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American Express Company (NYSE:AXP)

February 08, 2012 2:30 pm ET

Executives

Kenneth I. Chenault - Chairman, Chief Executive Officer, Member of Operating Committee, Chairman of American Express Travel Related Services Company Inc and Chief Executive Officer of American Express Travel Related Services Company Inc

Stephen J. Squeri - Group President of Global Corporate Services and Member of Operating Committee

Edward P. Gilligan - Head of Global Consumer and Small Business Card Issuing Network and Merchant businesses, Vice Chairman and Member of Operating Committee

Louise M. Parent - Executive Vice President, General Counsel and Member of Operating Committee

Daniel T. Henry - Chief Financial officer, Executive Vice President and Member of Operating Committee

Ashwini Gupta - Chief Risk Officer, Member of Operating Committee and President of Risk Information Management & Banking Group

Analysts

Unknown Analyst

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

Kenneth I. Chenault

Good afternoon, and welcome to our first financial community meeting of 2012. Here's today's agenda. I'm going to begin by covering our 2011 financial performance, including our strong metrics and the aspects of our business model that made it such a successful year. I'll then spend some time reviewing some outcomes of our multiyear investment strategy. I'll cover the performance of some of our key 2011 investments, with a particular emphasis on how we're capitalizing on opportunities in the digital space.

One area of focus for us, and certainly an area of interest for many of you, is expense margins. Our P&L in 2012 will be marked by the reduction of 2 major benefits, the elimination of payments from Visa and MasterCard related to the 2007-2008 legal settlements and lower credit reserve releases.

Now we've known for some time that we'd face these reductions and we've been planning accordingly. We're proactively -- we've proactively reviewed all of our expense categories over the last several years and have implemented appropriate actions to make our expense base more efficient and improve our growth trajectory.

I'll start this topic off by addressing some of our overall margin and expense growth trends, and then Steve Squeri, Group President of Global Corporate Services, will provide a deeper drill into OpEx. Steve is directly responsible for several functions that represent a large portion of our expense base, including technology, customer service, credit and collections and shared services, as well as for our Global Corporate payments and business travel businesses. As you'll see, we've already taken a number of actions to reduce our expense growth and have credible plans in place to do even more. We'll then leave time as always for any questions you may have on these or any other topics.

So let me get right to our financial performance. For 2011, we generated $4.9 billion of net income, earnings per share growth of 22%, revenue growth of 9% and a return on equity of 28%. Given the continuing softness and uncertainty across the global economy during the year, I'm very proud of our performance. Our profitability was strong and well above the net income peak we hit in 2007. Our EPS growth far exceeded our on average and over time financial objectives of 12% to 15%. Revenue growth remained strong, driven by the strength of our cardmember base and the performance of our investments. And return on equity reflected our strong capital position and the inherent strength of our spend-based business model.

In 2011, the advantages of our model were quite clear. Billed business, cards-in-force and average cardmember spending all remained strong, and our billings growth clearly outperformed the pace of the economy overall. At $822 billion, billed business for the full year was our highest ever as was our average spend of almost $15,000. Cardmember Loan growth moved into positive territory for the year and was up 3% in the fourth quarter. Now this is not a huge number. But as you'll see in a few slides, one that bucks the trend of many card issuers. Our credit performance improved significantly, on both an absolute and relative basis over the course of the year, and remains best in class.

Now let me give you a bit more detail on our billings performance since this remains our key business driver. I'll start with our billings trend by region. As you can see, the growth rate of each region trended down somewhat over the last 2 quarters as we came up against relatively high comparables in the latter half of 2010.

Europe has particularly weakened, given debt and economic concerns, and we've seen slower growth in several markets such as Italy and France. Now while one month certainly doesn't make a trend, our European billings growth in January did not weaken further but was generally consistent with the fourth quarter on an FX-adjusted basis as were our January billings overall.

Within the U.S., billings growth has held up well against the charge and credit volumes of Visa and MasterCard, though at a somewhat decreasing rate. We continued to outpace MasterCard in the fourth quarter with 11% growth to their 6%. Although including faster-growing debit products, our growth rates were just about equal. Debit has been a good source of growth for the networks over the last decade, but its appeal for U.S. issuers and consumers will likely decrease as a result of recent regulation. Through the third quarter, these growth rates translated into an 80 basis point increase in our share of U.S. credit and charge purchase volume, which is on top of a 160 basis point gain last year. This outcome has been the result of a lot of hard work, along with our consistent investment in both cardmember and merchant value.

On a global basis, relative to Visa and MasterCard, we were all at the same approximate growth level in the third quarter, though MasterCard did outpace us in the fourth. This was driven by their international growth, largely in Europe, where our growth decline exceeded theirs, likely because of the greater proportion of discretionary spending within our base.

While volume growth is an important metric for all of us, the strength of our business model really comes through when you look at profitability. As pure processors, the goal of both Visa and MasterCard is to keep putting volume through their pipes, which they do. Our model is focused on volume growth but also on expanding our customer and merchant value, which, in turn, expands our revenue base. This is why our profitability per dollar of volume is 6x greater than either Visa or MasterCard.

Relative to major U.S. issuers, the strength of our performance is also quite clear. Our total billings were almost 2.5x the level of our nearest competitor, and our growth rate of 15% significantly outpaced all major issuers, except for Capital One.

On the lending side, all of these competitors saw declines in average balances while we reported 1% positive growth driven by our continued focus on premium lending. These metrics are important on their own. But when they're correlated against revenue, they show a key point relative to future growth potential.

On our 15% billings growth, we posted a 9% increase in revenues, strong growth for each category. When compared to other issuers, however, you can see a disconnect. Even with positive billings growth, everyone, except Discover, is reporting negative revenue growth. As you can see in some cases, the gap between the 2 metrics is quite substantial, with both BofA and Capital One reporting a difference that's greater than 20 percentage points.

So what does their revenue growth correlate to? What's their key driver. As you can see here, it's loan balances. Despite positive growth in billings, most of these bank card issuers are still reporting negative revenue growth in their card business because they're still reporting negative growth in their balances. Their lend-centric card models pretty much dictate that material revenue growth can only come about by growing AR. Their dependency on spread revenues continues despite their stated efforts over the last several years to put greater focus on transactors and premium customers. Given the sheer size of spread revenues relative to the rest of their base, the challenge for these lend-centric issuers is like turning an oil tanker at sea. It will take time and significant investment dollars before they can begin to make a turn in the mix, and current trends are not moving in their favor.

Card AR across the industry has fallen substantially since the crisis. As of November 2011, total U.S. card balances were down 18% from peak levels in 2008, and there was no growth in industry AR from 2010 to 2011. Consumers have clearly deleveraged, and the growth of small business lending has also been soft. While there have been some signs that these trends may have bottomed out, I don't believe we'll be returning to precrisis lending growth rates anytime soon. This will put substantial pressure on bank card revenue growth going forward, on their profitability once industry-wide credit benefits turn and also on their ability to invest.

I much prefer our position in spend-centric model. As you've heard me say before, our spend-based model has major economic advantages. As we continue to add merchants and consumers to our franchise by providing them with premium value and as we continue to incent existing cardmembers to put more spend on our network, our base of billings will grow, driving both revenues and income. As demand comes back in the small business and large corporate sectors for everything from travel and supplies to capital investments, we would also expect to benefit from this spend.

At the same time, we'll continue to focus on profitable premium lending for consumers, largely through our major co-brand partnerships and also on lending to specific segments of small businesses. These categories of lending remained very attractive to us and provide value for our customers. I believe our spend-centric model is a competitive advantage. It puts us in a far better position relative to our lend-based issuing peers, particularly when it comes to generating sustainable, profitable growth.

This leads me to our next agenda topic, an update on some of the growth drivers and investment priorities we've shared at previous meetings. As we've discussed before, our investment approach is a balanced one. We're focused on investments that generate short- to moderate-term growth, as well as those with a longer-time horizon to sustain growth over the moderate to long term. Overlaying this balance, we also have the objective of transforming all of our businesses for the digital marketplace, which is rapidly taking shape as off-line and online commerce converge. We gave you a -- we covered the digital strategy at our August meeting, and I'll give you an update on some of our progress in a moment.

So let me start with the outcome from 2 of our ongoing areas of investment, customer and merchant acquisition. We continue to see excellent results from our investments in new cardmembers. These investments tend to have short- to moderate-term payback, and we have pretty high confidence in their performance.

For 2011, new cards acquired across all of our proprietary products and markets increased by 6%. We continue to see strong steady growth in our core charge products. Co-brand acquisition has flattened out somewhat now that we have the full benefit of several major product launches in 2010. And after significant reductions in proprietary lending acquisition during the financial crisis, we're now seeing an appropriate planned rebound in this category.

By acquiring cards for the sake of cards-in-force is not what we're looking for. The goal of our investments is to drive profitable spending, and we continue to do so. The cards we acquired this year are estimated to generate 21% more in first year of spend when compared to the cards we acquired in 2010.

As you may remember, when we presented this slide at our August meeting, we estimated that our growth rate would be 11%, a number we outperformed given our strong momentum in the second half of the year. This exceptional performance occurred across all card types and was the result of improvements in our targeting and segmentation capabilities, areas we've invested in over the last several years.

The growth also came on top of strong results in 2010, when we saw spend growth on first-year cards increased by 31%. Our spend activation programs, our relevant rewards and the high overall value we provide all serve to engage new members in our franchise and add to our base of billings and discount revenue.

At the same time, we're also driving card fee revenues. The vast majority of our consumer and small business acquisitions are fee-based products. That has always been the case with our charge and co-brand portfolios, but we're now ramping up this strategy with our proprietary lending products. Much of the acquisition within this category for 2011 resulted from the relaunch of Blue Cash and the launch of Blue Cash Preferred, a premium product that comes with a $75 annual fee.

As I've covered with you before, finding the right credit-worthy, high-spending prospect and bringing them into the franchise is an effective use of our investment dollars, and it's in line with our strategy to focus less on our absolute number of cards and more on the quality and spend capacity of new cardmembers. As these numbers show, our core acquisition investments are doing just that. The investments we're making in the expansion of our merchant base and in our value to merchants also continue to drive billings growth. The new merchant locations acquired in 2011 were up 5% on top of a 23% growth the previous year.

One contributor to our growth in the U.S. is our OnePoint program. OnePoint uses outside sales agents to acquire small- and medium-sized merchants for us. This acquisition channel, which we continue to invest in, generated excellent results last year. New signings through this channel grew by 32% in 2011 and generated new book charge volume of 57%. We added well over 1 million merchant locations to our base in each of the last 2 years. These new merchants clearly see the value of joining our network and welcoming our cardmembers, and our cardmembers gained the benefit of using our products in a growing number of locations and spend categories. Those are just a couple of examples of the outcomes driven by our core investments in acquisition, investments that drive our base businesses and generate ongoing strong returns.

As I took you through due in August, we've also got a number of investment priorities that are focused on driving growth over longer timeframes. These priorities cover a range of business areas that we consider critical to our moderate and long-term success, with particular emphasis on our digital transformation. Our 5 growth priorities are: increase our share of online billings across all products and enhance our customers' digital experience; drive greater value to our merchant base; accelerate our growth outside of the U.S. through proprietary consumer, small business and corporate products, GNS partners and new payment alternatives; make significant progress within Enterprise Growth; and broaden our customer base.

So let me take you through in each one, and let me remind you that many of our investments overlap more than one area. Programs that, say, drive online spend also serves to increase our merchant value. Investments in Enterprise Growth can also make great progress against our international priority. So I give you examples of some of our progress within each area, but in many cases the carryover benefit between the priorities is substantial.

Against our first growth priority of driving online spend and advancing our digital efforts, we've made terrific progress. Our overall goal is to be the payment provider of choice for customer spending, whether that involves handing over a piece of plastic, clicking online or waving a mobile phone. As we evolve our business models and processes more fully for the digital environment, we have the advantage of starting from a very strong base. Our online presence is already well established, and the benefits and services included with the many of our products give us advantages over other issuers.

For 2011, we conservatively estimate that online billings across our merchant base were over $130 billion. We estimate this spend because some retail and airline merchants, largely outside of the U.S., don't segregate their online and off-line charges. Against 2010, this represents growth in online spend of approximately 22%, outpacing our overall billings growth of 15%, a trend you'd expect given the increased shift to e-commerce.

As a point of reference, comScore has reported 12% growth in the U.S. online consumer spend to the first 3 quarters of 2011, leading us to believe we'll likely gain share in e-commerce spend for the year. From all of the numbers and analysis we've seen, we continue to believe we're the volume leader among issuers in online payments.

We also remain larger than PayPal, certainly one of the major online payment providers, which reported $119 billion in merchant volume for the year. Now I see this trend continuing because of the assets and capabilities we bring to online commerce: our affluent, engaged cardmember base, our rewards programs and the attributes of our brand, particularly to association with trust, security, service and privacy, all of which resonate strongly with online users.

We also had a strong year in terms of our customers' digital experience. This is just a snapshot of some of the programs, products and services we launched during the year. It includes partnerships and programs with major digital leaders, such as Facebook, Foursquare and iTunes. We covered this, and we went through this time line at our August meeting, and I believe we gave you a good sense of both our objectives and achievements.

Here are some examples of our more recent progress. In October, we launched our apps for iPad and Android tablets, which allow our cardmembers to carry our transaction service and reward capabilities with them wherever they go. We presented live global streaming of Coldplay's concert in Madrid as part of our American Express Unstaged series. The concert generated over 19 million streams on YouTube, the largest ever for a live single artist event, with over 60% of viewers from outside of the U.S. It was a terrific experience for customers and prospects and gave us a 13% lift in brand favorability among surveyed cardmembers.

In November, we welcome Groupon into our Membership Rewards program, a redemption option that we believe will be highly relevant to our cardmembers. And finally, we saw a terrific response to our second Small Business Saturday. Estimates are that over 100 million Americans shop small on the Saturday after Thanksgiving, thanks to higher public awareness which increased to 65% compared to 37% last year. We partnered with over 75 companies such as FedEx, Google and Facebook to provide value to both customers and merchants and to promote the day to their online channels, including more than 2.7 million likes on Facebook. Across our franchise, we saw a 23% increase in transactions by our cardmembers at small merchants on top of a similar increase last year.

The critical point of this page is not just to list of partnerships and programs impacting our business today. We're pleased, of course, that this list is lengthy, relevant and represents value actually in the marketplace, rather just written about in press releases. The key point on this page is how we're using these efforts to shape our digital future. We're building partnerships and executing programs with market-leading companies, companies our customers and prospects do business with today. We're bringing buyers and sellers together online, adding value to both, and we're building and using digital capabilities that can be leveraged for future growth.

Another related priority is to drive greater value to our merchant base. Now we have several means of driving merchant value, and over the course of the year, we've made progress against each. For example our high-spending cardmembers are a unique source of value for our merchants. Our customers continue to spend far more each year than the cardholders of other payment networks. We continue to sustain a large gap against both VISA and MasterCard, a gap that has been consistent over the last decade. As I said earlier, this is despite statements by a number of bank card issuers that they've ramped up their acquisition of affluent cardmembers.

Beyond our substantial spend value, we also continue to launch and expand other services for merchants. Some examples here include Accertify, the acquisition we made in 2010, which continues to build its client base for fraud management services and Business Insights, our merchant information management business, which also continues to expand the breadth and depth of its de-generating services.

We also continue to add value to merchants by helping them connect with new customers. This includes programs such as: Small Business Saturday, which I discussed earlier; Go Social, which provides merchants with social media tools to build their customer base; and our Smart Offer API, which merchants can use to develop digital offers for customers.

As I mentioned earlier, the value we provide to merchants allowed us to add well over 1 million merchant locations to our base in each of the last 2 years, with some markets growing by double digits. Our merchant relationships are a key to our future opportunities. And based on the growth we've generated on locations, I believe it's clear, merchants recognize the high premium we provide to them.

The next priority is to accelerate our international growth. Just about every one of our businesses has a role to play here: Proprietary Card, GNS, Corporate Services, Prepaid and Serve. When we did a deep drill into international at the same meeting last year, we showed you the progress we've made in profitably growing businesses outside of the U.S.

As you can see here, that success continued in 2011. Across our Proprietary and GNS businesses, we grew billings by 13% on an FX-adjusted basis, which helped drive pretax income growth by 38%. We had already doubled our international pretax profits from 2008 to 2010, and 2011 was further evidence of our commitment to international and the success of our ongoing investments.

One key driver of our billings performance has been the continued high growth of GNS. We continue to have great success with GNS in the U.S., but the roots of GNS are international. International billings represent approximately 85% of GNS's total, driven by our 131 partnerships in 154 countries and including 8 new partnerships launched in 2011.

As you can see here, GNS crossed the $100 billion level of billings last year, adding to its long-term CAGR of 25%. The growth in this business continues to be impressive, and our continued success in signing partnerships in key markets, such as China, gives me confidence in the sustainability of our performance.

Also key to our international success will be the contributions of new products and businesses outside of our core charge and credit products. For specific segments of prospects, we're investing in Prepaid, which we believe can be an important growth driver in specific countries. We continue to sign partnerships with key players from co-brands with Virgin Australia and Costco in the U.K. to Tenpay, which is China's second largest online payments network. This partnership has the objective of making it possible for Chinese consumers to purchase on U.S. and U.K. websites. The potential of which could be substantial. Serve will be an important component of international growth. We've already announced an important partnership with China, which I'll talk about in a moment, and expect to further capitalize and growth potential in countries with similar digital opportunities.

Now moving from potential opportunity to current contributions, another great example is Loyalty Partner, the coalition rewards company we purchased last year. We've now completed all of our integration work streams at a lower cost than expected, and we were also pleased with their revenue performance in 2011. Very importantly, we're already seeing Loyalty Partner expand our international customer base. They brought an established base of 35 million customers with them at acquisition, and we've seen that number grow over the year.

For example, Loyalty Partner expanded in India in 2011, where we bought a number of major merchants into the program, for example, Future Group, the largest retailer in the country. Since Future Group joined in November, we've added over 2.2 million customers to the program, representing a 25% growth in our collector base.

Another great outcome here is the engagement level of these new customers. Over 81% of these new point collectors have activated and made a purchase since they joined. I'm pleased with our progress against this priority and continue to believe that we'll be able to capitalize on this important opportunity.

Our next priority is making significant progress in our Enterprise Growth businesses, including prepaid, mobile and online payments and our fee services business. In August, you heard from Dan Schulman on his strategies, tactics and accomplishments, and our progress has continued.

Here are some examples. Our Prepaid products continue to expand our overall franchise. Dan told you about the American Express reloadable prepaid card in August. And since then, that product has successfully brought new customers into our base. Some consumers continue to deleverage and move away from credit products. As they do so, we're finding that reloadable prepaid meets their needs, and we're finding that it's a great way of attracting new segments of consumers to American Express.

For example, almost 20% of the reloadable prepaid customers we acquired since launch had been turned down for one of our Proprietary charge or credit products. These prospects applied for one of our products, so they clearly had an affinity for our brand. Now with prepaid, we're able to offer them an option for joining our franchise, an option that's attractive to them and economically attractive for us.

We'll continue to pursue this opportunity in a number of ways through the marketing of our core product, as well as through a co-brand offerings with partners such as Target, which we launched in November, and others that will be announced this year. 2011 was also a good year for our Gift Card product. We had our sixth year of strong double-digit sales growth, selling over 20 million American Express-branded gift cards in the marketplace.

Also within Enterprise Growth are a number of our fee-service businesses, such as LoyaltyEdge, our white label rewards platform used by Delta and for which we have planned launches with several new clients in 2012. Another important achievement was our November launch of vente-privee USA, our online flash sales business that we developed in partnership with vente-privee of France, the global leader of online private sales. We leveraged our cardmember base to preregister tens of thousands of customers prior to launch and have grown in release to hundreds of thousands since.

We continue to make steady progress across all of our fee service business, both those that are within Enterprise Growth and those in other parts of the company. In earlier forums, I have mentioned a goal I've set to generate $3 billion in fee-based revenues for the company by the end of 2014. Based on our continued progress in 2011, which saw us generating $1.3 billion, I continue to believe we're on track to achieve this objective.

Another major focus within Enterprise Growth is Serve, our online and mobile payments platform. Dan took you through our rollout plans in August, and we continue to make excellent progress in positioning Serve for future growth. To the end of 2011, we had signed 15 distribution partners for the Serve platform, including major companies such as Ticketmaster, Verizon, Sprint and AOL. By the end of 2012, we expect to have made substantial progress in implementing our partnerships and adding to our customer base.

As I said earlier, we intend to use Serve as a key driver of our international expansion. To this end, we made a strategic investment in the Lianlian group, which includes a mobile top-up company in China. As you may know, the mobile market in China follows a prepaid model. Instead of monthly or annual plans, mobile users in China pay as they go. They pay to load minutes on their phones, and as their minutes get used, then they pay to add more minutes, also called topping up. Founded in 2004, Lianlian is one of the largest providers of this top-up service and has served over 300 million customers with a distribution network of over 300,000 agents across 14 provinces.

We've made this investment with the intent of developing Serve as the online and mobile payments platform that will facilitate a range of digital transactions for Lianlian's customer base. We believe this is a great entrée into the Chinese market. We're taking this step with an innovative partner and with what we believe are appropriate risk parameters, attractive economics and potential for future growth.

During 2011, we focused on ensuring that Serve was ready for growth, that could -- that it could appropriately meet the needs of a range of customers, have the necessary capabilities for international rollout and the heavy-duty infrastructure to support substantial scale. In 2012, our objectives moves from development to execution. We've set goals for the Serve team that are focused on outcomes, specifically customer acquisition and transactions, and we believe we're in a strong position to meet these objectives. A strong foundation has been set. Now it's about activation, revenue generation and accelerating our growth.

Finally, we expect our digital transformation to be further accelerated by strategic investments we're making. For example, our acquisition of Sometrics, a virtual currency technology platform, and our investment in Payfone, a capability that allows consumers to pay for goods and services using their mobile phone.

In November, we announced the creation of a $100 million investment program to expand our digital capabilities by working with early stage startups in Silicon Valley, Silicon Alley, Mumbai, Shanghai and wherever innovations are being developed. We're looking to invest in capabilities across all of our new and core businesses, including loyalty and rewards, online and mobile payments, security and fraud, to name just a few. Our office in Palo Alto has just opened and is already making its presence known. We've had great dialogue with hundreds of companies and have already got a range of relevant possibilities in the pipeline.

The final priority is to appropriately balance our base of customers. In order to sustain our growth over the longer term, we need to have healthy demographics across the franchise, including both younger customers and women. While we didn't have specific investment stacked against this priority in 2011, we knew that succeeding at a number of our other growth priorities would also serve to broaden our customer base, and that has certainly been the case.

For example, 40% of our prepaid customers are under the age of 35, 60% of our vente-privee customers are women, 55% of our Serve enrollees are 35 and under. And initial analysis shows that cardmembers who have synced their Amex cards with Foursquare and Facebook skew significantly younger than our overall base while also having income levels consistent with our overall average. Our digital transformation is already having a positive impact on our demographics, and I believe our progress will continue.

I believe 2011 was an excellent year for us. We generated exceptionally strong financial results, also making significant progress against our key growth priorities. Despite a continued slow and uncertain economic environment, we achieved record billings and best-in-class credit results. Our customer service metrics continued to improve and remain best in class. For the fifth straight year, we received the J.D. Power Award for highest credit card customer satisfaction in the U.S. and received service recognitions in several other countries as well.

Importantly, as I just went through, we took full advantage of our earnings performance to substantially invest in growth and made good progress against our digital transformation. But even as we ramped up investments, our ongoing operating expenses were well controlled, and we continue to generate significant reengineering benefits across our major business processes. Because of the achievements and progress we made last year, I believe we're in a strong position to sustain our growth over the short, moderate and long term.

As we move into 2012, one issue we've been focused on, and certainly an issue you've raised, is the confluence of events we face this year: the Visa and MasterCard settlement payments are gone, the significant reduction in credit reserve releases and the continued need to invest in our digital transformation and businesses. While each of these serve to put pressure on our financials, the good news is that none of this comes as a surprise. We've known about all 3 for several years. And as a result, we've been able to address their implications quite planfully.

We've shared this challenge with you before. As you may recall from 2010, we recognized that we'd be moving from 5 major sources of investment funding to essentially 3. Credit performance has the potential to be a source over certain periods in the future, but as we look out over the near term, we know our benefits here are subsiding. While we may, on occasion, have one-off financial benefits that we use to fund investments, a practice we followed over the last decade, on an ongoing basis we'll rely on revenue growth and expense control to source our growth priorities. And, of course, all of these actions will be balanced against the on-average and over time achievement of our earnings per share, revenue and ROE objectives.

In terms of our revenue potential, I think you know where I stand. I continue to believe strongly in our ability to grow revenues across all of our businesses. The progress we've already made and the plans we have in place give me confidence in our growth potential and in all revenue categories. While interest income likely won't return to our past growth levels, targeted growth in certain premium lending segments will add to our revenue base.

Our core opportunity continues to be the overall growth and shift across payment categories. It's estimated that this global payment pie grew by almost 6% from 2010 to 2011, a growth rate not many large industries can match. The overall growth on top of the ongoing global shift away from cash and checks provides our payment businesses with a lot of runway. As a result, I continue to have a great deal of confidence in our revenue potential, in both our core and new business.

Our other ongoing investment source is expense control. Now given the major investments we've made over the last several years, our expense levels have risen. And as a result, questions have been raised and rightfully so about our ongoing balance between expense control and investments. Specifically, will we be able to manage our expenses even while investing for growth and succeeding at our digital transformation? It's a good question and one, as I said earlier, we've been addressing for several years now.

Appropriately balancing current expenses against future growth has been a priority for our entire leadership team. We believe we've made the appropriate trade-offs over time to achieve this balance, but we know that our task is not going to get easier. Our accelerated investments over the last several years have been very broad-based, and their impact has been seen across all of our major expense lines. For example, marketing and promotion. M&P has always been critical to our cardmember acquisition efforts and our loyalty investments. We've appropriately cut back on these investments during the financial crisis while continuing to fund our most critical priorities. Once credit began to turn in 2010, we ramped up our M&P spending and generally held our investments steady for 2011.

Going forward, we're targeting M&P spending to hold at a rate of approximately 9% of total revenue, net of interest expense. This is our objective on average and over time, though, as I mentioned earlier, should events happen that give us the capacity to invest more, we likely would.

Another major expense category that received investment dollars over the last several years is cardmember Rewards and Services. The direct correlation of rewards to spending makes towards a key driver of our economics. On an absolute level and as a percentage of billed business, reward costs have steadily increased since 2009, have outcome that's positive for our business overall.

As we've discussed with you before, Rewards positively impact our economics through higher spending, higher cardmember retention and better credit performance. We've invested directly in Rewards by making our programs more attractive to cardmembers. For example, expanding the number of MR partners and the range of redemption options we provide.

We know that cardmembers who redeem rewards are highly engaged in our franchise. And because of this, our goal is not to reduce these costs, but to make sure we're getting appropriate returns on our dollars.

We continue to modify our programs and offerings to make sure we're getting appropriate, profitable behavior from our cardmembers.

Rewards expense is driven by a number of factors. For example, volumes, cardmember behavior and the cost of our offerings. But our objective is to have this cost of generally grow in line with billings on average and over time. We intend to keep our programs as efficient as we can while also retaining the high value our cardmembers place on rewards. By taking advantage of higher investment sources in 2010 and 2011, and by appropriately spending to grow our franchise, we did see increases in our expense to revenue ratios.

While our -- with our investment sources coming down, we will look to reduce this ratio as well. Our objective is to move this ratio towards 2007 levels even as we continue to maintain our on average and over-time revenue growth target of 8% plus.

The largest component of our controllable cost base is operating expense, which includes salaries and benefits, professional services and other operating expense. Our accelerated investments over the last several years have impacted this line pretty substantially as we ramped up our sales forces, expanded our digital and information management capabilities and launched Enterprise Growth.

On an ongoing basis, our objective is to grow OpEx at a slower rate than revenues, something that we did achieve in the fourth quarter. Because of the size of our base and the critical role that we'll play in funding our investments, we felt it was an appropriate time to give you a deep drill of the components of OpEx, as well as the actions we've taken and expect to take to appropriately control its growth. As I mentioned earlier, Steve Squeri is responsible for a number of functions that represent major elements of our OpEx base. Steve has been responsible for much of the reengineering success we've attained over the last several years and can provide you with great context on how we see our expense base supporting and driving our future growth. Steve?

Stephen J. Squeri

Thanks, Ken, and good afternoon. As Ken showed you on this chart, our total adjusted expense to manage revenue ratio has increased over the last 2 years. As we reinvested the benefits from lower provision and the Visa/MasterCard payments into business building initiatives. These investments helped us achieve industry-leading growth in volumes and strengthened our position in digital commerce.

The increases in investment spending cut across Marketing, Rewards and Operating Expense lines on the P&L.

Ken addressed Marketing and Rewards, and I'll talk about how our investment strategy affected operating expense growth over the past 2 years and why we believe we can move our overall expense to revenue ratio back towards 2007 levels over time.

I'll also spend some time talking about what we've done and are continuing to do in Global Services to become more efficient and to create operating leverage for the company.

Even though our expense growth in the fourth quarter of 2011 was flat to 2010, the growth over the last few years has raised a number of questions. What I'll share with you now are some details on how OpEx growth over the last 2 years and the approach we plan to take over the next few years.

On an adjusted basis including FX, our operating expenses grew at a compound annual growth rate, or CAGR, of 1% between 2008 and 2011, but at a 7% CAGR over the last 2 years. As you can see, it was a sharp decline in expenses between 2008 and 2009, which was largely the result of actions taken during the recession to reduce headcount, 401(k) and profit-sharing contributions and T&E. In 2010, as business performance improved, we started to restore some of those cuts in OpEx and began investing more aggressively in growth initiatives.

To illustrate this dynamic and give you a sense of what to expect in the future, I'm going to drill down on select OpEx categories over this time period.

We haven't shown our OpEx broken down into these categories in the past, but we're doing it today to give you additional insight, but we do not intend to report on them on an ongoing basis.

As you can see on this chart, we've divided our operating expenses into 3 categories: Global Services group, Technology Development Spending and Investment in Other OpEx. I'll be covering each of these categories today and I'll start with the factors driving expense growth in the bottom category, Investment in Other OpEx, which grew the CAGR of 11% since 2009.

We broke the bottom category down further into investment OpEx, which is growing at a faster rate; and other OpEx, which is growing more modestly and includes most of our business and staff functions. The increase in investment OpEx relates to deliberate decisions we made to strengthen our network, grow our sales force and build out new businesses for the future. Many of these initiatives hit the OpEx line as they involve people, partners and technology more than traditional marketing.

Let me provide some detail on these programs. One example is our decision to grow the sales force in client management teams over the last 2 years. This effort spans both in-house and third-party resources and cuts across many of our businesses. These resources grew at a CAGR of 11% since 2009. They are critical to maintaining and expanding our closed loop relationships and they directly drive new business growth. Together, they had contributed to the outstanding growth we've seen in charge volume over the last 2 years.

For example, in our U.S. Corporate Payments business, our sales force has expanded by 20% over the past 2 years, and the charge volume from newly acquired accounts grew by 60%. While these investments will remain a priority in the future, they are discretionary, and we expect to manage these expenses in the context of the revenue they generate.

The next category is New Business Initiatives, which was essentially 0 in 2009 and has ramped up aggressively over the last couple of years. As Ken described, these businesses are designed to expand our customer base by leveraging the company's core assets, diversifying revenue streams and strengthening our hand in digital commerce. These initiatives include organic efforts such as Business Insights and LoyaltyEdge, as well as recently acquired businesses like Accertify, Loyalty Partner and Serve. We expect that all of these initiatives will generate fee-based revenues.

Over the longer term, operating expenses in these new businesses will be managed in the context of the new revenue they generate. This does not include any potential, future M&A activity, which we'll evaluate on a case-by-case basis.

OpEx associated with our Global Network Services business has grown at a CAGR of 12% since 2009. While higher than the company average, this rate of growth is lower than billings and revenue growth being generated by the GNS business. The expansion of GNS continues to strengthen our network and add profitable growth.

Like other financial institutions, we've made substantial investments in enhancing our control infrastructure, given the regulatory environment. We've also become a bank holding company. In the line called Regulatory and Control Infrastructure, we capture our internal audit, operational risk, compliance, global banking and Basel II expenses. As you can see, these expenses grew at a 27% CAGR since 2009.

Obviously, control and compliance will continue to be a top priority for the company, and we expect that future expenditures in this category will be matched to regulatory expectations, as well as our own goal of operating in a well-controlled manner.

If they're isolating these investment categories, the remaining Other OpEx category has grown at a 6% CAGR since 2009. As I mentioned earlier, some of this growth is due to the reinstatement of employee benefit cuts we made during the recession. We're targeting other OpEx growth at less than 5% for the next few years.

The top 2 categories in this bar on the left, Global Services Group and Technology Development, represent the functions that I manage. Together, they make up almost 45% of the company's operating expense base.

Later in the presentation, I'll describe how we manage the expenses in Global Services to maximize efficiency, facilitate growth and deliver superior service.

But first, I want to walk you through what has driven the growth in technology development spending. We've been investing aggressively in technology development, which is funded by the individual business units, but managed in Global Services. Spending in this area has increased at an 18% CAGR since 2009. This increase is a result of a conscious decision on our part to increase technology investments over this time period. These investments enabled us to make needed platform upgrades to several of our core systems, including our financial and HR systems, as well as consolidate our U.S. accounts receivable platform onto one.

We took advantage of the funding opportunities we had in the last couple of years to put these large onetime development projects behind us. We also invested heavily in new digital capabilities. We believe that our current level of investment in Technology Development is sufficient to power our future growth initiatives and to ensure our basic platforms are consistently enhanced. As a result, we're targeting these expenses to grow between 0% and 2% for the next few years.

Finally, core Global Services OpEx includes all other technology costs, as well as costs associated with customer service, credit and collections and our business services unit, which manages the company's internal processes. Expenses in this category have gone down by 2% in the past 2 years and we've targeted flat to 2% growth over the next few years. I'll speak to Global Services in depth in a few minutes.

To recap, the 7% compound annual growth rate in total adjusted OpEx from 2009 to 2011 was mainly driven by conscious investment decisions that we've made to drive growth and build capabilities.

As we've said, our objective is to move our total expense to revenue ratio back towards 2007 levels. An important part of accomplishing this goal will be to manage OpEx so that it grows slower than revenues, and that is exactly what we are targeting over the next 2 to 3 years. I should point out that this is an on-average and over-time target and there may be individual quarters where OpEx grows faster than revenues. For example, that may be the case in early 2012 because we had relatively lower levels of OpEx in the early part of 2011.

On this slide are the targets that we've established for the various components of OpEx over the next 2 to 3 years. As you can see, we're not taking a one-size-fits-all approach across the board as we're targeting slower growth in most areas while some areas may see higher growth based on business opportunities and regulatory requirements. Obviously, circumstances may change and we will adapt as necessary. However, our goal is to achieve our overall target of having operating expenses grow slower than revenues. And that's one reason we're confident in our ability to achieve our on-average and over-time financial targets.

Now I'm going to spend the remainder of the presentation illustrating how we've been able to manage our expenses within Global Services while improving customer satisfaction and how we can leverage this success to drive increased efficiency and operating leverage across the rest of the company.

Global Services is a shared services organization we created in 2009 to sharpen our focus on customer service and to improve effectiveness and efficiency across all of our business operations. From the outset, we constructed it to be run like a business, based on world-class capabilities, quality and cost. Today, Global Services is comprised of technology, world service, global credit administration and global business services.

While these 4 businesses differ in function, they're all focused on a common mission: To provide American Express with a competitive advantage through superior service, solutions, capabilities and operational excellence, which will enable us to increase customer and shareholder value.

In terms of shareholder value, Ken gave us a specific challenge to cut $500 million of cost in 3 years in order to create more operating leverage for the rest of the company.

To achieve our mission, we've taken a five-step approach. First, we focused our people on internalizing the Global Services mission and reinforce that what they do, whether handling customer calls or managing real estate, is important and makes a difference. Second, we leveraged scale to drive efficiency by bringing our transactional functions together. Third, we created a flexible resourcing model across all of Global Services, which allows us to expand or contract based on volumes. Fourth, we're exploiting the synergies between technologies, operations, real estate and procurement to improve our end-to-end processes and create a leaner organization. And finally, we're building capabilities that enable our people to provide better service to our customers and to our employees.

With this five-step approach, we've been able to lower operating costs, improve quality and increase customer satisfaction. In fact, by following this approach, we achieved Ken's goal of cutting over $500 million of cost in 2 years versus 3, reducing the overall cost of running Global Services and enabling us to absorb volume growth and increase our investment levels.

This chart gives you a sense of the business volume growth we've been able to absorb over the past 2 years. While card transactions were 18% higher and cards-in-force were 11% higher last year versus 2009, Global Services expenses were 3% lower over the same time period. But we do not measure success by cost reduction alone. At our core, American Express is a service business with a reputation for continually evolving and delivering innovative offerings. In an increasingly competitive environment, we recognize that we must continue to reinvent our business.

Now I'm going to share with you how we're transforming the core infrastructure and processes of the company to not only become more efficient, but to also deliver new capabilities that we believe will keep us on the cutting edge of the digital revolution.

I'll start with our technology group. Our technology organization is responsible for both developing and running all of our technology systems for both our customers and our employees. It is the backbone of the company. We bucket our technology expenses into 2 categories: development and nondevelopment.

First, I'll cover development spending, which includes the cost of building new capabilities as well as modernizing our current application portfolio. We use a combination of Amex employees, or fixed resources, and external partners, or variable resources, to develop and deliver technology solutions. This enables us to create a flexible development model that can easily ramp up or down based on how much we have to invest. It also gives us access to top talent globally.

While development investments have grown over the past few years, as I showed earlier, we're delivering at a more efficient manner. Over the past 2 years, we've reduced the average hourly variable rate by 5%. At the same time, we've leveraged our internal fixed resources far more effectively. Today, we manage 24% more variable development spending per dollar of fixed resources than we did 2 years ago.

Nondevelopment expenses include our technology infrastructure, running our data centers, processing, telecommunications, maintenance and information and security. As with development, in addition to the American Express employees who support our infrastructure, we rely on strategic partners as part of a multi-vendored outsource approach. We believe this gives us a number of advantages, including access to the world's best technology as well as a flexible cost structure. As you can see, this approach has worked well for us as we've lowered our nondevelopment cost by 3% since 2009 despite double-digit growth in most processing volumes.

Our success in getting a higher return on our development spending and keeping our nondevelopment costs flat is the result of a three-pronged strategy our Technology Group has followed to improve operational excellence: transform our infrastructure, modernize our delivery methods and build new capabilities.

Over the past several years, we've transformed our core technology infrastructure including implementing a new network infrastructure and building new data center facilities. We simplified our network and made it more resilient, faster and less expensive to maintain and easier for third-party integrations. We did this by consolidating our legacy network onto a new dual carrier network.

Our data center strategy is core to our current business and the future growth of our company. We've embarked on a multiyear journey to create new flexible data centers to absorb additional volume growth while ensuring that we maintain and improve our already high levels of system availability and information security. By 2015, we'll have 2 new data centers with the first one opening in the second quarter of this year.

In addition to transforming our infrastructure, we've rolled out a number of new technology tools and processes to modernize the way we deliver solutions. We are moving away from custom-built applications to more modern assembly that uses tools such as visualization, business process mapping, service-oriented architecture, web services and agile development techniques.

With these modern delivery tools, we're able to design and deliver solutions iteratively in close partnership with the business. This results in faster speed to market and improved quality. Also, it better aligns our delivery processes with external companies like Facebook and Amazon, making it easier to partner with us.

As I mentioned before, we have a multitude of efforts under way to globalize and rationalize our technology platforms. However, we invest the majority of our development spending in building new capabilities. An example of leveraging a core legacy asset to create a new capability is Pay with Points. The ability to transform Membership Rewards, originally launched in 1991 and one of the world's largest loyalty platforms, into a virtual currency is the direct result of a multiyear initiative to upgrade our global authorization and settlement infrastructure.

As more customers move to online servicing, we're continuously improving our digital servicing channels. Last year, we completed a comprehensive replacement of the infrastructure behind Manage Your Card Account, which is our online self-service platform, as well as the new global home page on our website.

Another good example is our registered card platform, which as you may recall from previous presentations, enables us to provide customized couponless offers to customers who opt in online.

By creating a single standardized office platform, we were able to easily and quickly expand this capability to our Smart Offer API to bring the same types of deals to cardmembers via their mobile devices and key third-party platforms like Facebook and Foursquare.

In addition, we continue to invest in building new capabilities on our new Serve platform. We'll continue to integrate Serve into the payments path of a growing number of partners such as Verizon and Ticketmaster in order to reach new customer segments and facilitate new types of transactions.

All the capabilities I've described above create powerful new value propositions in the digital world by either leveraging our legacy systems or our new Serve platform.

Ken showed this slide earlier to describe our unique business model. The technology environment at American Express is very different from that of a company entering the marketplace today. Startups begin with a blank sheet of paper and could design their technology systems and infrastructure for today's cloud-based digital world. We started with the blank sheet of paper over 160 years ago. Our challenge is to leverage our legacy environment to make our capabilities more accessible to third-party platforms and developers in order to drive growth in this digital era.

We've already begun to see the fruits of our efforts as evidenced by this headline in TechCrunch, "160 year-old American Express Out-Innovates Google and Groupon." As the result of improving our infrastructure and modernizing our delivery methods, we've enabled key business wins in the digital space including Amazon Pay with Points, Link Like Love with Facebook and our Foursquare partnership.

Our goal is to ensure that our legacy environment becomes an accelerator of growth as opposed to a barrier and that we have the ability to fully leverage our assets including our closed loop advantage.

Now let me tell you about World Service, our customer service organization. At American Express, service has been at the core of our company since our founding over 160 years ago. We have over 20,000 talented people across the globe, who are committed to helping us achieve American Express's vision to become the world's most respected service brand. And every day through every call, every e-mail, every problem and every solution, we strive to make this vision a reality.

We provide service to cardmembers in 16 languages across 20 markets and through multiple channels. Expectations regarding service have evolved and will continue to do so as the world becomes increasingly digital. As you know, we live in an interconnected global society, where customers are more informed and empowered and there is an ever-increasing regulatory scrutiny.

To become more customer-centric in an era that is increasingly global and complex, we focused our servicing strategy on 3 areas: Creating one global-integrated network, improving capabilities and empowering our people.

Prior to 2009, customer service at American Express was provided by 2 separate organizations, one covering the U.S. and one for all our international markets. Our first step was to bring these 2 groups together to eliminate the inherent efficiencies, capitalizing on our global scale and leveraging best practices from around the world. We're globalizing processes such as telephone servicing and disputes. As a result of these process globalization, as well as more customers moving to online servicing, we've been consolidating and closing a number of facilities, thereby increasing the overall efficiency of our servicing network.

In addition, similar to technology, our servicing organization is comprised of both American Express employees and vendor partner resources. Leveraging our global scale, we've deployed a flexible resource model that drives efficiencies and quality and enables us to more easily adjust to resourcing levels based on volumes.

In addition to driving efficiencies, we have a multiyear plan under way to improve and globalize our capabilities to enable our people to serve our customers more effectively. We've developed a new real-time knowledge management system in the U.S. and have improved our servicing portal, enabling our front-line employees to access and view more data at the same time.

In order to deepen our relationships with customers and increase loyalty, we needed to create a capability to help us listen to them and better understand how we could create more unique and personalized interactions. So we invested in an infrastructure that enables us to measure customer satisfaction. or what we call voice of the customer.

To measure our progress in improving customer satisfaction, we boiled all of our various internal metrics down to one simple question: Would you recommend American Express to a friend based on this servicing interaction? While these improved capabilities and processes help us to be more efficient and effective, what really sets us apart is people. People who are passionate about what they do and who are empowered to do what is right for our customers. And to truly empower your people, you need to let them be who they are. Let their personality come through over the phone or through digital channels. At American Express, we built a service culture that fosters this type of empowerment.

Our service ethos at American Express is called Relationship Care. It's based on a simple philosophy: We treat our customers the way we want to be treated as customers. This ethos is summed up in 4 key behaviors. We want to recognize customers when they call and make them feel valued. We want to make emotional connections by being genuine and authentic. We want to resolve requests on the first try. And we want to treat our customers as people, not numbers.

Anyone can build new and improved tools and processes. All you need is money. But you can't buy real empathy and genuine care for other people. It's what we look for when hiring a customer care professional. It's our culture. And it's not just the U.S. phenomenon, it is a global phenomenon. This Relationship Care service ethos, which we have built and nurtured over the years, is the heart and soul of our company. It is our competitive advantage.

The key outcome we're driving toward in making this transformation is to create millions of brand ambassadors, customers who tell their friends and families about how much they like the products and services we offer, and encourage these people to try us out. So how are we doing?

As I mentioned earlier, we use recommend to a friend to measure satisfaction. And as of December, the measure reached an all-time high in the U.S. and was 28% higher than in 2009. But don't just take our word for it, as Ken mentioned earlier, for the fifth year in a row, American Express was recognized by J.D. Power and Associates for having the highest customer satisfaction among U.S. credit card providers.

We've also been recognized globally as a service leader, not just in our own industry, but across industries by several media and service organizations around the world.

Superior service not only makes our customers happy. It's also good business. Highly satisfied customers are more engaged. They spend more and attrite less. Based on our most recent analysis, promoters spend approximately 10% more annually than non-promoters. In addition to being higher spenders, promoters attrite from the franchise approximately 4x less than non-promoters.

In summary, we view providing great customer service as an investment in the relationship, not as a cost. Even as we've reached these outstanding customer results, our servicing base -- expense base has gone down by 2% since 2009 while absorbing substantial growth in both transactions and cards-in-force.

Superior service is part of our heritage and is a key differentiator. Relationship care delivered by our front-line customer care professionals is a competitive advantage. We built an efficient servicing network, which can be flexed up or down based on business volumes. But service is not static. We're committed to taking Relationship Care to the next level and to go where our customers are and where they want to be served.

Powered by technology, we're investing and building new capabilities to serve our customers across multiple channels, including web, phone and text. We have more capabilities -- mobile capabilities across 14 markets with iPhone, iPad and Android-servicing apps, and we're testing customer servicing via social media in the U.S. and the U.K. Our goal is to redefine customer service in a digital age and deliver a value-generating experience seamlessly across all customer touch points to drive brand advocacy and deepen engagement.

Let's turn now to credit administration. Servicing customers and collecting from them are 2 different things, and we wanted to ensure a laser focus on both. Therefore, we split these functions from servicing and created a separate global credit administration organization to handle collections and fraud servicing across the enterprise.

To be successful at collections, you have to do 2 things really well. First is making sure a high percentage of calls you make to delinquent cardmembers result in actual conversations. We call this right party contacts.

Second, you need to make sure those conversations lead to customers paying you back. And while contacting the delinquent customer is critical, it's even more critical to get to that customer first as 57% of delinquent Amex cardmembers are also delinquent on at least one other card issued by a competitor.

We've taken a two-pronged approach to contacting and collecting from our delinquent customers: Flexible resourcing and building capabilities. As in all our global services businesses, our flexible resourcing model enables us to ramp up or down based on business volumes. We partnered with outside agencies in key phases of our early and late stage collections and are beginning to use non-phone channels, such as the web, to rapidly react to unexpected volume changes.

We're also developing new capabilities to make our collections environment even more effective and efficient. We've deployed new and enhanced systems in key markets to more effectively blend inbound and outbound call volume. We're enhancing our global reporting capabilities and have established command centers in Phoenix and in Brighton to provide real-time monitoring. As a result of these efforts and our loyal cardmember base, our U.S. delinquent right party contact rate has remained steady even as delinquency cases have come down from their peak in 2009.

Once you contact the customer, you then need to persuade them to pay. Here, a combination of first-rate collections professionals and efficient payment tools really makes the difference. While servicing and collections interactions are different, our service ethos, Relationship Care, still applies. We take more time to engage and speak with our customers. And as a result, we've been able to improve customer satisfaction as seen on this slide. Not an easy task given the nature of these conversations. Based on our customer surveys in 2011, 79% of U.S. delinquent cardmembers rate our collections interactions as good or better.

And finally, we're making it easier for our customers to pay us back by deploying new tools to collect delinquent payments electronically instead of by check.

Taken together, our cardmember base, service culture, flexible resourcing model and capabilities power our collections effectiveness. As you can see, Q3 write-offs in our U.S. consumer lending business as a percentage of newly delinquent AR was 11% compared to the industry peer average of 20%.

Well, we cannot continue to simply rely on our phone channel to drive collections. As we've done in our other customers servicing areas, we're developing online and mobile collection tools to reach our delinquent cardmembers how and where they want to be reached. This year and into the future, we expect to continue to invest and build our collections capabilities globally through our flexible resource model, reporting tools and capabilities including new digital solutions we endeavor to improve our collections effectiveness and be ready in the event of another economic downturn.

The fourth component of our organization is global business services, which is comprised of our internal business operations such as real estate, procurement and financial operations. In addition to making our internal processes more efficient and user-friendly, we're creating a new workplace environment to help us use real estate more efficiently while at the same time redefining how we work at American Express.

Our goals are to increase productivity and engagement across our employee base and to help us attract and retain the best talent. We call this new environment BlueWork. It provides a wide variety of work space configurations, thereby optimizing our use of real estate. Because it's open and flexible, it also encourages more collaboration and can accommodate today's more mobile employee work style.

In addition to a new physical environment, global business services is partnering with the technology team to introduce new workplace technology tools, including more videoconferencing across the globe to enable more interaction and collaboration within and across teams, as well as reduce travel expenses.

Global Business Services is also partnering with World Service to enable our home-based servicing initiatives. This program will enable us to access a broader pool of talent to recruit from. Our goal with BlueWork is to create a highly collaborative and results-oriented workforce no matter where they work. We believe that by providing our people with the right tools and processes and with choice about where and how they work, we'll achieve higher overall employee satisfaction and engagement, which will enable us to attract and retain the best talent.

As we've seen time and again over the years, this focus on employee engagement leads to higher customer satisfaction, which in turn enables us to generate superior economic returns over time.

Across all internal business operations, we've established an end-to-end process mindset and approach. By doing so, we can identify and eliminate waste and ensure an appropriate control environment. We've developed this waste framework to question the value in all of our activities with the objective of reducing excessive demand and increasing overall effectiveness.

We've applied this mindset and framework across multiple processes, and it will be our approach going forward across a number of our other business processes. This will result in the improvement of existing processes. The creation of centers of excellence for like functions and the combination of other subscale transaction processes from across the company into Global Services.

We believe that we've accomplished quite a bit within Global Services over the past 2 years. We've driven cost out of our environment, absorbed incremental volumes and built new capabilities through increased investment.

The net result is a lower cost structure in 2011 than we had in 2009 despite double-digit volume growth over that time period. At the same time, we've increased customer satisfaction and we've provided our company with the capacity to drive growth and enable its digital transformation.

We are continuing to turn a legacy infrastructure into an enabler of growth.

As a result of my remarks today, I hope you have a better understanding of how our overall operating expense -- of our overall operating expense base, a sense of how we're targeting OpEx growth over the next few years, and how we're managing the Global Services expense base in a way that gives us a competitive advantage. Thank you.

Kenneth I. Chenault

All right. We'll now open things up for questions.

Question-and-Answer Session

Unknown Analyst

I have 2 questions. I guess the first one will be for Steve. There's been some press recently on collections practices at credit card companies and the use of in-house lawyers, and I can foresee a potential political storm, where you could have similar to what they have in the mortgage space where credit card issuers encounter political pressure for collecting on credit card customers. Can you just give me your thoughts on that risk and what you do to mitigate that risk that today and in the future?

Stephen J. Squeri

Yes, I think what we do, do is we make sure that we work very carefully with the regulatory agencies and Consumer Protection Agency. And we also make sure that, internally, we follow all their practices, but we do use outside lawyers, and it is an issue in the mortgage industry, but we'll continue to make sure that we have everything aligned and in compliance with regulators.

Unknown Analyst

And my second question is regarding surcharging. It seems like there's a likely outcome of the Visa/MasterCard merchant litigation that their ban on surcharging would be repealed, in which case their credit card could potentially be surcharged at U.S. merchants. Who knows how much the merchants would like to use that. But from your perspective, you've obviously had experience with this the past, but would your rules -- obviously not directly impacted by the merchant case. How do you feel competitively that could play out? I could foresee a scenario where if Visa and MasterCard cards were being surcharged because of settlement and you weren't, you would actually have an advantage at the point of sale. Is that totally off-the-wall to think that way, or is it a real possibility?

Stephen J. Squeri

I think, I'll sort of start, and Ed and others can join in. I mean, it's hard to speculate what's going to happen. To your point, we've experienced surcharging in Australia. And while we had a momentary adjustment period, obviously, to that, I think we were able to surmount the issues, and we're running a very profitable business in Australia. How it turns out and how things are agreed to, I don't even want to speculate. Ed?

Edward P. Gilligan

So we had the reverse in Australia, where some retailers were surcharging for Amex and less, maybe, for other cards, and we've reached a much better equilibrium. As Ken said, we've got a very healthy business there. But I think one thing that came out of Australia, when the regulators and other groups look at what happened, it's clearly anti-consumer when you're surcharging.

And I think -- so we don't know what's going to happen in the U.S. with Visa and MasterCard and their lawsuits. We have -- whether it's surcharging or what will happen. But the message from other parts of the world is that you may solve one problem, you cause others. And I can't imagine surcharging being welcomed by consumers in the United States.

Unknown Analyst

No, neither can I, but I guess the other part of the question was, with the DOJ case in the U.S., Visa, MasterCard seemingly capitulated on the steering between cards. And you took a different approach and took a very hard line against steering between cards. Would you foresee if the settlement came out tomorrow, and all of a sudden Visa and MasterCard are repealing their surcharging ban and there's political and/or merchant pressure for you to repeal your surcharging ban to take a similar hard line that that's an absolute key part of your merchant strategy, or maybe not?

Edward P. Gilligan

Well, I mean, I've -- we believe, as the Department of Justice many years ago said, Visa and MasterCard have market parity and we don't. We strongly believe that our cardmembers -- if the merchant decides to welcome our card that they should not be discriminated at the point-of-sale. And that's how we run the company, and we've run it, I think, very effectively by following these principles.

And so it's -- I don't want to speculate on what Visa or MasterCard might do because, honestly, we don't know. Generally, our approach is when there is a change in the system, the equilibrium that exists has to adjust. There are usually risks, but there are always opportunities in a change like that. And we try to look at it through both lenses. And again, we probably overused the Australia scenario, but that's one where there was a risk. Visa, MasterCard is regulated, we weren't. Their interchange dropped, our discount rate had to come down over time. We had time to adjust. We improved the value proposition in our consumer card proprietary business, and we substantially grew our GNS business. So what was a risk became an opportunity. And that experience, we'll bring to the U.S. if and when something -- some change hits the system.

Kenneth I. Chenault

I think what's important, also, is to reinforce the point that Ed made is, we don't have market power relative to Visa and MasterCard. And our position is, the reality is merchants don't have to accept us. We have to demonstrate day in and day out. That's in our DNA. And I think our performances, since 1958, has demonstrated that we, in fact, have the products and services that incent customers into that merchant, and that we bring more value to that merchant. And I use the example, frankly, Walmart is not -- we don't have market power to have Walmart accept us. Walmart accepts us because of the incremental value that we provide. That's central to our business model.

Unknown Analyst

I wanted to ask with regard to this slide that's entitled Technology Development Spending Productivity. Should the takeaway from that be that you are going to flatten both your variable development in your fixed development or you're going to shift more to one versus the other?

Stephen J. Squeri

No, I think the takeaway from that is that, number one, we'll continue to look to push the vendor rate down. So if you assume that we held -- if we held development flat in terms of that overall dollar amount with that breakout, we would push the vendor rate down, and we would continue to get more efficiency out of our existing internal resources, okay? And so the comment I made talking about different development methodologies and tools. What we've really done over the last few years is made our internal resources a lot more efficient and effective, so they can manage more hours to develop a variable development spending.

Kenneth I. Chenault

Why don't we go in the middle, and then to the right. Someone had their hand up.

Unknown Analyst

Two questions. Number one, can you remind us the 12% to 15% EPS growth targets? Is that a pure long-term goal? Or do you think because of the expense initiative, you can achieve it in the near term as well? And I have a follow-up.

Stephen J. Squeri

The 12% to 15% EPS goal for growth is an on-average and over-time goal. We said you should think about 2010 as being the base for that, so we're not modifying the goal for EPS growth.

Unknown Analyst

And the second, just on the DOJ case again. I mean, in one of your earliest slides, you show your -- the market share, you need a billing -- billed volume growth -- billed volume is now 26%, something like that. Does that mean you're gaining market power? How does that change your dialogue with the DOJ?

Kenneth I. Chenault

I think what's important is what it is says is we're gaining share in Billings. The reality is that MasterCard and Visa, from a scale standpoint, have substantial market power. And the way that I would interpret it, and I think it's very positive, is that we're gaining share in the marketplace. But the reality is that we don't have the level of market power of Visa and MasterCard. I don't know, Louise, if you want to comment? Louise is our General Counsel.

Louise M. Parent

I would essentially echo what Ken said. We are gaining share because of the investments that we are making in our merchant relationship and the value that we bring to merchants. It's very clear that merchants don't have to accept American Express, if they don't see the value. And many don't. But for the ones that do, we believe that we grow share because of the investments that we've made and the value that we bring in enhancing our network. And that is -- we don't believe at all that our success in the marketplace, in a highly competitive, frankly, marketplace is going to be any impediment into our success in the DOJ lawsuits.

Kenneth I. Chenault

The other point I would make about merchant value and this changes in the marketplace is, if you look at what's happened with the LivingSocials and the Groupons, what's clear, and we think frankly this plays into our power alley, is that the American Express, with our closed loop, we really can help build value and build business for merchants. That's what's really critical.

Someone over here?

Unknown Analyst

Sonya Parchinyan [ph] from S&P Capital IQ. First, have you quantified your global opportunity for prepaid cards? And second to that, what stopped you from targeting the global prepaid business in the past?

Daniel T. Henry

Prepaid is obviously an extremely large industry. it's some $400 billion growing to, over the next several years, maybe to $800 billion, $900 billion. So it's obviously quite large growth and growth potential. This year, as you know, this past year, we launched our global reloadable prepaid card. It really changed the industry with that, a value proposition that basically did away with fees. And we were able to do that because we control the entire business model. We issue the cards, we acquire the merchants, we have in the network. So our cost structure is very different.

And as Ken mentioned, we've started to gain some great traction as a result of that. We've applied for licenses and regulatory approval in numerous locations across the world right now. We've started to roll those out. We've got travel cards in several countries right now that are showing great growth, as Ken mentioned, our scale in gift cards is now tens of millions that we're selling. So we're beginning to see very good traction while rolling out with national retailers like Target at the end of last year. We've got others in the pipeline. So you can expect to see us aggressively go after that market.

Kenneth I. Chenault

Yes. I think, also, what's important is if you go back 5 or 10 years, the reality is we'd come out with gift cards, we'd come out with different specialty type of prepaid cards. But with the reloadable prepaid, we think we have a value proposition that has a lot of appeal. And the formula is, obviously, we're going to require customers on our own. But the partnerships, I think, what's very significant as a model, is the rollout, national rollout that we're doing with Target. We think we'll do programs with other retailers. We also think it goes back and is tied into our digital strategy, which is the need, in fact, to expand scale and the way we've integrated our prepaid product with Serve. That gives us both online and offline acceptance. So I think what you have is a confluence of market factors, plus the creation of internal capabilities that we've been able to build that we now can really pursue this as an opportunity.

Unknown Analyst

Basically, you're saying, I agree that the opportunity is immense. And my question really was, Providian, Capital One years ago went after the prepaid market. So did I understand you correctly in saying that you just really sort of dreamed up more recently with the reloadable idea and how to make this thing really work for you?

Daniel T. Henry

We started off, as we mentioned, with gift cards. We started -- revolutionized that with doing away with the fees. We saw how quickly we were able to garner scale with that. Then, as Ken said, we should be able to do this with the reloadable card. The reloadable card, that whole industry is rife with paying points for the consumer with all these fees.

Kenneth I. Chenault

I think it might be useful, Dan, just as a backdrop, because I think what's important and that's significant is how we, in fact, have changed the economics of the reloadable prepaid card and what that has done to the industry. I think that would be useful context for people to have.

Daniel T. Henry

Yes. So we did away with fees, we now, kind of, have a model that enables us to have a value proposition that we can acquire significant sums of customers without high acquisition cost because, literally, our value proposition is differentiated. And because we are combining what was a separate prepaid infrastructure now with what is a digital platform, we can start to add a whole slew of value-added services, on top of the ability for the under banker, those who weren't able to get to a creditor-charged product to be able to move from cash to online and offline spend.

And so that combination of things is very powerful. And as we look to expand our franchise and get scale, leverage our closed loop data on that, I think that helps all of us in terms of what we're trying to do with value to merchants as well.

Kenneth I. Chenault

And I think what's also important is, as Steve talked about, we have built up from our legacy platform of traveler's checks, and we've really made major improvements in that infrastructure and added new capabilities. That's critical.

The second is, the payments industry, as we've talked about, is changing dramatically. If we look at what's happened to debit, that's a major change. So reloadable prepaid is more attractive to some of those segments that may have been more inclined to debit in the past. And then what's critical is, and this is true of the company overall and why I have a lot of confidence in our digital transformation, is the integrated payments platform, the fact that we are a merchant acquirer, we are an issuer, we're a global authorizer, that gives us important advantages against other payment providers that, in fact, have a disaggregated model.

One over there, and then we'll see how this group does. I haven't seen a hand yet, so I'm not -- I see it now, so we'll come over to you after 2 or 3 people.

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

One numbers question. I was just wondering over what period of time you expect that 23% of revenues numbers from [indiscernible] to come down to 19%? I guess over the short term, should we expect that the rewards expense line grow slower than billed business by virtue of that? And then I guess secondarily, just on the Blue card, what's different about your underwriting standards today versus what we had prerecession?

Kenneth I. Chenault

Dan, why don't you answer most of that. And then, Ed, talk about the Blue card.

Daniel T. Henry

So we said that the expenses in total will come back to historical levels. It doesn't mean that each category will come back to historical level. I think we're certainly looking at rewards. As you know, the landscape has changed. I don't necessarily see that particular item going back to 19%. Although we will endeavor to both have rewards as part of the overall product that we offer. And the product offering is a lot more than the rewards: It's service, it's the brand, all the things that we stand for. But we will look at how we can be economical in terms of how we use rewards to fuel customer engagement. I think because of the shift that we've had in how we look at lending to be focused on premium lending, it could well be over time that provision isn't the same as percentage of revenues than it was in the past. That would be a source of funding. And very much to the conversation we had today that Steve led is we're very focused on OpEx. And to the extent we can be efficient there, that can be a source of funding as well.

But the primary thing is, one that Ken talked about, is it's not just all about expenses. It's about what can you do with revenues. It's the extent you get revenue growth then that influences how many resources you have in the other categories.

Edward P. Gilligan

So I think our product strategy, Sanjay, has been through the last 2 years coming out of the recession, we said, 2 years ago at this meeting, focus on charge, take advantage of the co-brand, winning the Northwest, converting it into Delta, expanding the same approach in the international, building a network, et cetera. All the things we talked about 2 years ago, we've been executing on.

Lending 2 years ago was a little bit more of a question. What are the customer demands? What is the role of lending in our business model? And we had to get through that phase. So we focused most of our acquisition on the things that were working incredibly well, and you see that in our results.

In the past year, we have come back in our prop lending business. You can see it was the biggest increase in new cards acquired. And what you could also see the amount of new charge volume we pour it on. But I would say, the biggest change has not been really underwriting. Our approval rates are more or less the same. But there are things we're not doing, like we're not doing a lot of the balance transfer activity that really attracted not our core cost rate. It attracted people who are looking to park balances, to take advantage of promotional rates. So we're not doing that. In fact, Ken mentioned we launched fee-based Blue products for the first time. So strong rewards, targeted for people who want rational rewards, cash back, charge to fees for a premium version of that, and it seems to be resonating in the market.

We're bringing on affluent, mass affluent consumers. Still a lot of transactors and occasional revolvers. So it's really how you segment the customer base and position the product, and the line sizes you give and what -- almost what you don't do to get the right customers. So we've made all those changes, and you could see the results in our accounts receivable base starting to slowly grow, yields stabilizing. So it was a headwind for us for the last 2 years. The whole lending business is now, kind of neutral in the mix, but you can say that it's moving in the right direction.

Kenneth I. Chenault

Ash, you have anything you want to add?

Ashwini Gupta

No.

Kenneth I. Chenault

Good. All right, Meredith?

Unknown Analyst

I have 2 questions. The first is on -- I'm just going to add on to the question on the other side of the room, which is, you can follow all the rules and have a great relationships with the regulators, but you got a new regulatory agency. There's a lot of unknown, and there's a lot of political momentum against financial institutions. So how would you describe the visibility on the regulatory environment today versus a year ago, 2 years ago, 3 years ago?

Kenneth I. Chenault

Yes, look, I think around the world, the regulatory environment is more intense, not just the U.S. Our approach and strategy is, in fact, to engage with the regulators and explain to them the elements of our business model, how it works, what are the differences, what are the similarities, and really to try to focus on making sure that we are compliant, and that we're following the rules. I think every financial institution is certainly undergoing more intense regulation. I would say different from a bank, if we look at it, Dodd-Frank doesn't impact us in the same way. Our focus is more on the Consumer Financial Protection Bureau. It's still early in the stage, but we are in dialogue with them on a pretty consistent basis, talking about our business and our models, our new products, changes that we're making. And I think that's the reality that we're in. And my view is that we should be proactive not defensive about engaging with the regulators.

Unknown Analyst

My second question is also on visibility, which is I think the last time you were surprised by consumer behavior was summer 2007. And if I look back 2 years ago, you had incredible visibility in terms of how consumers were going to pay, and it sounded, last year -- a couple of years ago, incredibly confident. How do you feel today about your visibility on the consumer? I understand your statement on reserve releases. But in your comments, how much visibility do you have today? And what could surprise you?

Kenneth I. Chenault

Let me make a general comment, and then I'll ask Dan and Ed to join in. I think overall, as I said, I can't project out and won't project out our performance. But we have been pleased with what we've seen over the past 2 years. As we look at our billings growth, I think what it comes down to is -- are the value propositions that we've been able to put out in the marketplace that consumers have found very appealing.

I think one of the reasons why I wanted Steve not just to cover expenses, but to go through our Relationship Care, is I think people frankly -- and I hope our competitors continue to undervalue the importance of service and investing in service, because we know there's a direct correlation between these service interactions and the level of spend. I think certainly 2 years ago, I would not have thought credit would have improved as fast as it did. We're obviously pleased. But what I'm also even more pleased about is when we entered the financial crisis. We had around 100 basis point gap between ourselves and the competitors. We are exiting this with around 200 basis points gap relative to write-off rates.

So I think some of the changes that we've made in refining our business model and honing it have actually put us in a situation where we are a substantially stronger company coming out of the financial crisis than we were going in.

Dan, Ed, any comments?

Daniel T. Henry

I mean, what I would say is, certainly there's a lot of uncertainty in the environment today in terms of which direction we're going to go. Do we stay where we are? Do things deteriorate? Do they get better? We can't forecast that. But certainly, one of our objectives is to do better than the competition, continue to take share whether it's a robust environment, a kind of a middle-of-the-road environment or even in a solid environment to do better from a share perspective. And to, as Ken mentioned, continue to have credit results that are best in the industry.

Kenneth I. Chenault

Yes. The only other thing I would say and then let Ed jump in, as I said in my opening remarks is, one month does not make a trend. But obviously we feel better in the month of January that things helped, that -- and that's important, but it's not a trend. And we clearly have to see how the economic environment, how Europe performs, what's happening in Asia. So I think anyone who says that it's smooth sailing, I don't think you can make that statement at this point.

Edward P. Gilligan

I'd just say, Meredith, we have an incredible customer base. We have a lot of insights, both from consumers, small businesses, corporate accounts, U.S. and around the world. And we feel great about the performance in 2011. And gaining share is a great example and being able to grow billings double-digit. And we watch very closely for trends. I think what happened in '07 was a shock to the system. The '07 shock was the real estate bubble bursting. So something shocks the system. Our business, obviously, will be impacted like everyone else around the world. But what we see right now is good stability. And we've looked very closely at what's going on in the fourth quarter. We showed you online spend. We looked at a lot of different drivers, and we feel very good about the performance about where we are right now.

Unknown Analyst

I'll never forget you guys were the absolute first people to talk about it in terms of how the payment structures had changed. And I guess a different way of getting at it is if I use something as standard as FICO. Is the FICO balance of your average FICO of your customer base materially better than it was 3 or 4 years ago, so you feel more connected to your customer, and you know the -- or it's more -- the band is smaller or is it narrower?

Kenneth I. Chenault

Ash? Ash Gupta is our Chief Risk Officer.

Ashwini Gupta

The FICO band is probably marginally better, but not a lot better. The basic improvement in this technology makes -- we can take more risk within the same FICO band because that risk analysis within the FICO band is a lot better than it ever was.

But if you look at our portfolio distribution by FICO, it will look better but only very marginally right now.

Kenneth I. Chenault

Over here.

Unknown Analyst

Shifting back to the online spending comments. Were the dollar figures you posted the dollar volumes for the American Express network by itself, or were those included things where American Express customers might have uploaded their PayPal account? I'm just trying to get a measure of online spend because there's 2 very different conclusions that we might draw up based on that answers.

Kenneth I. Chenault

I don't think you'd draw a different conclusion. So I think PayPal is in the number.

Edward P. Gilligan

Yes. It's $130 billion of online spend. It's all spending by Amex cardmembers, online retailers, of which using PayPal is in the number. I would say it's a small percentage of that total.

Unknown Analyst

Great. And kind of transitioning to that. As we think about Serve and its revenue model is predicated on pricing for, kind of, the prepaid debit product and the loadings of that. It seems like PayPal now with their online app only requires people -- allows people to load it with their checking accounts. And it seems like that the e-wallet model itself is focused very much on that model and pushing ACH type payments for loading. But online spending seems to be driven by credit card usage, and especially by the higher spend consumers who have the spending power.

How do you reconcile both of those in terms of a strategy because they seem like very diverging paths ultimately coming back towards American Express and Serve winning as an online payment world?

Kenneth I. Chenault

Yes, let me just open, then I'll turn it to Dan. I think what's very, very important and frankly not unlike -- but in an even more transformational way, not unlike what we had to deal with in the '70s and '80s where you had charge card T&E focus, and you had revolving credit. And the company for years said, we're going to stay in T&E in general for the business T&E customer. And the reality is everyday spend was very attractive. And what we want is we want that spend from a set of different sources. We think that the existing Amex card product and what we've done to really bring about the digital transformation on our existing card product has been terrific, and were doing an excellent job in gaining online spend. We also think that Serve is going to bring in different customers, different segments and also has attractive economics, but very importantly, will make American Express more relevant in the lives of larger numbers of customers.

Daniel T. Henry

You summarized most of the comments. I think our primary objective both on -- both prepaid and on Serve and their coming together as a common platform is to increase the number of members that we have in our franchise overall. And they are different segments of the market. It can be the youth market. It could be the underbank market. Overseas, clearly, economies are jumping not from cash to checks to plastic to digital payments, they're jumping from cash straight to mobile payments, given the explosion of mobile phones. On the Serve platform, as you know, it's agnostic to funding. You can fund from cash, which we added this past year. You can go to a retailer to give cash. You can fund your digital platform that way. You can do it by any debit card or frankly any credit card into the platform. And that is intended to appeal to a different segment of customers. And as we've looked at our initial loading of that platform, we're seeing that happen in terms, and Ken mentioned some of the demographics of that. We do think that the platform, though, overall, our digital platform, can be expanded to our entire franchise going forward. It doesn't need to just be prepaid. You can do pass-through type of economics as well. And the more that we could combine all that creates scale on top of that platform, and then create opportunities to create value, different types of value between merchants and consumers. That's really where we're going with these digital platforms. They're not just digital payments platforms. They're digital payments and commerce platforms. And as we look at future revenue streams, it's not just incremental spend that will come from discount revenues and cross-border fees and that kind of thing, but really the revenues and the margins that come from creating the ability for merchants to sub-segment and target consumers on an individual basis.

And for us, that's really the advantage in why data in many ways and our closed loop is such an advantage for us because data really is that Holy Grail for digital commerce.

Kenneth I. Chenault

I think one other thing I would say is if you look across all of our businesses, whether it's Loyalty Partners, which is our coalition rewards business, our existing card business, Serve, one of the terms that I would emphasize that you're going to be hearing more and more about is performance marketing. Because using the information and the data to improve the performance for our merchants and at the same time bringing value to the end-user customer is very, very important. That means we need a broader representation in the products and services that we offer in commerce. Because this convergence of online and offline is major. And so the strategic alignment is critical. So what we're doing on coalition rewards and rewards overall feeds in to all of our payment businesses. And so it's not just better value propositions, which is essential to the end-user customer, but, in fact, improving the performance of the merchants that we do business, and information and data becomes the gateway for doing that. Yes?

Unknown Analyst

Just one clarification and one follow-up on that. So you mentioned that in January, you were feeling good about that January has held. And that was with regard to Europe, I thought your comments were...

Kenneth I. Chenault

Europe has held and overall.

Unknown Analyst

Okay, so no distinction between anything else at all. It's pretty much the same as it was in the fourth quarter in January? Right? Okay. And then I noticed that there -- you didn't have an ROE discussions slide like you usually have in the deck. And I'm just wondering, I know we're in the middle of CCAR and the requests and all that. You probably can't talk about that, but could you just give us a sense of how you're thinking about capital requirements and ROEs over time, especially as you drive your expense ratios down and your ROE up you're going to be dropping more earnings to the bottom line. So how do we think about that migration at?

Kenneth I. Chenault

We love talking our ROEs. Ours is pretty good. Dan?

Daniel T. Henry

Yes. So our target is better than 25% in ROE. And last year, I think it was about 28%, which is a consequence of the capital that we're currently holding and the good earnings performance that we have. As we think about capital, our plan is to retain about 50% of our capital to help the growth of the business, return about 50% to shareholders through either dividends or share buybacks. In the retained capital, part of it supports just the growth of our balance sheet as our business grows. Although to the extent that consumers continue to have more cautious approach and are basically deleveraging, we probably only knew the small amount for that. So we've allocated about $2 billion for acquisitions. We'll only make those acquisitions if they support our business strategy, and they have good financial returns. To the extent that we don't have acquisitions at that level, we would then be inclined to return more capital to shareholders than the 50%. On the other hand, if we had excellent process -- prospects for acquisitions, we would take that higher. So the 50% is really a guideline.

What you noticed in 2011, we made a submission, requested a certain amount that we could return to shareholders. It was based on that about 50% split between retaining and doing acquisitions. At the end of the day, we did less acquisitions than the $2 billion. We did about $900 billion worth. And we were kind of capped in terms of our share buyback. That cost our Tier 1 capital to increase from about 11.1% last year up to 12.3%. So as we go forward and make our CCAR submission we build more flexibility into our request, we obviously have to wait and see what's approved by the Fed, but we'd like to have that flexibility if we can. But we're staying with our basic philosophy about what we retain and what we return to shareholders.

Unknown Analyst

Right. Flexibility so you could adjust at year end if you didn't use the capital.

Daniel T. Henry

Flexibility if we did less acquisitions, so we'd have more capability, but it's subject to approval by the Fed.

Kenneth I. Chenault

Yes?

Unknown Analyst

In the future, it's possible that U.S. residents may be able to gamble online and purchase state lottery tickets through electronic payments. Has American Express considered preparations for addressing this potential market? And given the content, would you consider partnering up?

Kenneth I. Chenault

Ed?

Edward P. Gilligan

Well, I mean, there are markets today where gambling is legal in other parts of the world. We don't allow it because we've been -- we're focused on our reputational risk and brand risk. But there are probably some circumstances we would consider it. We haven't really focused much on the plan for the U.S. There are some markets where it's a big part of the industry today, and customers can use Visa and MasterCard and not Amex, so we get request every now to look at that from within our company to look at the risks to the brand, the reputational risk, the credit risk. And we look at all that, and so far we have not allowed it. But we'll make that decision on an ongoing basis based on the facts at hand.

Unknown Analyst

Talk about the pace of change in payments. And as you think about the -- what you're telling us about expenses and being able to better control them, is there a risk to that where the technology curve is so steep that you find yourselves, kind of, pedaling faster to catch up there? And do we think about that acquisition budget as one of the ways you deal with that?

Kenneth I. Chenault

Why don't you, Steve...

Stephen J. Squeri

Yes. I think that one of the things that we've done over the last few years is, I mentioned, about the legacy infrastructure. And we've really spent a lot of time and money developing whether it's the new data centers to have more computing power, more security, whether it's the new telecommunications network. And what you have to understand is that one of the main advantages that we have is the closed loop environment. That lives within that legacy infrastructure. And what we really try and do is to make sure that, that legacy infrastructure is very easily integrated into, okay?

And so while there is a tremendous pace of change with technology -- I'll just give you an example. We just did the RedLaser application, which was a -- RedLaser, you can actually scan, go on Shop Amex and then it goes back into Membership Rewards to allow you to buy. Well, the way that we architected that is RedLaser connects into an outside provider that we have, which connects into our host network. And so by making it very approachable, our system, and using services and things like that, the pace of change, I don't think we're going to be on that pedal and keep going and going.

The other thing that we do is we will acquire companies or capabilities to augment what we have. Serve is a great example of that. We saw Revolution Money acquisition as a really good opportunity for us to get a lot more capabilities in the prepaid space, to get a lot more person-to-person capabilities. So I think the key here is to make sure that our existing infrastructure and capabilities and technologies are approachable, and that we're smart about how we acquire capabilities, and that we are also smart about, I've talked about, development methodologies. We're really changing our development approach and methodologies, so that we can integrate in. So I don't think we're going to be in that treadmill.

Edward P. Gilligan

And our goals are obviously, let's say, very relevant to our customers and merchants as this, kind of, digital wave hits and customer behavior changes and threats and opportunities arise, that's the most important thing we're focused on. What we do, spending on technology, I mean, we're not going to let that throttle our ability if we think, somehow, we risk becoming obsolete, but we'll just fund it from other sources within the company in order to hit our objectives. And as you said, be flexible thinking about acquisitions and investments to build capabilities.

Daniel T. Henry

To point out in general in the software industry and over all. Although the pace of change is exploding right now, and there's no question about that. Because you now have cloud-based infrastructures, you have massive, kind of, high-speed networks solely built through wireless networks, you have distribution through smartphones out there, the cost now of innovation is dropping dramatically. And so what Steve mentioned in terms of us building that technological underpinning, really our cloud, creating these API sets that we're able to extend out one way or another and then create software on top of that for applications, the

real challenge is not so much that cost of technology right now because we've invested. We've got pretty flexible modular infrastructure. We always need to improve that. The real challenge is to make sure that your understanding, kind of, where the industry is going that you're executing against ideas, you're in the market iterating on new ideas, getting feedback constantly and be willing to change all the time. And so I think it's not so much the cost piece of it. It's us leveraging the assets we have and constantly innovating. It's more of a mindset for us in terms of what we need to continually do because we've made the investments over the last couple of years.

Kenneth I. Chenault

The other point I would make is if you look at, really, the progress we've made over the last 3 or 4 years and you talk to the Facebooks than Foursquares of the world and ask them about our speed and flexibility, I would say you'd get some very positive responses to that. I think they have been very, very pleased with how quickly we've been able to move. And I think that's a result of the focus that we've had both from a technology standpoint, but also what we've done across our business in really understanding how we leverage this integrated payments platform and our closed loop, and how we think about those opportunities. So what we haven't done is approach these partnerships from just a pure payments perspective. What we have done is really approach the partnerships saying, "Here are the set of capabilities that we can bring that actually can help move your business as well as move our business."

Any other questions? All right. Thank you very much.

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