’s a virtuous cycle.

It’s not an overnight success story. We’ve been doing this since the 1980s, but lately we’ve got, we’ve really perfected the business model and I think we’re making real progress. But when I look at the next – where growth is going to come in the next five or 10 years, small businesses loom large for American Express.

Now with international, it’s interesting. So in the U.S., if you look at some of the Nielsen share data as an example and you look at general credit cards charging credit card spending in the U.S., American Express has 26% or 27% share. Outside the U.S., there’s really no markets where we have that presence with the exception of Mexico.

Most of the established markets where credit cards exist today, AmEx has a brand presence, it’s well-known, but has a smaller share. So, we’re even a more affluent business in international than we are today and in each one of these key markets for us, we’ve been working the last five or 10 years to continue to expand our presence. So for example (indiscernible) and I go back a long way, I lived in London for six years and ran our international business.

When I moved there 10 years ago, AmEx had about a 4% share of the UK; now we are probably double-digit in that range. And that just comes from applying many of the things that work in the U.S., but putting more resources, focus, effort on international markets. And even though the UK economy has not been performing well since the recession, our business has been performing very well. Same is true in Japan. Mexico has been a great growth market for us. Australia has been a great growth market for us.

And we continue to evolve our business where we invest and we’re accelerating our presence in Now when you look at the next five to 10 years, you see, and you look at projections for where credit card spending will grow, emerging markets, high growth markets loom large. And in markets like Brazil, India, China, Russia, Korea, Indonesia, and Malaysia; the projection for those markets will be double-digit growth in credit card spending in the next five plus years.

And many of those markets are franchise markets of American Express, we call them independent operators and we work with bank partners and this is what we call our GNS business, Global Network Services. And we have expanded the number of partners that we have around the world and we’ve expanded our product offerings and our network offerings to those banks to earn a higher share of their business.

So for example, in Brazil, we work with a bank called Bradesco. Bradesco is also the largest Visa issuer in Brazil and it has the American Express franchise. And every day we work with Bradesco to find a way to earn a higher share of their business and sometimes it’s through financial arrangements usually because that’s really how Visa and MasterCard operate; but in addition to that, we bring assets to Bradesco that comes from our expertise of running a card business in the U.S. and other places.

So, Bradesco for example was here in New York not too long ago and they loved Pay with Points in New York City taxis. So, now we’re enabling the acquirer in Brazil to be able to do that for Bradesco AmEx card members. And taking some of these digital products we built in the U.S. and bringing them to these high growth markets is going to enable us to change the basis of competition with Visa and MasterCard. I believe over time that we can bring assets from being the largest card issuer in the world, which we are today; we can bring those assets to network partners in Brazil, in India, in China, in Russia et cetera to help differentiate American Express and earn a higher share of their business over time.

And John, as you know, from following AmEx for a long time, the network business has been the fastest growing part of the Company for most of the last decade and yet when look over the next five plus years, I believe again, we’re only in the early stages of that business being a meaningful contributor to American Express.

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

And how do you decide when to go into a new country with your own card proprietary basis versus going with a partner on GNS?

Edward P. Gilligan

Well, there’s very few new markets for us right now. We haven’t gone into a market fresh in a long time. So we’ve established the card business throughout most of the big international developed markets in the 1970s, 1980s, early 1990s where you would expect Western Europe, UK, Australia, Canada, Mexico, Argentina even. And it’s really the last 10 years that we’ve seen the emerging markets grow and that’s where we really built our network business, because in the network business like for example in China, we’re not deploying capital into China or now into Brazil or into Russia.

We’re working as a network signing up a bank partner, someone who we know will take good care of our brand that will agree to the conditions of doing business with us and we’ll work with them over time to earn a higher share of their issuing business. Many of those banks also acquire merchants for us in those markets as well.

So, the next area where we will start entering, most like, we will be in Africa, where we only have a small presence today in South Africa and in Northern Africa. But sub-Saharan is still new to us, we have some merchant acquiring deals, but you will see us over time build up a network business down there. We will not deploy capital there; we’ll treat that like other emerging markets and try to find the right bank partners and build our brand over the next five years.

So again, when I look at where I think you’ll see more growth from five to 10 years, small business and international and the network business in the emerging markets will be some of the higher growing parts of the company, I believe. That’s how our strategy is being built. We’re not walking away from the U.S. consumer business obviously; we still think there’s a great runway to grow there. But I do see great opportunities in small business and in many parts of international.

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

What’s the status of merchant coverage internationally versus in the U.S.? And you’ve been good at growing that merchant coverage in the U.S. What's the status of merchant coverage internationally versus in the U.S.? And you’ve been good at growing that merchant coverage in the U.S., convincing merchants of the value proposition, pay a little more perhaps at the point of sale for AmEx cards, but get more spend. How does that work internationally? Is it a greater challenge?

Edward P. Gilligan

So, the glass is more than half full for American Express in merchant coverage. I mean the best proof of that is last year $950 billion of spending around the world on AmEx cards at merchants who accept the card around the world, but yet we know, it’s not full, the glass is not full. We have to sign more merchants here in the U.S. and even more so outside the U.S., particularly small merchants. So when you look where AmEx customers go, our spending is highly concentrated at large merchants, [D&E] (ph), luxury, retail, B2B. But we know there is many small merchants around the world who we want to accept the card. We’ve never really had the established channels that would be cost effective for us to acquire small merchants in mass because you don’t get a lot of spending from those merchants, but we know it’s critical so our model has evolved.

In the U.S., we’ve had a couple of different iterations of bringing merchants on and recently we announced a program called OptBlue, which we can talk about, but which we know over the next two or three years will bring substantially more small merchants into the franchise under a different construct. And we’ve signed, six, seven, eight, plus merchant acquirers in the U.S., which are only beginning to be implemented now to bring more merchants on.

Outside the U.S., there is not really one pan-European acquirer that you go to or one across Asia or South America. You have to go to each country and in each there are four or five acquirers in that country so it’s harder, you’re right. In other words, there’s no silver bullet that we could do one deal and get massive coverage over time. So we’ve been at this trying to find out what’s the right construct for working with merchant acquirers to bring more on. Ten years ago we did a deal in Japan with ACB, which is a very big network in Japan as you might imagine. And as a result of that deal, we have parity coverage in Japan meaning as many merchants accept American Express as Visa and MasterCard or JCB cards. We did a similar deal in Brazil with Cielo, which is a large merchant acquirer in Brazil so now we have any place that accepts Visa, accepts American Express as an example.

We’ve done deals that are not quite as dramatic as those two in many other parts of the world. And now based on our experience in the U.S., we are now shifting our efforts to many parts of international to do more of these deals with Visa and MasterCard acquirers where we change our construct and in return; those acquirers go back to their existing book of merchants, look at all the ones that don’t accept the American Express, and we give them incentives to go back and sign them. In the U.S., we talked a lot about this under OptBlue where in effect we're giving up pricing, the end pricing to the end pricing to the merchant. We believe we protected our economics well. But as a result, we know the acquiring industry in the U.S. is now primed for us to bring on millions of more merchants over the next few years.

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

And this really OptBlue program is designed to get smaller merchants?

Edward P. Gilligan

It’s all of that small merchants.

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

And why is now the right time for this? Does it have to do with e-commerce and the growth of smaller merchants as well as some of the other products you’re launching? Is all that coming together?

Edward P. Gilligan

So I think it’s interesting, one I think American Express has learned a lot; but two, I think the market was ready. So if you look in the U.S. in particular over the last say three years, this company called Square has been disruptive to the merchant acquiring business. So if you know Square, it’s a device you plug into your smartphone and it can turn any one of us into a merchant that accepts Visa, MasterCard, AmEx, Discover. And what they do, Square is the merchant of record and they charge one price to the end merchant and it’s public for Square, they charge 2.75%; but for that, within 35 minutes you can set yourself up as a merchant.

Square has scaled in the U.S. with micro merchants. But I think they have not yet succeeded to the best of my knowledge at getting larger merchants to use Square, but they certainly came in and they disrupted the U.S. marketplace and merchant acquirers started paying attention. So, who are the merchant acquirers? First Data, Chase Paymentech, Elavon, Bank of America, Wells Fargo, Vantive; all these companies that have very good businesses acquiring merchants for Visa and MasterCard started waking up to this and they realized there’s something powerful about that value proposition.

So, I can’t tell you for a fact that with Square that got the merchant acquirers are saying, they want to change their relationship with AmEx, but I certainly believe that was a factor. On the AmEx side, we tried a bunch of different things. We used to have just AmEx sales people sell to merchants up until the mid-90’s, then we signed on some external sales agents that are in the industry to sign merchants for us and that was just called an ESA Program.

Then we went to something called OnePoint, where we still set the price, but all those acquirers that signed the merchants, did the servicing, settled with the merchants and we settled with them, but we controlled the price. And OptBlue is basically AmEx saying we’ll establish a buy rate with an acquirer, they will set the end price to the merchant, they’ll give us information back on who the merchant is, but they now have incentives to go and tell their merchants you can now have – however, you want to price the merchants, you’re not going to have AmEx, Visa, and MasterCard all together; however they want to do that and this is what they’ve been asking us for in the last year.

So, we’ve evolved our thinking and decided to go down this road and I think the acquirers have been looking at what’s going on and they were ready for something different. So, we had a good meeting of the minds and in really a very short order we signed now six to eight, I don’t know, have we said eight. Eight with probably more to come.

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

And you expect this to accelerate obviously your small business in really micro merchants?

Edward P. Gilligan

We would expect this to bring on couple of million new small merchants in the next two years or so. Everything else being equal, we would expect a small decline in our average discount rate in the U.S. as a result, we would expect more spending to come on that would offset that decline, and we would expect some sizable operating expense gains, where today where we’re setting the price with these acquirers and paying them incentive, we no longer will pay them an incentive. So the math on this looks very good to us and most importantly, I think we’re going to see, our card members will see over the next year or two many more small merchants accepting the card.

So in international, again there’s not one kind of silver bullet to do that, but there are many different constructs as well. And we’re focused on key markets like the UK, and France and Spain, we’re looking at Mexico, looking at Canada, and looking at the acquirers in those markets and trying to come up with constructs that would be attractive to them and have the same result for us. Many of those markets, this Square phenomenon has not yet landed and it’s not just Square, there’s a few other companies like Square in different parts of the world doing this.

But I think when the acquirers start seeing that maybe there is a disruptive force in their country and they realize AmEx now will have an adaptable model, I think you’ll see again over the next two years or so AmEx bringing a lot more small merchants on around the world. And that’s certainly part of our growth strategy, particularly outside the U.S. is to get a lot more small merchants. That doesn’t drive huge amounts of spending for us, but what it does, it changes the perception and improves the value proposition of our cards. And none of us are satisfied with that we have all the merchant coverage we need, we definitely want more. And now I think we’ve seen that we can accelerate coverage in ways we haven’t been able to do before.

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

Let me shift gears a little bit and talk about some of your broader thoughts on kind of the next generation payments landscape, kind of the idea of where transaction format's headed in the future. And I guess for starters, why hasn’t there been as much progress on some of the new mediums, the NFC and kind of mobile wallets and the adoption of this kind of thing, those types of things as much as people thought and have forecasted?

Edward P. Gilligan

Well, I mean like if you went back two or three years ago at a lot of conferences like this and around the country, there was kind of digital mania going on that a large technology player could come in and change the game and consumers would use their phones to pay for goods and services at merchants. So, the way I used to answer this question two or three years ago is kind of the same way I answer it now. There is some naivete in the air that the POS, the point of sale infrastructure at merchants in the U.S. and around the world, very complicated [plumbing] (ph); very complicated, non-standard, many different players, not easy to switch out the point of sale device to accept the phone payment.

So we knew it is going to be complicated from a merchant infrastructure point of view. But even more fundamental than that is the customer value proposition, is it better to have card detail stored on the chip in the phone and tap a terminal or is it simple to do what you always have done, which is swipe a card. So, there wasn’t a strong customer value proposition and there was very complicated merchant infrastructure and as a result, I think it was fairly predictable that when you got beyond the hype that there’s nothing really there. That doesn’t mean the next three years will be the same as the last three. It doesn’t mean that at all.

And I think we’re watching the space closely as we always have been to see how are things evolving, how is consumer behavior changing. Clearly, all of us walking around with smartphones and the Internet in our pocket is changing our behavior of how get information, how we think about what we’re going to buy, and it will change eventually how we pay for things. It may or may not be NFC; it might be, it may not be. It may be just walking into a store, scanning a barcode, and paying from a click from your phone and paying in the cloud. It may still be swiping your card, it may be NFC tap and pay.

There’s going to be a variety of solutions that will come out and I do believe you’ll see more change in the next three years than we saw in the last three. But I still think three years from now the predominant way that consumers pay for things will be on Main Street will be swiping your card. But you’ll see two or three other things emerge that haven’t come out. Now again, two or three years ago, you had players like Google who talked a lot about the Google Wallet and they were going to tests with NFC on the phone. And I think the technology was interesting, but it was not a great customer experience. We were not a big fan of it, we didn’t want to participate because we thought it was going to cause card member confusion and open up customer service disputes; who is the merchant of record, do you really know who you’re buying from, it was a can of worms.

I think some of those things will get ironed out in the next few years, whether it’s Google or Apple or whoever is going to come into the space. I think whatever the future will be, it will be based on learnings that you have to have a better customer value proposition and you have to be able to deal with multiple different ways that merchants want to do business.

And then you layer on top of the whole merchant side, it’s not just will they put a new terminal that reads a chip; you have this whole EMV chip and signature, chip and PIN, all hitting at the same time. And up until a few months ago there was still a lot of talk of NFC. In the last few months, what you hear from merchants is help me protect my card data, I need chip and PIN, why is the U.S. the only major market in the world that doesn’t have a chip and pin?

So, you hear a lot more talk about EMV than you hear about NFC and that’s just the reality of the marketplace that we’re doing business in today.

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

And what is American Express doing on the cyber security front? Are card issuers working together on some of these issues as Target card issues just kind of accelerated folks efforts there?

Edward P. Gilligan

Well I think it was clear, became clear to most people that in the post-Target world there’s an issue about security of credit card data. That issue for many merchants and for credit card players, whether they’re issuers or the networks, was very top of mind before Target. But after Target, you have things happening where the U.S. government wants to get involved, merchants are even more paranoid because a few merchants said if it happened to them, it could happen to us. They all looked at what happened to sales at Target post the breach, they look at the liability that’s floating out there still for the fraudulent cards that came out of it, and I think the sensitivity awareness is at an all-time high.

So, what American Express has always tried to do, where we don’t have market power in the U.S., we can’t set the standard, right. We have a great company with tremendous growth potential. But you look at Visa and MasterCard and you look at credit and debit, they are the dominant players and in the end they'll set the standards for the payment industry. And we've seen this in other markets around the world that have gone to EMV, which is using a chip and PIN. Instead of a swipe of mag stripe, you have a chip; you insert the chip into a reader instead of swiping the card, you might put a PIN in there, you might use signature. But this has happened in most places around the world and it's just coming to the U.S. now.

And it will take on the current trajectory three, maybe even four years for the U.S. to move to what's now chip and a signature as a standard that's been agreed to. And as all cards in the U.S. have to be issued with chips on them and all terminals in the U.S. have to be able to read those chips and that will take time. So, the first thing AmEx tries to protect our customers, as and we have regardless of whether it's a chip or a swipe, we have the lowest fraud rates in the industry in the U.S. and around the world because of our closed-loop model, which means we have more information we put to work. When you swipe your AmEx card, we know a lot about you and how you used your card in the past and we know a lot about that merchant that you're at.

We have a lot of information and we know that transaction data and as a result of using that in Big Data and heavy analytics we were at very good at fraud detection and stopping for early and as a result, our fraud rates and I we show this at our last financial community meeting just half of Visa and MasterCard. The attempted fraud in our network is at an all-time high, but the actual net fraud that hits our P&L is very small number for us. So regardless of what happens at the point of sale, our first job is to protect our customers and fraud. And our customers have a higher standard for American Express.

It's critical to our brands and so that's most important to us is protect our customers information. Then, we do work with Visa and MasterCard and we're all talking to major retailers about the situation and should we accelerate a move to EMV, having a chip on the card. And it's a big question that's still looming does the U.S. state chip and signature meaning you insert your chip card into a reader, a receipt comes out and you sign it versus say in Europe, you insert your card into a reader and you key a PIN into the terminal.

PINs are more secure, but only slightly more secure. There's a big expense for the industry, if it goes to chip and PIN versus chip and signature, which is why I believe Visa and MasterCard set the standard at chip and signature. So, we're constantly evaluating and talking to merchants and being part of industry discussions. We understand the differences. We try to make sure the facts come out not just the emotion and we want to do everything we can that protect our card member data and work with merchants who accept the card to help them.

This discussion will still be going on over the next few years. The chips we're issuing on AmEx cards today, if started and will continue most likely on an accelerated pace, will work in both the chip and signature environment or if the industry in the U.S. changes to chip and PIN, those same chips will work for us. So, we've thought about this ahead of time to make sure we have the right technology on the card and then we move with the industry standard as we see fit.

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

That's helpful and thank you. Couple of questions, just actually one more on kind of e-commerce front you kind of an leader in using social media as part of your marketing and enhancing relations with customers. Can you give a couple examples of how you're leading that into business?

Edward P. Gilliam

Well. John, it goes back like three years ago, when there was lot of the NFC mania going on and the Google Wallet was coming out what we looked at this and we knew NFC was going to take a long time, but what was the promise of NFC then and even now is it’s not just tapping and paying. As you walk into a store, the merchant knows who you are, they send you an offer if they choose to, you use that offer when you're checking out to pay.

That was the promise of NFC was not just about tapping and paying it was merchant loyalty. So, we started thinking about this three and four years ago and realized American Express has some unique advantages as a closed loop; issuer, acquirer, network; and our goal three years ago was try to bring to light the things that were different about American Express and not wait for NFC. So three years ago, we launched our first coupon this offer on Foursquare and then went to Facebook and then went to Twitter after that and the concept was let's go where our customers are.

So we have a lot of customers on Facebook, we had some on Foursquare, we have a lot on Twitter, and how do we create unique experience with that, so we came up with this concept syncing your card. Sync your card with Facebook based on U.S. what you like your social graph will sure up merchant offers, you load it to your card by tapping it will be something like spend $50 at this merchant get $10 credit, it's loaded digitally to your card. You go to that merchant and you swipe or click a mouse, we see if you are spending the $50 of the offer and if you are where we issue staying credit and send you a text message saying that your credit would be on your next statement.

We started doing that three years ago and have continued to work on that and bring it around the world and we would call like our digital offer ecosystem, where we created digital offers for merchants that we can work with merchants and put their marketing to AmEx card members on social media. We can make it simple so you don't train the merchant or the person at the counter, you don't have to show you phone, you don't have to hold up a barcode, you don't have to train a cashier. It's fall behind the scenes done by our technology creating APIs plugging our technology into these platforms.

And we've been experimenting that for three years and we launched like Foursquare, Facebook, Twitter. Then we did tweet to buy where you could tweet AmEx Kindle and buy an Amazon Kindle on Twitter. We went to TripAdvisor and you can sync your card with TripAdvisor and you can see reviews written by AmEx card members and where AmEx card members stay when you're in the city. We did people point to New York City taxis where you can swipe your card today in half the taxis in the city and if you have membership rewards, at the speed of authorizations, you can use points to pay for that taxi ride.

These are all things we've been experimenting with and all of it was to learn about consumer behavior and how to bring things to light that are unique to AmEx. And the things we did three years ago. Very few of many of our competitors are figured out to how to do it today right because in the way when we talk a lot to hi-tech companies, whether it’s Silicon Valley or Silicon Alley or in Israel, and explain the AmEx model, AmEx is more like Apple. Apple owns the hardware, software obsesses over consumer experience. Android has more volume, but they can’t control what happens on the phone, Samsung can control that.

So, AmEx is like Apple. We have the relationship with card member with the merchant we obsess over consumer experience. Visa and MasterCard like Android to have more volume than we do, but they can’t control what happens with the customer. The bank issuer does, they can’t control what the merchant does, the acquirer does that.

So, they have more volume, interesting business model, but they can't control their ecosystem and we can and our whole goal is bring that to life where our customers are and learn about consumer behavior.

All of this is AmEx moving from being a payments company to being more relevant for commerce, right. Not just when so, be relevant when you're thinking about what to buy not just when you're about to swipe your card standing in front of a point of sale machine. And how do and we are very relevant today in travel commerce with we are help you plan your trip, consumer or business travel, use your AmEx Platinum Card or Corporate Card to pay for your trip. We've been doing that for 30 years, but now in digital world, we can do that in many other aspects of commerce by connecting merchant content with card members and doing it in unique ways.

And not just coming to, but finding you when you're on Twitter or Facebook or TripAdvisor on these massive platforms. And that's worked well for us. I'd still say it's early, but I think you too for a 164-year-old company, we feel like innovation is alive and well on American Express.

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

Great. Lets shift gears a little bit and talk about your kind of year views on the economy and just kind of what you're seeing how your business trends are. Just overall, what should be with the recovery here and what do AmEx's metrics tell us about the strength of corporate confidence and consumer confidence.

Edward P. Gilliam

So, I can talk about the first quarter?

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

Yes. Yes. Your published numbers not plenty of its just kind of…

Edward P. Gilliam

Yes. So, we – like we said, the first quarter for us was slower than we thought, particularly the first half of the first quarter and clearly weather had an impact in the U.S. that we saw, but it look like recent more than weather. And even today, I think if you saw GDP was revised downward for Q1. so I think you said minus 1% sequentially in the first quarter. So we certainly saw that, but what we also said during our earnings call for Q1 was the back half of Q1 look better and the early days of April, the trend continued.

So what we're saying there is we do see some improvements in our run rates, which we can talk obviously a lot more about when we publish Q2. But, I'd say the first part of the quarter was disappointing, but we felt better with how the quarter ended in the U.S. What we saw in other parts of the world, we saw some improvements in many other parts of the world. Some improvements in our spending in Europe, Asia look good, Mexico look better, Mexico had within the doldrums for most of the last year. So, we saw strong performance there and some encouraging signs by the end of the first quarter.

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

So, the company it’s kind of been shrugging along it a mid-single-digit revenue growth rate, longer-term your average over time and goals not 8% right? So what's needed to kind of get you from that 5% or so up to 8% plus over time?

Edward P. Gilliam

Well. We do believe that’s the what we say on average and over time AmEx believes we can grow revenue 8% plus, earnings per share 12% to 15% and a return on equity of 25% plus. And on return on equity and earnings per share, I think we’ve done very well in the recent past, but we have not hit our 8% revenue growth. And as John, you're saying, we're kind mid-single-digits. We still believe that 8% target on average and over time not in any given year is very relevant and we believe that because of the organic growth potential of the business. Certainly if the economy gets soft enough in some parts of the world, our business is impacted negatively.

If the economy accelerates, our business will be helped by that. But on a standalone basis, we believe 8% relevant target for us because of the organic growth potential that we have and consumers more business international and the merchant business and then, we have a number of new things that are more R&D like prepaid, the Serve product, and Bluebird as well as our loyalty coalition business outside the U.S. that we believe longer-term will be complementary and additive to our revenue growth rates. So we do believe we have gas in the tank to get there on average and over time, we have to continue to refine our business model, generate more money to invest, and a little help from the economy wouldn’t hurt.

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

So can you talk a little bit about some of these new initiatives? I guess under the umbrella of making the brand more inclusive.

Edward P. Gilliam


John Eamon McDonald – Sanford C. Bernstein & Co. LLC

You’ve got the Serve and the Bluebird and some other things, maybe you can just kind of talk about that general umbrella.

Edward P. Gilliam

Great. So, a lot of it. I mean I think it’s been a journey for us. When we came out of the recession, there were lots of questions about American Express. Would our consumer spending rebound post the recession, would our spend-based model, spend-centric model still be relevant, would our credit losses come down, would we get our expenses in order? All those things I think we’ve attempted to answer those questions over time and I think last year in particular, I think we have answered a lot of those questions. The quality of the questions now are shifting to what's the growth potential going forward. As we just said, we believe we have great organic growth potential. But one of the things that we believe have changed coming out of the recession in the U.S. and many parts of the world is the definition of success.

American Express has always been an aspirational brand, it's always been one that stands for success and helping people succeed and I've been in the Company a long time and very proud of our track record of standing by our customers. And we have an incredibly strong brand that we never take for granted, but we do think the definition of success is evolving here in the U.S. and many parts of the world.

And we think where exclusivity was very important part of the definition of success, that may have some baggage today. So we believe we can be very successful and be aspirational, but be more inclusive and I believe that is a trend that's important in this country and in other developed parts of the world that we want to be inclusive not exclusive. We want to be with our customers not just when they've arrived, but for their journey and have products and services for people who want to do business with us and make sure we are relevant during their lifecycle.

We never really had an entry level product for people who weren't creditworthy as an example, we never did. We don't have debit cards. We always have to underwrite customers to give them a charge card or a credit card. But now what we have with prepaid is a product where there is no credit risk, customers have to put money on their account before they can use it.

But now they can be in the AmEx brand, they can get a sense of what the AmEx brand is like and we know that brand is relevant to a lot of people who we can't underwrite because we still turn down a lot of people who apply for cards, particularly people under 35.

So now I feel great that over the digital journey we've been on, we bought a company called Revolution Money three or four years ago, re-branded it Serve, started looking at how we could use this digital platform in different ways and what we realized is that this prepaid functionality under the AmEx brand is fairly powerful.

We found the first big partner in Wal-Mart and created a product with Wal-Mart called Bluebird. Wal-Mart was dealing with tens of billion dollars of cash flowing through their stores, there's a big expense around that and they wanted more opportunities to get out of the cash business. And through working with them as a merchant and talking to them about our Serve platform, we created Bluebird.

And we also have the same product functionality or similar product functionality not going through Wal-Mart, but going through other distribution channels under the brand American Express Serve. And what it is it's a prepaid account, comes with an AmEx piece of plastic, but an account number that could be used online as well.

You can load money on through a direct deposit of your paycheck or in Wal-Mart giving to a cashier or in many of the retail distribution points we have, loading money on the account. You can get money off the account through ATMs, by swiping your card if buying things at merchants, or by paying bills of that platform.

So, it's become kind of a platform for financial servicing some aspect of financial servicing for people who are either not yet ready for credit or are not served properly by banks or feel the fees are too high or the minimum levels of deposits are too high and they're paying lots of fees. So we have found in a niche here we believe that's very interesting for American Express and it's a segment that we never had a product for before.

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

It really does sound like a checking account, a debit account. I mean it's really the more thing of all these things together, it’s ranks as banking.

Edward P. Gilligan

We can describe it many ways, it's a prepaid account. But yes, there are many ways of thinking about this and it's giving customers options and it certainly comes with an app for smartphones that make it real easy, but it's also for people who don't have phones. But at the end, it's an alternative and what it's doing it's bringing millions of customers into the franchise, people who many of which we wouldn't have been able to underwrite for a card. They're seeing what AmEx is like and in and of itself, we believe there's a profitable business here once it scales more than it is today. And it's an investment today, but it's one that we feel very good about.

And over time, it's going to give us a source of customers that perhaps we can move on to credit and charge cards in the future because now they've been in the franchise maybe for a couple of years, they've established their spending and their credit behavior, and maybe two years from now we'll be able to underwrite them for an AmEx EveryDay Credit Card or a Green Charge Card. And so I do believe it's going to be – and actually AmEx has been growing its cards businesses for 50 years.

Get customers in on green cards, move them gold to platinum, get them on credit cards, move them up into premium credit cards. This has been a very important part of our growth story for 50 years. We just never had an entry-level product before.

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

And even it’s again as you've said even if you don't upsell them credit cards, you believe this product can be profitable on its own. We do believe a change in the fees you're getting off of it?

Edward P. Gilligan

We do believe it. It has a different cost structure than credit so there's no credit losses. There's no membership reward expense. There's a lower discount rate. But in total once this thing start scaling, we do think it will be really strong, it will be a positive contributor to revenue and earnings for us. It's still early in its journey so it's a net investment now, but we do see there's a path to profitability here and strategically a path to bring more customers into our credit products.

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

So a couple of questions on the cards. In terms of the competitive landscape, some of the banks have seen their profitability sap with Dodd-Frank and a number of them are refocusing on cards. So, how is that affecting the way you think about your business? Is it affecting the targeted segments you look at?

Edward P. Gilligan

So, I think clearly U.S. consumer business is very competitive. It's always been, but I'd say in the last couple of years even more so maybe for the reasons you are saying that a lot of issuers now are looking at the more affluent consumers, higher spending consumers as a source of revenue growth for them and moving more into space that there were fewer affluent credit card providers before.

So, it's a very competitive space. We believe and we know from the fact that AmEx is faring very well here and we're not just really playing defense, we're playing offense. We continue to feel we have opportunities here to continue to be the leader of charge and credit cards in the U.S. and we also believe our model is stronger, particularly with that segment of people who spend a lot, but don't revolve.

And you just look at our results, consistently in the last couple of years we have strong billings growth and positive revenue growth. Even though it's not yet at 8%, we feel the mid-single digit revenue growth is good for our issuing business. When you look at other large issuers even those who may have billing growth rates that may be at or slightly above ours, their revenue growth is flat to negative.

If you look at most card issuing banks in the U.S., their card businesses, you still get 70% to 80% of their revenue comes from lending balances. If you look at American Express as a company as a whole, closer to 15% of our revenue is coming from lending. We're less lend centric. So even though some of these competitors are growing their spending, they haven't been able to grow their revenue yet.

I don't know where that leads for them, I'm not really thinking much about them, but I do see that the AmEx business model is really focused to do incredibly well with transactors and people who occasionally revolve, the affluent consumers and the aspiring affluent and our products we believe is best in class and we continue to improve the value we offer the card members and we continue to grow despite the tough competition.

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

A specific question here on OptBlue. Is OptBlue part of the closed-loop? In other words, do you have access to the customer and merchant data as always or do you give anything up with OptBlue arrangement?

Edward P. Gilligan

So from the card member side, it's exactly the same, we have full card member information. From the acquiring side, we get the information from every one of the OptBlue partners. So in order for us to certify and acquire under OptBlue, they have to agree to give us the closed-loop information back so that we can protect the customer experience, so that we can protect the customer experience. We would not have done this and that’s one of the reasons why the market was not aligned a few years ago for us to move in this directions, because the acquirers wouldn’t necessarily give us all the information we need.

And I’ll go back to this issue about Square. And so for example, Square accepts American Express, they are the merchant of record, but they give us all the information we need. And therefore before we signed the first OptBlue contract, we made sure that was a requirement of us doing business was to get the full information so that we can continue to have a closed-loop. That’s obviously critical to us and we weren’t going to sacrifice that

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

So just a last question here, you’ve done a great job, growing EPS even with the mid-single digit revenue, you’ve used capital management effectively, you’ve had a great credit environment. Just as the management team, how are you thinking about expenses and what kind of commitments have you made to expenses as maybe the credit environment gets tough over the next five years or something like that?

Edward P. Gilliam

Yes. When we do think write-off rates will trend higher over time. They’ve never been as low as they are now. So, we have to believe they will trend up just as normal business conditions not us changing the risk profile of the Company, but normal business conditions; most likely credit loss rates will trend higher. We said that, you’ve asked this question before, and so far they’ve kept trending down.

So we're really in unchartered territory, but I do believe over time they’ll go up. But I do believe also American Express has demonstrated kind of a flexible and adaptable business model. And one of the questions people had about our company two years ago when our expenses were growing 8% to 10% of operating expenses, because we were doubling down on some investments and really hitting the accelerator was could we manage our expenses. And we went through a fairly big re-engineering effort a year-and-a-half ago eliminating 5,000 jobs taking out a lot of expenses and making a commitment that last year and this year, our operating expenses would grow at less than 3% a year and we hit that last year, and so far we’re trending well against that target this year. But what we did with that expense saving was to put it back into our investment pool, more or less, right.

We needed more gas in the tank to accelerate growth. And some of those investments were just made towards the end of last year and into early this year and we do believe that was a very important thing for us to do. In other words, we had a longer list of investments than we had money to spend. And we had to demonstrate that we could have flexibility in our business to reduce expense growth and redeploy against revenue growth. And I think over time, we have depending on business circumstances we feel we can throttle up or throttle back expenses and investments, depending on the business condition. And we feel very good about the flexibility of our model and we’ve been tested many times in the past decade or so about this and responding quickly to market events and making sure we consistently deliver EPS to the best of our ability.

And I believe that will be true going forward as well that we have demonstrated the ability to dial up or dial down on business conditions and opportunities.

John Eamon McDonald – Sanford C. Bernstein & Co. LLC

Great. Ed, thanks so much. Appreciate it.

Edward P. Gilliam

John, it’s a pleasure. Thank you.

Question-and-Answer Session

[No Q&A session for this event]

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