American Express Company Shareholder/Analyst Call

| About: American Express (AXP)
This article is now exclusive for PRO subscribers.

American Express Company (NYSE:AXP) August 3, 2011 2:30 PM ET


Daniel Schulman - Group President of Enterprise Growth

Unknown Executive -

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

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

Kenneth 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


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

Unknown Analyst -

Kenneth Chenault

Good afternoon, and welcome to our Second Financial Community Meeting of the Year. After covering our financial and business performance, we'll then turn to a topic I know is of interest to all of you. As I mentioned at our meeting in February, our focus today will be on the digital evolution of American Express, our approach, priorities and progress.

As you know, there's been a lot of activity in the digital marketplace by us, by traditional competitors and by new players. Our goal today is to give you some context on this environment and cover the actions we're taking to transform our company for the digital marketplace and ensure that both our core businesses and our newer businesses are positioned to succeed over the moderate to long term.

Given the breadth of this topic, we're going to double-team it today. I'll cover the digital progress within our core businesses. Dan Schulman, Group President of Enterprise Growth, will update you on the activities underway within his portfolio, which includes alternative and mobile payments, prepaid products and our new fee-based businesses. Our objective is to have you walk away with a better understanding of the digital environment, the opportunities we're pursuing and why we believe we're in a strong position to capitalize on the substantial change that's underway.

So let's get right to our performance. Year-to-date through June, I believe we've generated excellent results. I'm particularly pleased with our revenue performance. At a time when top line growth remains a challenge for many companies, in the second quarter, we exceeded our 8% on average and overtime revenue growth target, even after adjusting for FX. Strong revenue growth and improved credit allowed us to continue to invest in our businesses, even as we generated double-digit EPS growth and an ROE of 28%.

Our financials were driven by strong metrics, which are trending positive across the board. Second quarter reported billings were up 18%, the strongest billings quarter in our history. Cards in force grew by 6% and average cardmember spend was up 15%. Now I'm very pleased with these results, which reflect our hard work and our investment over time. I'm also pleased with our growth rates, given the generally strong comparables of last year.

Another good sign in our metrics is growth in average cardmember spending, our first positive quarter since the end of 2008. Our P&L is not dependent on spread revenue, but we're nonetheless encouraged by the stabilization and turnaround within our premium lending portfolios. Finally, our credit performance continues to be the best among our large industry peers for both write-off and past due rates.

Now let me drill down a bit, beginning with billings. As we've noted for several quarters, our rebound in billings has been broad-based, cutting across customer segments and geographies. As you can see, all of our businesses are generating double-digit billings growth on an FX-adjusted basis. And this is now the fourth consecutive quarter we've been able to make that statement. The split by geography also shows consistent double-digit growth even in Europe, which has had a somewhat slower rebound than other regions.

Since online billings growth is one of our stated priorities for the moderate to long term, I thought I'd update this slide from our February meeting. As you can see, our growth in online billings is up over 20% for the first half of the year and continues to outpace our overall billings growth.

With external sources projecting that online retail spend was up 12% during the first quarter of the year, I continue to believe we're gaining overall share in this important category. We remain the leader in online billings. And as you'll see in a few moments, we've got a range of innovative programs in the marketplace that reinforce this leadership position.

Our results, once again, generated very strong relative performance against our major competitors. Our billings for the first half of the year are more than twice the level of our nearest issuing competitor, and our growth rate over this high base was exceptionally strong. As I said earlier, we're up against strong comparables.

Our current billings growth of 18% is on top of 16% growth this time last year, while our peers are only up against negative to low single-digit growth. I believe these results are the outcome of the value we continue to bring to cardmembers, merchants and partners in a very tough competitive environment.

The loan side of the graph shows a somewhat different story. You can see that our portfolio has now stabilized and returned to positive growth. While our growth rate was indeed modest, it nonetheless compares quite favorably to our peers. For me, this graph highlights a major challenge coming for a number of our lend-centric competitors.

Despite all of the marketing, they direct it at gaining premium transactors. Our major competitors are still heavily dependent on revolving balances to generate positive economics within their card segments. And while they may be seeing improved growth in their card spending, that's not really a substantial driver of their revenues. Their revenues are still predominantly driven by loans. Their lend-based revenues have taken 2 sizable hits: First, on rate driven by regulatory changes; and second, by substantial consumer deleveraging, which has driven down volumes and which will likely impact future demand.

Over the short term, we're all seeing an earnings benefit from credit, but those benefits are already beginning to moderate. Going forward, sustainable earnings growth will have to come from revenues. As consumers continue to delever and with the regulatory focus on fees and rates continuing, I believe these issuers face strong headwinds in getting back to their pre-crisis results.

As I said, one positive we're all seeing is the continued improvement in write-off rates. At 3.1%, we continue to lead the industry, with a rate that's almost 200 basis points better than our nearest competitor.

Another contributor to our results has been the positive returns generated on our investment spending. As we've noted before, over the last several years, we've made substantial investments in several key growth areas. We pulled back on investments in 2009, as many companies did, but we upped our spending substantially in 2010 and have continued to invest in 2011.

Because of our spend-based model, our range of products, our ability to innovate and the existence of untapped segments and geographies, we've always had a surplus of productive investment opportunities. Over the years, this has provided us with flexibility to ramp up or cut back on expenses as economic conditions change or as funding sources became available.

For example, in 2010, we had several sources of funding: higher revenues generated by our core businesses; our credit performance; and the settlement dollars from Visa and MasterCard. We took advantage of these inflows to accelerate our spending across a range of investments, even while exceeding our long-term EPS growth target.

The breadth of our investments can be seen in the allocation shown here. As you can see, many investments are in traditional categories. For example, customer acquisition, brand, loyalty and our merchant network. Now here are some examples of our investment outcomes.

Through June, our proprietary new cards are up 9% on a global basis. That's good performance, but the driver of our returns is really the spend on these cards. Based on current spending trends, the cards we've acquired through June are projected to generate first-year spend that's 11% higher than the cards acquired during the same period in 2010. Now for reference, the first-year spend on all of the new cards we acquired in 2010 was 33% higher than the cards acquired in 2009.

The new customers coming into our franchise today are very engaged with strong spending. The objective of our acquisition investments is to bring in high-spending, creditworthy prospects. And it's clear from these results in our credit performance, we're doing just that. Investments that expand the spend of cardmembers, once they're in the franchise fall under loyalty. These investments look to reinforce the value of our products, and one important metric here is retention.

Despite the economic downturn over the last 2 years, our card base has held up exceptionally well. Since many of our cards have annual fees, we thought we might see a spike in cancellations during this time, but this did not happen. As you can see across our U.S. consumer- and small-business base, our retention has steadily improved. This is the result of a number of factors, but it certainly includes the success of our loyalty programs, our reward marketing and our investments in value enhancement over the last several years. The investments we're making in the expansion of our merchant base and Global Network Services are also showing good results.

Our new booked-charge volumes, defined as merchant volumes new to our franchise, are up by 7% in the first half of the year, after being up 25% in 2010. Our OnePoint merchant-acquisition program, which uses outside sales agents to acquire small merchants, has generated growth in new signings of 20% on top of 46% growth last year. Within international, our new partnership with la Caixa added significant new merchant signings in Spain, up 5-fold.

These new merchants clearly see the value of joining our network and welcoming our cardmembers. And our cardmembers gain the benefit of being able to use our products in a growing number of locations and spend categories.

Exceptional growth has also continued in Global Network Services. Billings for the first half of the year are up 33%, the seventh consecutive quarter of double-digit growth. And total cards in force is up 15%, coming from both existing partners and the 8 new partners we've added over the last 12 months. Across our GNMS segment, these results have contributed to a 62% return on segment capital and a PTI margin of 41%.

The ultimate measure of success for any business is the expansion of profitable share. And by this measure, it's clear that our investments are paying off. While still an estimate, we believe that in the first quarter, we saw at least another 60 basis points of share gain within general-purpose charge and credit spending. Our ability to grow our share over the last 8 years is, to me, the best measure of the overall effectiveness of our investments, particularly since this growth occurred during a period of aggressive competition for premium customers.

The remaining 2 areas of investment spending are new businesses and technology. Now Dan Schulman will give you insight into some of our new business investments. So let me tell you a bit more about our technology spend.

As you know, payments is a tech-dependent industry. Whether it's the large models used to run our risk processes of the thousands of merchant authorizations and transactions we run every day, technology is at the center of fulfilling our cardmember merchant and partner commitments. And given the size of our tech spend, the way we prioritize and the increased effectiveness of these investments has been critical to achieving our shareholder commitments.

Our tech investments cross business lines and enable a range of capabilities in both our core and new businesses. This spending breaks down into 3 major categories: First, the capabilities we're building to enable our digital progress. This includes investments in core functionalities such as Pay with Points, registered card and realtime customer notification. And as you'll see in a few moments, we then leverage these applications and improve our investment returns by plugging them in to multiple programs with a range of merchants and partners.

The other 2 categories of tech-investment spend are focused on efficiency improvement. One category is the core infrastructure work we continually do to rationalize our global platforms, with the goal of improving our operating costs and processing times. The second category is workplace efficiency, which includes investments in our front-line service applications, desktop functionality and employee systems.

The objective here is to ensure that our customer-care professionals have the data and tools they need to provide exceptional service to our customers, and that our entire workforce is as productive as possible. These tech investments, along with many investments in our network and new businesses, are all ultimately reported as operating expense on our P&L.

As the competitive environment has changed, over the last several years, we've prioritized our efforts across tech, sales, rewards and information modeling to provide value and generate growth. The spending is subject to the same discipline and financial assessment we've always applied to our investments. These investments have increased our operating expense base, but they wouldn't be approved unless we expected them to meet our hurdle rates.

Appropriately balancing our sources and uses of investment funds is an ongoing priority. Over the short term as I said earlier, our sources of funding will change.

The Visa and MasterCard payments in this year and the benefit we're currently seeing from credit will moderate. As these sources wind down, we expect revenue from a number of our newer business investments to ramp up. Combined with the ongoing funding generated by our core businesses, we'll believe we'll continue to have sufficient sources for investment.

Now overlaying these -- both sides of the scale here are our reengineering actions. When triggered, they can represent a use of funds because of the onetime costs associated with these actions. Over time, however, we consider them a source of investment funding because of the ongoing savings they generate.

Reengineering is always a part of our overall investment strategy, and it's certainly a contributing factor to the slower growth we expect to see in operating expense, as we exit 2011 and head into 2012 and as we work to migrate our margins towards historical levels. Now given the flexibility of our model and our attractive pipeline of growth properties, should unplanned gains or benefits arise from our businesses, we'd look to add to our investment spending as appropriate and as consistent with our past practices.

So to sum up our financial performance, I believe we're having an excellent year. We continue to generate industry-leading financial and metric performance. Our spending gains are broad-based, leading to a revenue base on which we can build. And we're aggressively investing for future growth across a range of opportunities, some with shorter-term paybacks that are contributing to current results and others that will provide benefit over the moderate to long term.

Based on our current performance and our future plans, I'm confident that our on-average and overtime financial targets remain appropriate: 8%-plus revenue growth, 12% to 15% EPS growth and 25%-plus return on equity.

Now much of my confidence in our growth prospects is driven by the momentum we've generated in our digital transformation, the major topic of our meeting today. As I told you in February, it's clear to us that one driver of our future growth will be how we adapt to digital change in the marketplace, and specifically, the digital change occurring in payments and services.

The marketplace is evolving rapidly, and we've all seen the trends: The geometric increases in smart phones globally; the continued expansion of social media; the integration of online commerce into the day-to-day routines of both individuals and businesses. The evolution of online commerce has come about in a number of stages.

If you think about the early years of the Internet, Web 1.0, the focus was on basic online information, search capabilities and simple transactions. Web 2.0, which has accelerated over the last several years, has been about the social application of Internet technology, building online communities, modeling user preferences and expanding online interactions, be they P2P, B2B or P2B.

I believe we're now entering a new phase of the digital evolution. Internally, we've referred to this as Web 3.0. It's all about convergence. The convergence of online and offline experiences, transactions and interactions and the information that drives it all.

A few years ago, consumers would use their desktop computer at home to research prices, and man, in many cases, go to a store to make a purchase. Today, many people live in a state of near-constant connection thanks to vast improvements in mobile technology. Their online and offline experiences are converging. Customers now have a smartphone in hand, while they're out shopping, and they'll use that phone to compare prices on the spot to look for better deals nearby and even to get a special offer at the point of purchase.

Consumers now book vacations, while they're commuting to work and pay bills while they're on vacation. Going online is not just something that happens at home or at work. Nowadays, it's literally in our hands 24 by 7. As a result, in 3 -- in Web 3.0, I see the separations between the 2 worlds dissolving. Online and offline are converging, and the roles and relationships between buyers and sellers and partners and competitors will change substantially as a result.

As we thought about this convergence and developed our strategy for the company's next evolution, we had several objectives: To remain a leader among our range of businesses regardless of form factor, regardless of changes to the competitive set; to use the digital evolution to add new and unique elements to our value proposition for cardmembers, merchants, non-card customers and business partners; and in doing so, to fully leverage the many assets capabilities and relationships we've built over the years to drive our digital growth.

We believe that by fulfilling these objectives, we'll be able to meet the payment needs and preferences of our customers regardless of whether they're swiping a piece of plastic, clicking online, waving a phone or loading an e-wallet. But beyond payments, we believe fulfilling these objectives will serve to expand the services and value we provide to our communities of consumers, merchants, businesses and partners, as they interact with us and each other.

As we've always done, we want to expand choice for our customers and prospective customers in the digital environment. So we'll be creating different products and services to meet their different and evolving needs. Now we've done this throughout our history, whether it was the creation of the Corporate Card, the opening of our network, the bank issuers or now with the launch of our Serve platform. Customers may move from one product to another, but by providing them with a range of choices, we put ourselves in a better position to serve them within our franchise.

As we address the challenges presented by this convergence, there are a couple of guiding principles we're following. Our first principle has a major impact on where and how we place our digital investment dollars, and that's our choice to focus on opportunities that go where our customers go, rather than on opportunities that would require them to come to us. We clearly could choose to spend time and money building our own site into more of a destination site. And we know that some competitors have chosen this option, creating customer marketplaces on their website.

Now we do, of course, provide substantial value and content on our site. We provide a range of service transactions, travel information, booking capabilities, merchant offer, shopping and much more. But our website is not the foundation of our digital strategy. Our belief is that our time and money are better spent going with our customers, recognizing and respecting their preferences and providing them value on sites they go to today, or sites we believe they'll go based on their needs.

You've seen the application of this principle in many of the programs we've already introduced such as Shop with Points on Amazon and our Foursquare and Facebook launches, all of which, I'll speak about in a moment. In this new environment, the customer is clearly in control. And we'll look to be with them, as they go about their digital lives.

A second principle related to a number of our efforts is that we want to be embedded into the purchase path of our customers, be they cardmembers, merchants, Serve customers or others. We always want American Express products to be used by our customer. But as appropriate, for certain applications, we'll seek to be the embedded option of choice based on our unique capabilities and value. During Dan's presentation, you'll see some examples that clearly illustrate this point.

Another guiding principle is that we want to keep our options open. We want to ensure we remain well positioned for whatever happens, whenever it happens across the digital marketplace. We know particularly with mobile and alternative payments that there will be game-changing developments in Web 3.0. We don't know when the tipping point will come. We don't know what the outcome will look like. We don't know what the transition will be. So our principle is to pursue digital opportunities that allow us to maintain multiple options.

As we've all seen, there are currently a lot of players across many industries, trying to create the payments ecosystem of the future. Now I personally don't believe a single product or operating system will turn out to be the winner here, particularly when you look around the world, where different stages of economic and technology development will likely require different solutions.

Our principle is to keep as many options open in this area as we can to stay flexible for new developments as the environment evolves. This is why you won't see us making all-or-nothing bets. This is why you will see us working with multiple players creating many new products. For example, we'll have our own digital wallet through Serve. But we also expect to participate in other wallets, as appropriate, based on the preferences and needs of our customers.

Now let me also add that while we will keep our options open, we're not waiting around for the future to happen. We're taking action now, entering partnerships now, launching products now. But as we do so, we're making sure these actions don't lock us out of options and don't box us in. There are many ways the future can evolve. No one has the answer to what will happen, nor when. Our principle is to remain open to and prepared for multiple possibilities for the sake of our customers, as well as our shareholders.

The final principle is that we want to focus on digital opportunities on expanding our franchise within new customer segments. Now, of course, we intend to innovate and add value to our core customer base. But as I shared with you in February, one of our priorities is to expand the demographics of our franchise in order to sustain and expand our growth for the longer term.

We believe the digital space provides us with new unique ways of fulfilling the needs of under-penetrated segments, such as women and younger consumers. A healthy customer franchise is one that crosses demographic lines. By using digital capabilities to attract new prospects, I believe we can tap into the considerable growth potential they represent.

Now I believe we have a number of clear advantages as we pursue our digital opportunities. First, are the existing assets capabilities and relationships at our disposal. We build these assets and capabilities over time as we innovated and competed in the offline space. We invested in them over decades, and we continue to invest heavily in them today. As a result, they've become strong competitive advantages. We applied many of these advantages to our Web 1.0 and 2.0 efforts, and I believe they'll add even more value to our 3.0 opportunities.

We all know of companies that basically had to start over when faced with industry transformation. They had to throw out some or all of their existing assets and build new ones in order to compete effectively in a changed environment. In our case, we not only don't have to throw out assets and capabilities, but they're actually enabling and accelerating many of our new opportunities. Ultimately, I believe these assets and capabilities, along with the innovations and creativity we apply to them, will drive our future growth.

Chief among these assets is our closed loop and the information it generates. Information is the critical element of the offline-online convergence. Having it, analyzing it effectively within privacy parameters, using it appropriately to drive further value for customers and merchants, all of this is crucial to capitalizing on digital opportunities regardless of industry.

Our closed loop has always been a core asset. But now, our digital closed loop puts us in a unique position, because we're a merchant acquirer, a network and a card issuer. We have robust information on all key elements of the payment cycle: cardmembers, merchants and transactions. Other merchant acquirers have merchant data. Payment issuers have customer information. Networks such as Visa and MasterCard don't have direct broad rights to either. Their transaction pass through highways. But because we have full breadth and depth of information on buyers and sellers, we can provide value to both in ways that clearly differentiate us from our competitors.

Using aggregated data, we can, and are, providing merchants with insights on customers they currently serve and potential customers they can tap into. And we can, and are, providing cardmembers with customized offers and experiences relevant to their lives. This gives us a major advantage against traditional payment competitors, but it's also a substantial advantage over newer online competitors, particularly when it comes to merchant value.

We have aggregated information on offline transactions, online transactions and purchase history, along with the ability to merge and analyze all 3 on behalf of both merchants and cardmembers. For example, while some companies can answer the question "What do potential customers search for online?" We can answer a merchant's question of "Did customers actually buy either online or off?" With our aggregated information, we closed the loop. I believe the advantages here will be evident when I talk about some of our digital launches in a few moments.

Our global relationships, with affluent customers and merchants, is also a key asset with substantial value. Our diverse cardmember base is 94 million strong and includes affluent consumers, small businesses and mid to large corporations. These customers have tremendous purchasing power, making them attractive to merchants and potential digital partners. And this is why we continually invest in attracting and retaining these high-spending premium customers.

We've always valued the members of our merchant community. And as you'll hear from Dan, as offline and online commerce converge, our merchant network is an even greater competitive advantage. Digital wallet providers and online players who compete with us, such as PayPal, do not have an established network of bricks-and-mortar merchants. Our ability to capture offline, as well as online spend is a clear advantage to bring to this space. As digital competitors try to figure out how to buy or build their way into a merchant base, our existing relationships provide us an advantage in terms of both consumer relevance and speed to market.

Under the category of rewards and loyalty, I believe we have 2 key assets. First is our competency in loyalty marketing. Our long experience in working with merchants, combined with our information, has made us experts at generating value that motivates both consumers and merchants. And that's what much of Web 3.0 is about. How do you get a customer to not just add an item to their shopping cart but complete a sale? What can merchants do to generate sustainable repeat business? Ask Google, Facebook or Foursquare. It's all about generating plus business for their advertisers, and that's something we know how to do.

The second key asset in this category is our rewards bank. We certainly believe we have the largest point bank of any credit card reward program. And given how long MR has been in the marketplace and our higher level of billings, we believe our bank is substantially larger than any of our card-issuing peers.

This sheer volume of points, along with our range of redemption options, has effectively made Membership Rewards a virtual currency and attribute we're promoting in our Social Currency campaign. We already have the capability for cardmembers to seamlessly redeem at point of sale and several online merchants. And in the future, we expect that they'll be able to load their points into our digital wallet.

In the digital marketplace reward points can function as a virtual currency, which is why you'll see us expanding our Pay with Points capability with multiple partners. We want our customers to be engaged. We want them to earn points. We want them to redeem points. The economic benefits of rewards have been a key driver of our earnings over the last decade, and we expect those benefits to continue as we make our digital transformation. Regardless of whether a payment is online, offline, mobile or plastic, loyalty and rewards will remain key to building successful value propositions. And I believe we're in a great position to capitalize on this as the marketplace converges.

Our ability to partner is another critical competency is we move into Web 3.0. There are very few companies with the assets and abilities to go it alone in this environment. And I think that's clear from everything you read. Each day brings new announcements on partnerships, joint ventures and equity investments. But as we all know, the press release is the easy part, building a relationship and executing together is what ultimately makes or breaks a deal.

One advantage is that we know how to partner. We know how to build successful partnerships for the long term. Now we've proved this over the years with many of our co-brand partners, our GNS issuers and our merchants. We have the flexibility, the service ethic and the company culture that will make partnerships work, a competency that's going to be more important as we move forward.

Finally, I believe our oldest asset is perhaps our greatest advantage as we move to Web 3.0, and that's our brand. At 161 years old, our brand remains highly relevant with attributes that uniquely resonate in the digital space. Trust is critically important online. Our brand stands for trust and integrity. Security is a growing concern in the digital marketplace. Our brand stands for security and privacy. Customers whether online or off want to be well treated. Our brand stands for service, and we're an advocate for our customers.

Over the years, we continually invested in our brand and made sure it remained relevant for the times. And while we didn't plan it this way over the decades, it turns out that our 161 year-old brand has one of the best fits possible for the evolving digital era.

Over the last couple of years, I've been making regular visits to places such as Silicon Valley, Mumbai and Shanghai, speaking with established digital players, start-up companies and VC firms. And while our brand opens doors for us in these places, we still have to educate people on our business model and capabilities, so they understand that our capabilities are past being simply a payments card.

As they learn about our closed loop, our global relationships, our assets and our strategy, they start to see potential opportunities. And as they start to look at our track record of execution, they begin to recognize and respect our digital momentum. Dan Schulman is going to talk about the progress being made in enterprise growth.

So let me review some of the digital achievements across our core businesses. As you can see, there's been a lot going on. I don't have time to cover all of the achievements shown here. So let me drill down into a couple of them.

Now let me also add that we haven't broken out our international achievements separately on this slide. We build many of our digital capabilities and programs, whether developed in the U.S. or in an international market with a global rollout in mind. So for a number of the points on this timeline, you can, or soon, will be able to multiply them as we expand their use across markets.

Our run-up to Web 3.0 started last April with the launch of our servicing app. That app was followed by 16 others in areas such as lifestyle, cardmember offers, travel and apps specific to small businesses, all of which have been downloaded over 1.5 million times. We also built core functionality that allowed us to trigger realtime notifications to cardmembers, such as when they were approaching their credit limits or to remind them a payment was due.

Another important milestone was the launch of our Smart Offer API, which we've referred to previously as registered card. As we've shared with you before, Smart Offer is a capability that allows cardmembers to opt in and register for targeted offers based on their specific actions and spend.

For example, shop 3 times at Whole Foods and get a $50 credit. This capability, which is made possible through our digital closed loop, provides merchants with the seamless functionality of making coupon-less offers to customers and potential customers. Since the fulfillment happens at the back end, merchants don't need to spend time or money training their front-line employees. And our cardmembers don't have to print out coupons or show their phones to a cashier or waiter. And as you'll hear in a few moments, we're now actually leveraging this functionality and applying it to a range of digital opportunities.

Other launches in 2010 covered a range of customer needs. As I said earlier, our approach to digital commerce is to go where our customers go. And since many of them shop on Amazon, we developed and launched our Shop with Points capability on Amazon site, in time for the holidays.

But our digital efforts really came together in a big way with Small Business Saturday. Our intent with this program was to promote the Saturday after Thanksgiving as a day for customers to support and spend at their local small business merchants. Our goal was to have the idea go viral, and Facebook was our leading partner in these efforts. The idea really only developed towards the end of October. So we were fortunate to have so many assets at our disposal: Our engaged cardmember base, our base of small merchants, our relationship with Facebook and our Smart Offer capability, which we used to incent cardmembers to shop at their local small businesses. Given our sort development time frame, our effective use of social media became a critical success factor to Small Business Saturday.

By the time the day arrived, we had over 1.2 million fans on our Small Business Saturday Facebook page, the fastest-growing page that Facebook had seen at that time. Our intent is to support Small Business Saturday again this year, and I believe the digital experience we gained last year will lead to even greater value for cardmembers and small merchants across the U.S.

In 2011, the digital efforts within our core businesses have accelerated with Ed Gilligan and his team generating strong momentum. Let me take you through a couple of our more recent launches.

One major digital opportunity is our partnership with Foursquare. As I'm sure most of you know, Foursquare is a location-based application that allows people to use their smartphone to check in at locations such as stores and restaurants and let their friends know where they are. At the South by Southwest Tech conference in March, we did a pilot with Foursquare that allowed our cardmembers to link their American Express cards to their Foursquare profile. Doing this allowed them to receive local offers, when they checked in at over 50 participating Austin merchants. We fulfilled these offers by leveraging our Smart Offer capability to seamlessly execute the savings on our cardmember's billing statement. And we used our realtime customer notification to let people immediately know they had qualified for our offer.

The success of the pilot led us to expand this capability nationally. In June, we rolled out a number of offers with major merchants such as the Sports Authority. For example, spend $50 receive $20 back, H&M, Dunkin' Donuts and Union Square Hospitality, Danny Meyer's restaurant expertise. Over the coming weeks, we'll be adding offers in the fashion and restaurant categories to name just a few.

Even with no formal marketing, the first 3 weeks after our announcement saw thousands of cardmembers opt in to sink their Amex card to their Foursquare profile. Initial analysis shows that these synched cardmembers skew significantly younger than our overall base, and you'd expect that.

But very importantly, they had income levels consistent with our overall average, which is a very positive sign to the merchant value that we can generate. We're expanding this program as we speak, using our partnership with Foursquare to promote Restaurant Week here in New York this month and putting plans in place to use it during events at the U.S. Open and Fashion Week.

Facebook is another digital partnership we expanded in 2011. At the end of June, we announced the ability for cardmembers to redeem membership rewards for Facebook advertising, the first time a reward currency could be used for ad purchases. This is primarily a redemption option for small businesses, many of which are rapidly expanding their use of social media sites. This provides great value for our open cardmembers, and at the same time, expands Facebook's access to potential advertisers. This is the first time Facebook has allowed any currency other than their own Facebook credits to be used on their site.

Two weeks ago, we announced a further expansion of our Facebook relationship with the launch of Link, Like, Love. This program allows cardmembers to opt in and sync their Facebook profiles to their Amex account in order to receive merchant offers and access opportunities and experiences customized to their likes and the likes of their friends. Given our digital closed loop, we are uniquely positioned to provide these benefits to our cardmembers and merchants, and doing so on Facebook's platform makes it immediately relevant.

That same day, we also announced Go Social, a capability that assists merchants in effectively using social media such as Facebook and Foursquare to grow their business. Among other functionality, Go Social allows them to create offers specifically for American Express cardmembers. Our ability to set merchants up on social media sites seamlessly and basically in realtime removes friction from their process and provides them with exceptional value.

In combination, the value and capabilities we're bringing to our customers and merchants across social media through these launches is unprecedented. For example, Link, Like, Love, with its personalized offers and coupon-less redemption could not have been done by any other payment company. Because of our digital closed loop, this combination of functionality and value is unique to us, and I believe establishes our leadership position in this space.

Now pieces of these programs could possibly be done by other companies. And competitors will no doubt try to replicate some of these capabilities and try to cobble them together. But we've got first-mover advantage here. And some of the tech journalists covering these innovations agree. Here are just a few of the comments.

As you can see, these comments highlight the innovation we're bringing to the digital space. To me, they reinforce the strength of the assets, capabilities and relationships I mentioned earlier: Our strong base of customers, small businesses and merchants, our ability to leverage information and provide insights on their behalf and our ability to partner with fast-moving digital companies.

As you might imagine, I'm also pleased with the third quote, as it speaks directly to my confidence and belief in the strength and relevance of our brand within the digital environment. These comments also reinforce my earlier point on the changing relationships between partners and competitors. We don't consider ourselves to be direct competitors to either Amazon or Google, within their current core businesses, but we recognize that as companies innovate, traditional roles will change.

Now that you've seen several examples of our digital launches, let me come back to the digital closed-loop advantage I mentioned before. Hopefully, these end market examples give you a better sense of how our information, and most importantly, the insights we glean from it enable the functionality of our digital programs.

Our unique base of cardmembers and merchant information has allowed us to aggregate data and create value-added capabilities such as offer repositories and coupon-less rewards. We can then combine this information and capabilities to build products such as a Smart Offer, an API that connects cardmembers, merchants and partners in ways that drives value to all parties. Our closed loop information was and is a key benefit in the offline world. But I have to tell you I believe its power is truly multiplied in the digital space because of the unique customization it enables, customization we can seamlessly provide on a realtime basis.

As I said earlier, in Web 3.0, the customer is in control. And I believe our digital closed loop ups the ante on the value we can provide and makes us uniquely positioned to meet his or her needs.

As I look at this timeline, I'm struck by a couple of things. First, that this is not just a list of press releases announcing capabilities that will launch sometime in the future. This timeline represents real products and capabilities that are generating value for cardmembers and merchants in the marketplace today.

Second, these achievements are the outcome of the targeted dollars we've been investing in the digital space over the last 18 months. Not all of the payback from these investments will occur over the next 12 months, but we have a great deal of confidence in the positive economic benefit that will come from these efforts either through billings, new cardmembers and merchants or new revenue streams.

Third, the timeline represents our commitment to innovate within our core businesses. It shows our ability to aggressively take on the challenge of substantial industry change, and it represents the down payment on the digital transformation we're driving across the company. Our digital transformation is well underway across our core businesses, as you've just seen.

Now we're going to turn to Enterprise Growth, which also has a critical role to play in our company's next reinvention. Dan Schulman, Group President of Enterprise Growth, heads up the portfolio of businesses shown here.

Now Dan's only been with us a year, but he's already made substantial contributions to our global digital strategy. He's leading our efforts in mobile and alternative payments in our major markets, as well as in countries such as China and India. These are huge consumer markets where technology will certainly leapfrog the pace of advancement seen in developed economies.

Let me now turn the podium over to Dan.

Daniel Schulman

Thanks, Ken, and good afternoon, everyone. As you just heard, the digital transformation of our business operations span the full range, everything from servicing to the way we provide value between buyers and sellers across the globe. In the time we have together, I'm going to focus my remarks on providing an in-depth look at Enterprise Growth.

Enterprise Growth was formed almost a year ago to help drive change as the payment industry evolves and identify key growth opportunities beyond our core business. Our charge is to aggressively pursue new forms of payments and digital commerce that open the company to new customer segments, new geographies across the world and new products and services. We've made meaningful progress against these objectives not only by challenging conventional thinking, but by also leveraging the rich assets of American Express.

In the time we have together, I'm going to describe the rapidly evolving commerce landscape, our vision for the future and our progress in deploying new payments and commerce initiatives. I'd like you to leave today with a better understanding of how American Express is positioned to be at the forefront of the emerging digital economy.

It almost goes without saying that the payments industry is undergoing a fundamental change as the very nature of commerce is redefined, and these changes have the potential to bring about significant opportunities for American Express. As Ken said, Web 3.0, or the next phase of the digital economy, is being driven by the convergence of online and offline, and data is at the heart of digital commerce.

By now, we all know that the explosion of mobile phones, tablets and other devices, combined with advances in mobile communications has enabled the Internet to literally always be in your pocket. 2/3 of the global population already have mobile devices, and by some estimates, there will be more than 10 billion mobile Internet-connected devices in the coming years.

The smartphone is a game changer. It makes rich data available anywhere, providing consumers with access to customized news, entertainment, location-specific shopping, games and social networks. You no longer need to be behind your desktop to comparison shop, get recommendations or realtime offers. These changes are profoundly impacting the commerce experience, blurring the distinction between online and offline shopping. Consumers are leveraging all the tools available to them to make smarter purchase decisions.

Today, people are exchanging virtual dollars for real goods, real dollars for virtual goods, harnessing the power of social media to get better deals, socializing their wish and shopping list and seeking realtime recommendations and feedback. These technological advances, combined with sophisticated data analytics, are helping marketers reach new customers, provide micro-segmented offers to consumers and dramatically enhance marketing efficiencies. The end result is that buyers and sellers are coming together in ever more relevant ways.

For instance, let's say that I'm walking past Tom's drugstore, and they currently have excess stock of toothpaste. I get a mobile message for 35% off toothpaste, because it's on my shopping list housed in a mobile app on my smartphone. Not only do I get a timely and relevant deal, but it also helps Tom efficiently manage his inventory to effectively realtime dynamic pricing. Leveraging data analytics with mobile technology will make this a reality in the years ahead.

Data is becoming the crown jewel in the new retail platforms being established. Value is not just in the transaction, but increasingly, in the data we derive from that transaction. And this data is incredibly useful, as it becomes ever more granular down to product, brand and SKU level detail.

The capture of this data is crucial. At scale, data drives the algorithms that are the key marketing tool of software-based companies. They provide the ability to micro-segment and efficiently target prospects and current customers, dramatically improving the marketing return on investment.

However, there is another side to the evolving use of data, and that is the importance of protecting the privacy and security of our customers' personal information and collecting and using data in a responsible, transparent and legally compliant manner.

We provide information about our commitment to privacy and data protection to our customers and across all our products. We give our customers choices, and we respect those choices. For example, customers actually need to opt in, if they want to receive offers through our Facebook and Foursquare programs. Upholding the highest standards of privacy protection is what our brand stands for, and we intend to zealously safeguard that reputation.

The one thing industry experts uniformly agree about is that privacy and security are critical to succeeding in the digital age. But there are obviously a lot of factors as well, which I'd like to bring to life through a short video featuring some of our colleagues across the industry. Let's take a look at that.


I think that video provides a good summary of the themes that are being discussed across our industry. And against this backdrop, we believe we have a great head start to be a leader in the future of the digital economy. Across American Express, we're introducing innovative products and services, which leverage our strong existing assets from our infrastructure, risk capabilities and data-driven insights to our brand, marketing prowess and deep customer relationships.

As we develop the next generation of the digital closed loop, our vision is to utilize our assets to pursue new business models and services across the globe that enable digital commerce. We intend to help redefine the commerce experience for buyers and sellers, personalize the shopping experience and transform the power of marketing by capitalizing on new and evolving technologies, rich data and information and sophisticated analytics. This vision compels us to change our definition of scale. And to do so, we need to address new segments of customers, develop and deploy new products and penetrate new geographies.

Fundamental to this vision are the efforts we have underway to develop our new digital software platform, Serve. Version 1.0 of Serve was launched in March of this year, providing consumers a new way to spend, send and receive money, with services that go beyond traditional payment networks. The launch was an important first step and further established us as a player in digital payments and commerce.

Serve is built upon the very latest modular technology gained through our Revolution Money acquisition. Its various applications are hosted in a cloud-based, open-source architecture. Consequently, these applications are not limited to a single device or operating system. Serve customers can download and access applications on their desktop, on their iPhone or iPad, on Android mobile phones or phones running the Windows Mobile operating system. And we will roll out a version for BlackBerry users shortly.

The Serve ewallet application, or master account, is funding-agnostic. In other words, your Serve account can be funded by any bank account, by any debit, credit or charge card, and by receiving money from another Serve account. Once you've set up the Serve account and funded it, you can transact in a number of useful and innovative ways.

You can make person-to-person or P2P payments, send and request money whether it be to split a cab fare or collect your roommate's share of the utility bill or pay somebody back for concert tickets. You can set up multiple subaccounts for friends, family members or employees. This allows you to give your kids their allowance or remotely fund a home contractor's account to buy supplies. You can also set rules to control where they use those funds and get realtime reporting on their spend.

A distinct advantage for Serve is its ability to bridge the online and offline worlds. Customers can seamlessly transact both online and at brick-and-mortar locations, with all activity linked to their digital master account. Our goal at launch was to not only provide consumers with digital capabilities for the future but also provide a solution for the point-of-sale reality of today.

Every Serve account is issued a Serve prepaid card linked to their master account that can be used at any merchant or ATM that accepts American Express in the United States. You don't need to wait for the point-of-sale to be NFC-enabled to use Serve offline.

We recently introduced a host of innovative applications on our Serve platform that customers are using for social selling and fundraising. These applications give Serve customers the ability to upload photos, sell personal items or raise money through social networking channels such as their individual Facebook page or through personal websites.

The launch of Serve in March was a meaningful first step, but you can expect the platform to evolve with new releases every few months. We've already had multiple enhancements since launch, and our flexible software platform allows us to rapidly introduce new features and functions. We completed a test in Eugene, Oregon last month, and the insights and suggestions we gleaned have already been incorporated because of our continual release life cycle.

Our end market trials and market research with consumers and merchants play a crucial role in driving forward the changes we plan to implement in our road map. Our initial platform deployment established a robust and differentiated set of applications around payments, but we are quickly evolving. And as I said, our goal is to help shape the entire digital commerce experience.

Future releases of Serve should enable customers to load real and virtual currencies into their Serve master account. Customers essentially would be able to insert different types of value from cash and reward points to coupons and virtual currencies for games into their master account in order to transact.

Perhaps even more importantly, we intend for Serve to become a personalized offers platform, enabling merchants to provide customized offers and coupons based on a consumer's individual preferences, behavior and location. Consumers will be able to fund their master account with these customized realtime offers and either use them immediately or save them for shopping at a later date. In effect, Serve would become a platform for the exchange of value between buyers and sellers.

Serve would also provide other capabilities to help enable commerce. For instance, a merchant would be able to automate their loyalty programs by utilizing the Serve platform. Instead of a frozen yogurt shop handing you a paper card that's punched every time you buy a yogurt and you need to remember to carry that card with you all the time, your purchases will be tracked via the Serve application. Emails or text would be sent automatically to thank you for your every purchase, and your 10th free yogurt would be redeemed seamlessly. We're also working hard to have Serve operate in multiple languages, countries and currencies in order to capitalize on opportunities across the world, including dynamic markets such as China and India.

While at launch, we were able to immediately leverage our existing merchant network in the United States. Over time, we plan to acquire new segments of merchants. These might include individuals as merchants, digital and virtual goods providers, online micro-businesses and offline small businesses.

Technology has turned individuals into sellers and sellers into global merchants. In some ways, eBay changed the definition of a merchant, when they digitized and scaled the concept of a garage sale. In effect, all of us are merchants at some point in our lives, and this provides a huge opportunities for Serve and American Express.

Serve's open platform can deliver a comprehensive solution for merchants and consumers. While many players are talking about ewallet applications linked to NFC, the reality today is that only 1.5% of all retailers in the United States are using the platforms required for contact-less transactions. It will take substantial investment and time for broad-scale consumer and merchant adoption.

With that said, we do believe mobile-enabled technology is the future, and the Serve platform has the ability and flexibility to adapt as the various standards are deployed. But our research clearly stated that consumers want to use the funds in their digital accounts to make purchases both online and offline, and they want to be able to take cash out of their master account. And from day one, Serve customers have been able to do all 3.

There is certainly many players who are trying to crack the code for next-generation payments and services. Proclamations of new breakthroughs are happening almost every day with a host of traditional and new companies racing to get scale, to get data, to develop their algorithms.

Today, scale has a new meaning as technology and social media companies now boast hundreds of millions of users interacting with their platforms, and we intend to capitalize on the opportunities in front of us to drive scale through our Serve platform and alternative-payment solutions.

We've developed a 3-pronged approach to build scale on our Serve platform, including developing partnerships, opening our platform to the developer community and facilitating new digital capabilities for existing cardmembers. I'd like to take a moment and walk you through each of these.

Mutually beneficial partnerships are a cornerstone of driving scale for Serve. We're working with partners that have large customer bases and have unique needs that would benefit from embedding Serve directly into their purchase path. We've already announced several important partnerships, and you can expect more announcements as we align with gaming, entertainment and social-networking organizations, as well as the mobile industry.

The first partnership we announced was Ticketmaster. Through this deal, Ticketmaster will offer Serve as a P2P solution to its tens of millions of customers to help them make and collect payments towards ticket purchases. Serve will be inserted directly into the purchase flow, so a person buying concert tickets can easily collect payment from groups of friends and family, removing the headache and the hassle of collecting money after the purchase. For Ticketmaster, this helps to address one of the main reasons customers do not complete their orders. And it showcases the P2P in friction-less on-boarding capabilities of Serve.

In June, we announced a deal with AOL. Through this deal, Serve will offer millions of AOL Patch customers a digital wallet application and a co-branded card. As some of you may know, patch is a network of some 800 local community news sites, and our partnership will enable local businesses to reach consumers in a targeted way. Load offers directly onto the Serve platform and provide a seamless way to redeem them. Serve becomes a catalyst for driving customized local commerce, and we have the capabilities to be able to pinpoint and report the actual spend attributed to the offers.

And earlier this week, we announced a major partnership with Verizon Wireless, which will embed Serve as the rollover payment option for their mobile customers. Our Serve application will be preloaded on selected Verizon mobile phones and tablets. And Verizon's customers will have the option to pay for both hard and virtual goods by providing their mobile phone number at checkout. This is a significant milestone for both companies and will make transactions easier for tens of millions of consumers helping to drive the adoption of m-commerce.

All in, these partnerships have the potential to drive significant scale to our Serve platform while simultaneously improving the purchase experience for consumers.

Engaging the developer community is the second prong of our drive to scale. In order to do this, we believe that a robust, OpenAPI platform is necessary. Open APIs, or application program interface, allow developers to embed a piece of software or functionality associated with the Serve platform directly into their own application. Open APIs allow tens and tens of thousands of developers to create applications that leverage our platform's capabilities.

For instance, a game developer does not need to replicate or build a billing system. He can simply drag the Serve mobile checkout or negotiate functions and embed them right into his application and thereby allow gamers to buy virtual goods without interrupting their gaming experience.

We have begun development of open APIs, associated software development kits and a web portal to engage the developer community. A limited set of developers will begin to stress test our APIs over the next few months and we plan to open the platform to all developers in the first half of next year.

Our final goal is to make available the capabilities of the Serve platform to existing American Express customers, including rolling out digital functionalities, such as P2P. Our intent will be to leverage the underlying platform to seamlessly provide digital capabilities to American Express card members without any disruptive migration necessary.

As I mentioned, Serve provides us the opportunity to attract large and new customer segments, both in the United States and internationally. Assuming we can achieve appropriate scale, we believe the economics can be very attractive. We expect Serve to drive revenue from both payments and the enablement of digital commerce.

Initially, Serve transactions earn discount revenue at the prepaid rate we charge merchants, which is typically lower than the rate for credit and charge. As we build value for specific merchant segments, we should be able to price for that value and improve our economics over time. We also earn interest income on the float as money is loaded onto the platform before it is spent. And as we expand the platform globally, there's also the opportunity for cross-border fees. We will utilize the Serve platform to cross-sell and up-sell other products and services to our consumers, many of whom will be new to the American Express franchise.

Serve's cost structure is different from our charge and credit offerings, as there is little to no interest expense, rewards costs or credit losses. We intend to keep operating expenses low by leveraging our existing infrastructure for payments, technology and servicing. Customers have the choice to fund their Serve account from various load options and sources and our costs are impacted by the percentage loaded through ACH, debit or credit.

As we continue to test and learn how consumers interact with Serve, we will monitor and adjust our approach as necessary.

Perhaps most importantly, we plan to keep our acquisition costs low by embedding Serve into the purchase path of existing communities of consumers and our current partnership deals reflect this strategy.

In addition to the payments revenue stream, we also believe there are lucrative and large commerce-related revenue opportunities. The revenue pools in the United States related to the consumer credit and charge payments industry are estimated at $144 billion. However, commerce-enabling industries such as marketing and promotions, advertising, data and loyalty services and couponing have significantly larger revenue streams.

In 2009, company spent an estimated $364 billion on marketing and advertising alone. And if you add to that spend associated with couponing and data and loyalty services, we believe that total could be North of $400 billion, some 3x the size of the payments industry.

And many of these marketing services are currently rife with inefficiencies. I'm sure all of you have heard the old advertising adage: I know 50% of my advertising works just don't know which half. And, by some estimates, only 25% of the cost associated with couponing actually drive incremental sales. Only a portion of every marketing dollar spent by merchants or brands can be tracked to actual conversion to a sale or customer acquisition.

With sophisticated data analytics, we can help merchants be more effective in their marketing and drive incremental sales, bringing to life the next generation of the digital closed loop. These digital commerce capabilities provide us an opportunity to drive new revenues with high-margin structures associated with bringing buyers and sellers together. The daily deal providers offer a good illustration of how this model works. They often earn anywhere between 10% to 50% affiliate commissions for each transaction they drive to a merchant. Affiliate deals provide us the opportunity to earn higher percentage margin streams than our current traditional Payments business.

While much of our work is on new digital developments, we are also very focused on alternative payments around the world. This represents a $26 trillion in spend value and an enormous opportunity as we now have the platforms, products and services necessary to target segments of the market who currently use cash, checks and debit. In fact, some 85% of the world's transactions are still in cash, many of which occur in emerging markets outside the United States.

As Ken said, in the United States, the lingering effects of the recession, coupled with the changing regulatory landscape have made consumers reluctant to take on new debt, and financial institutions cautious about lending money. With this shift, we have seen rapid growth in both debit and prepaid products. For example, the open loop prepaid spend volume in the United States is expected to grow at about 36% annually.

To capitalize on all of these trends, we recognize we need to think differently and develop alternative payments and services that meet the needs of consumers in different places across the world. In countries like China and India, new forms of payments will likely leapfrog plastic, moving directly to mobile and stored-value products. Governments, like in India, are pushing for alternatives to cash and are driving for financial inclusion. Cash is inefficient and comes with leakage. This movement from cash naturally leads to prepaid and debit products, increasingly linked to prepaid mobile phones and this provides an opening for our Serve platform and prepaid franchise to take advantage of these global trends.

My team and I have spent a large amount of time in India, China and other vibrant economies and we are talking to potential partners in developing market entry strategies.

We are rapidly expanding our prepaid franchise into areas including general purpose reloadable, travel cards, international remittances and payroll cards and we fully intend to expand our gift card franchise. Not only can these products attract new customers to American Express, but capturing even a small share of this opportunity has the potential to drive meaningful revenue streams in the coming years.

Two years ago, we removed all back-end fees from our gift card portfolio and saw significant growth as a result. At a time when the value of debit products may lose some of their appeal and the need for a consumer-friendly everyday payment alternative continues to grow, we saw an opportunity to launch a transparent and consumer champion product as a foundation for future services.

As many of you know, the prepaid industry is criticized for being laden with fees and confusing terms. So what we announced in June is really quite simple, a reloadable prepaid card that you can use for everything, from gas to groceries with none of the nuisance fees. That means no fees for purchasing the card online, monthly maintenance, activation, balance inquiries, alerts, card replacement, foreign exchange transactions and loading from a bank account. The funds on the card do not expire. And if lost or stolen, can be replaced. And it comes with some of the same benefits customers have come to expect from American Express like Roadside Assistance, Purchase Protection, Global Assist and of course, our award-winning customer service.

Unlike other prepaid card providers, we were in a unique position to launch this model because American Express facilitates the end-to-end customer experience. We are the issuer, network and acquirer, which provides us numerous efficiencies and allowed us to introduce this breakthrough consumer proposition.

Eliminating nuisance fees was the right thing to do and consumer advocates and Washington agreed. We also received positive feedback from media, industry analysts and most importantly from consumers. We struck a chord with our new prepaid card and I believe have entered this space at a crucial time given the regulatory and economic environment. And even before we begin to market, tens of thousands of people have already signed up for this card.

Over the coming months, we plan to continue to add more features and capabilities to this product, including load options like direct deposit. We also intend to integrate elements of our Serve platform with our prepaid products and eventually have them fully linked. Though we initially launched in the United States, we plan to extend our prepaid portfolio to other parts of the world.

This groundbreaking value proposition provides opportunities to address new customer segments. We recently completed a pilot test with consumers unable to qualify for an American Express credit or charge card, and the results were extremely encouraging as these customers were thrilled to have access to American Express through our new prepaid card.

We're also looking to expand our franchise through partnerships. One such opportunity is adding payment functionality to the cards consumers already have in their wallets. For example, through our partnership with CardSmith, we plan to offer prepaid functionality embedded in campus ID cards to college students across the United States.

Another example is our partnership with AAA, Southern New England, whose members now have prepaid functionality embedded into their membership cards.

We intend to scale our Prepaid business through retail as we did our gift card franchise. We expect to roll out to multiple retail chains later this year and currently have a pilot underway with Target in select cities across the United States.

We believe that this consumer champion proposition will also bring additional profitable spend on to the American Express network. Like Serve, we earn discount revenue from merchants and we earn float revenue from funds loaded onto the card. And because the cards are prepaid, there is little or no interest expense, reward cost or credit losses.

As with Serve, we do not need large acquisition budgets to acquire prepaid customers. We are leveraging a superior product construct and customer experience. And then utilizing partnerships, affinity arrangements and online acquisition to gain scale.

Consequently, our target margin on spending for this product is attractive. And with capital requirements low, we believe the returns should be quite favorable.

We believe that there is no asset more powerful or valuable than the data we have and intend to expand as a result of our digital closed loop. We will substantially increase our efforts to leverage that asset for our fee-based initiatives.

We've spent time in the past discussing the company's focus on generating $3 billion from fee-based services by the end of 2014. And we've made substantial progress against that goal across the franchise.

We see 3 key opportunities to drive fee-based revenue growth. One, continue to grow our existing fee-based revenue streams such as our insurance products. Two, acquire companies with unique assets that complement our businesses and capabilities, such as the Loyalty Partner and Accertify. And three, introduce new business initiatives like LoyaltyEdge, Business Insights and vente-privee. And we're making good progress towards the company's target to generate $3 billion by the end of 2014. Through both organic growth and acquisitions, we believe we will generate approximately $1.3 billion in annual fee-based revenues in 2011.

Let me cover 3 of our recent announcements, 2 of which reside in businesses that Ed Gilligan manages. In March of this year, we completed the acquisition of Loyalty Partner, a leading marketing services company best known for the loyalty programs it operates in Germany, Poland and India. It also provides market analysis and consulting services to help merchants grow their businesses. Adding over 34 million customers to our franchise, Loyalty Partners helps expand and deepen international merchant relationships while driving and diversifying fee service revenues. And we are already seeing this potential as Loyalty Partners is on track to meet our internal targets.

Last November, we completed the acquisition of Accertify, a leader in solutions that help merchants combat fraudulent online and other transactions. As I mentioned before, expanding our merchant base and adding new types of merchants is a key part of our growth strategy. Broadening our offering of fraud prevention services to merchants, including transactions across all networks, is of tremendous value to merchants as they look for ways to improve their business, and to us as we look to demonstrate our unique capabilities to expand our merchant community.

Our newest initiative in fee-based services is a joint venture with vente-privee, the first and largest private flash sales provider in the world. Announced in May, this joint venture leverages our data capabilities and customer base, along with vente-privee's expertise in digital production and merchandising to bring unmatched private sales offerings to U.S. customers. This joint venture will allow us to test and learn so that we can gain valuable insights to help drive our overall data strategy. The JV plans to launch later this year or early next.

We've covered a lot today and there's unquestionably a new landscape emerging. It opens the doors to large opportunities for us, and we are already executing against a number of initiatives that achieve our vision.

We're running enterprise growth very much like a startup. We're trying new things in positioning ourselves in such a way that we're flexible, nimble and can easily adapt to the changing digital landscape. We are extremely focused on doing things efficiently and consistently review and measure our progress against key milestones and the drivers of our business model.

That said, unlike many startups who are prevalent in this space, we already have an established infrastructure, deep merchant and consumer relationships and a credible and trustworthy brand. We can also leverage the capital strength of the company as we look to acquire and invest in companies that have key capabilities we need or help us to penetrate new markets.

Because we are leveraging our existing assets, we don't have to make the same levels of investment that a startup or any other company entering into the space would have to make. All of this gives us a good head start on our competition.

We are operating on multiple fronts across the entire enterprise to transform for the digital era, but we know that this is just the beginning. Over the past 161 years, American Express has demonstrated its ability to innovate, to reinvent and to adapt to changes in the marketplace. And our entire management team is focused on seizing the enormous opportunity in front of us. And in doing so, we hope to write the next, exciting chapter of our history. Thank you for your time.

Kenneth Chenault

Thanks, Dan. We're going to go for questions. Ed, Steve, Dan. Thanks.

Question-and-Answer Session

Unknown Analyst -

I wanted to ask about the fee-based revenue, Dan. The $1.3 billion, could you share with us where that was relative to your expectations because that seems like an incremental number? Is that on target? And also could you proportionalize for us like where is business inside in that, relative to say Loyalty Partners or Accertify?

Daniel Schulman

Well, James, what we're -- I'm not just going to break out all the contributors. But if you go back to the number we gave in 2009, that was $800 million. So now we're at $1.3 billion. So I've made -- we certainly have made progress there. We obviously had improvement in some of our BAU businesses. Business Insights certainly has contributed. Acquisitions have contributed probably the most -- the largest one would be Loyalty Partner. But let me sense the cuts in both areas. Let me just have Dan comment briefly because we've had LoyaltyEdge and other products and Ed comment on some of the fee services in his area.

Daniel Schulman

I think we've seen reasonable growth in a number of different areas, LoyaltyEdge has continued to develop -- working very hard to expand its customer base. Our partnership with vente-privee. We have very high hopes for it as well, I've just announced. But partnering with a clear market leader in private flat sales, we have high expectations for that. Ed?

Edward Gilligan

Business Insights is just a little more than a year old. It started from scratch. We feel really good about it. It's leveraging our unique information, There is good demand from our merchants and other partners. And I'd say it's like a startup, but we're in our second year now. Loyalty Partner when we bought it, I think we quoted the number that it was around $300 million of revenue. And as Dan said in his presentation, we're really pleased with where we are. We closed the deal in March. We had said from the beginning, our plan is to expand it into new markets, so we haven't said much about that because we haven't entered new markets yet, but we're readying ourselves, making great progress. Accertify was much smaller company than the Loyalty Partner. It was a U.S. company and we're broadening that into the international markets and increasing our investment there. So I'd -- they're all in different life cycles, stages but we feel very good about the progress we're making.

Kenneth Chenault

And I think it's -- if you just go back and put into perspective of the $800 million in 2009 challenging environment in 2009. So the way to look at it is 2010 was a year when we were investing more in some of the existing business as usual. Some of our insurance side products obviously the acquisition helped. But I think the progress we've been able to make in almost 12 months to get from $800 million to $1.3 billion I think is good progress. So we're pleased against the internal targets that we setup, we're very comfortable that we are meeting those targets. We obviously still have a ways to go to get from $1.3 billion to $3 billion and it's going to be a balance as I've talked about of a number of the fee services that we have been operating for several -- for a number of years with some of the new organic programs that we put in place that are starting to get traction and then really accelerating those acquisitions. And so when I talked about this back in 2009, you may or may not recall, I talked about the balance between really turbocharging some of the existing fee services initiatives by having increased organizational focus, leveraging some of the existing assets that we had where we generate new fee services more organically. And third, engaging in targeted acquisitions to leverage some of the assets that we have, as well as bringing some of the new capabilities and I'm very pleased with how that strategy is being executed.

Daniel Henry

And as we look forward, this emphasis that we have on data and the ability to utilize that data for affiliate type of marketing fees that have relatively high margin structures, we think can be an increasingly large part of fee-based services in our overall online business.

Unknown Analyst -

As you've gotten deeper into the digital over the last 18 months, I was just curious kind of has your view evolved in terms of how quickly the take-up rate will be on alternative payments? And also are you more convinced that this is not a long-term threat to the payments business?

Kenneth Chenault

Here's what I think is important and I want to emphasize as I go through this. Some of what I'll initially say may sound self-serving because we have a very different business model. But very frankly, I don't think there's enough appreciation for how fundamentally the traditional payments business is changing. If you got your revenues tied close to 60% to 80% in spread. And you look at the fact that as a result of the financial crisis, consumers are de-leveraging. But I also think very importantly is the Credit CARD Act has brought about a substantial change. The inability to do the frequencing of dynamic of the space pricing makes it very challenging. So I have 2 concerns. From a societal standpoint, I think middle class and lower middle class will get less credit because you can't change. And that's going to have a major impact. So if you look going forward what I think I would focus on is you can't just look at the billings that are being generated, you've got to look at the AR growth that these companies are generating. Pre-financial crisis, the industry growth rate for AR was 5%. There is a reason why you see a lot of issuers in negative AR growth territory, so they have a lot of headwind to go against to get to positive AR growth which is critical to drive their economics. That's first piece. Second piece is, and this is why I think our assets are very important for our company, is because we have the end-to-end model where we have data from being a merchant acquirer, a network and an issuer, that gives us some very important advantages. And so those assets really help us leverage this digital closed loop that we've talked about and make it even more powerful because it's real. It's in realtime, we can provide those insights instantly, we can provide offers almost instantly. And so that gives us a very important set of advantages and opens up frankly, not just levers that we can pull to help drive billings and get new customers, but also sets up incremental revenues because of the types of customers that we're able to bring in. So I think what you're witnessing is -- my view is that the credit card industry will be fundamentally different 5 years from now. And that you will see a reconfiguration, you will see some new nontraditional players entering and you will find that some of the existing players are going to have to fundamentally change their model. And it is very hard to change a lever where your 60%, your revenues are driven from spread, you've got to believe that AR is going to return to a 5% to 8% growth rate to have that play all the way through. And that's why in our spin-centric model, we are not dependent on that. And so I think we're going to have some important advantages. The other thing I would say and, I'll call in Ed and Dan, you can jump in, that we have demonstrated with Foursquare and Facebook and that's just the beginning of the power to be able to implement these ideas immediately because we have the business model in place. Ed?

Edward Gilligan

Yes. So I mean, I think a year ago, 18 months ago, we certainly could be paranoid about the potential for disruption in payments because of what's going on in the digital space. That's still true today. But in the last year, I think what we've been able to demonstrate is we're keeping the core business growing, 17% growth in billings in Q1, 18% growth in Q2, one of the highest billing quarters, if not the highest billings growth rate we ever had as a company. And we're bringing the promise of digital commerce to life now. So I'm far more optimistic now than I've ever been that the digital transformation is a unique opportunity for AMEX to bring our business model to life in ways that we've never done before and that's going to be very hard for competition to match. So there are disruptive threats, but I think what we're proving right now is there's far more opportunities.

Kenneth Chenault

I would say usually in a transformation, you look at your business fundamentals and you see your business fundamentals are deteriorating. Ours are getting stronger and we look at the competitive and we look at what their traditional fundamentals are and we don't see them as strong. On the other side, as we look at new competitors and this is why this just hasn't happened over the last 18 months, we spent a lot of time with different Internet and technology companies over the last several years, educating them about our business model. And now what you're seeing is the real concrete demonstration of how this closed loop we manage is working. And so we are in a situation where we think this digital transformation we're really excited about the potential it has and what we've been able to deliver in our core businesses. The momentum that we're generating is excellent. At the same time, as we see the overlay of what we can do in some of the new things in the existing business and then some of the new things that Dan and his team is focused on, we're quite excited about the future, so I want to be clear, I got very healthy respect for the competition, whether they are traditional competitors or nontraditional competitors. But I frankly like our positioning very well because we don't have to. We think about this NFC-enabled issue. Any online competitor is saying, I've got to wait for that to happen before I get into the merchant. I can get into the merchant now, all right? And then I want to be ready as for as having multiple options that I can go in NFC if I want to do that. So I think that we are very well-positioned for these changes.

Daniel Henry

I think there are 3 things to think about. One is NFC, as I mentioned in my talk, is 1.5% of the POS is already for that today. And that's going to take some time to deploy. And I think in our conversations with everybody across the industry, there's an increasing recognition of that. Number two, this whole advent of digital commerce and the increasing recognition of how important data is going to be and we have a tremendous head start because of our closed loop in our inherent business model on that. And so we're able to deploy things today and take advantage of that data to create better value between sellers and buyers. And we are doing that today. And increasingly, partners are seeing that as an advantage for us. And I'd say the third thing is as we've had discussions across the international marketplace and the domestic marketplace, the Serve platform is actually a reasonably unique asset compared to anything out there right now. A lot of people are talking about assets, but they haven't deployed them yet. Serve is up, it's running, it has a number of differentiated features. Our release schedule is resonating and you're seeing us to begin to sign up some of the largest players here domestically and deep conversations across the world, in terms of the use of Serve.

Kenneth Chenault

Two other things and then I think we'll pass it, Dan, to this area is last year at this time, what we said was one of the signposts of success would be our ability to do meaningful partnerships where our capabilities would really be able to leverage -- to be leveraged in those partnerships. This concept that Dan talked about and I talked about of embedding Serve in the purchase path, as well as the card of products, is very, very important. And so that's really the next level is. It's not just doing a strategic alliance. It's very focused on what are the specific value propositions and what are the levers we're going to have to drive value. The second thing I would say with foursquare as I mentioned in my remarks is the fact that we not only were bringing in and were skewing to younger customers, but what is really attractive is, is that the spending on those cards was in fact very consistent with what we saw in the general population, so that's really positive to us to reinforce the value that we bring merchants. So let me move it over to this side if anyone has a question. If not, we'll go over to the other side. Sanjay?

Unknown Executive

I don't see any hands. Sanjay? All right.

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

So I have 1 for Ken and 2 for Dan. Ken, I was just wondering -- I appreciate the strategic update, but I just wanted to drill down on the initiatives. It sounds like it extends the business model, and I was wondering what the implications were to the financial targets because it seems it would be additive to those, but I don't know if that speaks to kind of what the core business is doing and whether there will be a transitionary period. And then just 2 questions for Dan. Just on contactless technology, I mean how soon do you think the merchants are enabled to accept contactless technology? And who's going to, kind of, foot the bill? Would it be the industry or the merchants alone? And then just on the prepaid side, that slide that you have on 93. In terms of the merchant acceptance you guys have, I guess the guys that you mentioned on 93 would argue that the acceptance isn't good enough in the areas where they serve. I was just wondering whether or not the acceptance is good there?

Kenneth Chenault

Here's where I go -- as we obviously go. We feel good about our on-average and overtime financial targets, but I put little bit in perspective for all of us. And it's natural because of the economic environment we're in. A year ago what people were saying is, "I'm not sure your financial targets are appropriate. I don't know if you're going to be able in this environment with all that's happened to be in a situation where you'll be able to achieve those financial targets." I think what we've been able to demonstrate thus far this year is we are very much in the range of our financial targets from our existing business and the changes that we put in place. So what I would also emphasize is that we don't want to do is overpromise. The reality is that the momentum we are able to generate, as Ed said, in the existing businesses has been very strong. The added capabilities with Facebook, with Foursquare, the other initiatives, give us some hope that we will not only be able to generate within our financial targets, but there are some incremental opportunities that are there. Then clearly, if Dan is able to generate the performance that we hope, there could very well be an upside. I don't want to commit to that upside until, in fact, we see how we're driving these different initiatives. We are encouraged by what we've seen and the progress there. And so I think the way I would look at it in an uncertain environment when the payments industry, particularly on the issuing side, there are real questions whether they can get back to the historical targets that they've had.

In our case, I do not believe that those questions are as pronounced. Some of you may have them, but in fact we feel much better, relative to our performance and that we are achieving those targets. Now I think the question is, based on what you're doing in your existing business, as well as the new businesses, what are the incremental opportunities? And we certainly hope there will be incremental opportunities.

Unknown Executive

Those are great targets, Ken. And it's 8% plus, Sanjay. What else can we tell you.

Kenneth Chenault

I'm certainly not apologetic for them.

Daniel Henry

In terms of your two questions that you had, Sanjay.

First of all nobody can predict the future, in terms of how quickly these things will roll out. I will say this. Based on a lot of conversations with merchants in the technology area with folks out in Silicon Valley, people are increasingly saying that if the only thing that this sort of mobile technology is it's a form factor change. In other words, you're just tapping your phone as opposed to swiping your card. It's going to take quite some time for this point-of-sale to really move over to contactless because it costs money to go and do that, and there's not really a large benefit from a form factor change. There is some, in terms of convenience, but not enough to be compelling to make the investment that merchants would have to do.

Unknown Executive

Merchants [indiscernible] chance to be there.

Daniel Henry

Exactly. And so what they are saying though is that this whole idea of digital commerce, which is really about taking the data associated with that transaction and shopping list and utilizing something like NFC in a doorway, so you tap your phone in the doorway before you make the purchase, so it's prepurchased. And therefore then you can start to exchange data back and forth between a seller and a buyer, not after you've made all the purchases but before. Then actually that might accelerate this capability because there's real advantage to merchants at that point. They can cut their marketing cost because they can be much more efficient and drive incremental revenues and sales. So depending on the advent of digital commerce, I think, will depend on the speed which point-of-sale is deployed. And we are big believers of that as you start to move to a Web 3.0, this convergence of online and offline, this use of data, that, that's where the real power is and some of the advantages that we have.

In terms of prepaid, we did put out a quite differentiated value proposition. I think it shook the industry when we put that out, and we were able to do that with good and attractive economics because we own the end-to-end piece of both the network requiring and the issuing side of that. I think we are already seeing very high demand for that. We'll start to market it. And as I mentioned, we're going to start to roll out into retail with our prepaid programs as well. We've got a number of retail chains that are interested in taking this groundbreaking product and distributing it, as well as a number of affinity partnerships that want to align themselves with our card as well. And so I think right now, some of our competitors are in retail. We fully intend to move into retail aggressively, as we move to the back half in the first part of next year?

Unknown Executive

Our coverage continues to expand. I mean, Ken gave you some of the numbers at one point last year. This year, we feel very good. We're continuing to expand merchant coverage, which will work for prepaid, as well as the existing charging credit card business.

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

Can merchants just take your prepaid card?

Unknown Executive

No. Yes?

Unknown Analyst -

So my question is -- I mean, obviously, your revenue growth in Billed business has been tremendous, and you've been spending a lot of money to generate that as you've had all these reserve releases and these MasterCard payments. So I'm just trying to get a better understanding, though, of the flexibility on the expense side, while maintaining the revenue momentum. And it's always dangerous to use anecdotes, right? But I'm a platinum cardholder. I've seen what you've done with foreign translation fees, with the airline credit, with the Pay with Points bonuses, 20% back, things that seem to enrich the value proposition, but don't strike me as easy to pull away once you've granted them. And then you look around the industry and see what's going on with rewards expense and expense generally in the second quarter. And it just makes me wonder about the flexibility of maintaining the top line momentum in the absence of having the largesse of the reserve release. Can you just address that?

Kenneth Chenault

So let me make some top line comments, ask Dan to comment, Ed, and I'd also like Steve to talk about some of the specific things we are doing from a reengineering standpoint. But what I'd emphasize overall is part of where you have to start with is in these investments, we actually have had outperformance against other people in the industry. That's one of the reasons why you saw the outside market share gain in 2010, and it looks like we're gaining market share in 2011. So I think we're getting some real payback from those investments. I also think what's important is that we are also making investments in the moderate term and the long term because I'm a strong believer and I say it at our organization all the time, you can't be here for the long term if you don't generate in the short term. You clearly have to have that focus, but if your focus is just exclusively on the here and now, you're really not going to generate the moderate long-term growth that you need. And that really is our overall investment philosophy. So we think we're getting returns from our investments, and I think as you'll see from some of the examples people will give and the overview that we have a balance and we think we have a real pathway to ensure that we have the appropriate balance between investments, the expense growth and the revenue growth.

So why don't we start, Dan, with you just sketching out how we're thinking it more broadly. Ed, obviously talking about because you've made a number of investments in the existing business, and, Steve, is very focused on Global Business Services. And what I'd emphasize Global Business Services through technology, through service and operations have supplied a lot of the capabilities that have allowed us to grow.

Daniel Henry

So as we exited the crisis in the beginning of 2010, we didn't want to focus on just why do we need to accomplish in 2010. We established a roadmap heading towards 2012. So we set for ourselves expense targets that we want to be at, as we enter '12, recognizing that the payments that we were receiving from Visa and MasterCard, we're going to have final payments in '11. And also recognizing that the benefits from the release of credit reserves is going to come to an end at some point. So we need those plans in terms of the expense levels we want to have in recognition of that. We also made a decision that we didn't want to take the benefits of strong billings and the credit release, and just simply drop them into the bottom line. We wanted to invest in the business momentum of our initiatives. And we think we've been successful with that, and we're actually seeing the fruits of that in 2011, and we think that will extend into the future. So a combination of the higher revenues that we are generating with good margins attached to it will contribute to that.

The other thing is even though the credit reserve releases are coming to an end, the actual write-off dollars that are falling into the quarter are less than they were a year ago or earlier this year. And those lower credit write-off dollars will also be very helpful, as we move into next year as well. So we're actually executing against the plan when we recognize these things are going to end as we move into 2012.

Edward Gilligan

We've invested a lot in our Platinum Card across the board. Some people have asked us, is it defensive because there's so many other competitors moving into the premium space. But we look at it as an offensive move, and Ken showed the numbers of growth in average spend and growth in billings. That doesn't just happen organically. It happens because we're investing, and it's paying back. So early signs of our investment in our premium card base are very positive. So we like what we've done, and that we think it's differentiating us, and it's generating new revenue we wouldn't have had otherwise. So that's a very good thing.

Across the board, then we look places we can take price, where we added value over time, where we can improve the yield of our lending business, right, where we can get more effectiveness and efficiency in our spending. And we're well aware of the math that Dan just said and have been for quite some time. And I think we're ready for this next chapter and I think we're going in with a ton of momentum that will -- hopefully, you'll continue to see in our numbers as the future unfolds. But we feel very good about the investments we're making, and I'm glad that you've noticed them.

Daniel Henry

So let me just comment on the expense base. Back in 2009, when Ken reorganized the company, we created a group called Global Services. And within that Global Services group, we took all of our scale operations. We took all of our operations from international, customer service, the U.S., credit and collections, procurement, technologies, back-office financing and so forth, and we took all our transactional-type businesses and put them all under one roof. And at that point in time, what we stated was that we really wanted to get operating leverage from the combination of all those transaction processing engines. And so if you remember back in February of 2010, Ken stated we would take out $500 million from that overall expense base. And what we did is we went -- we went about that in 3 ways. The first thing that we did was we looked at consolidation opportunities. So you'll notice that in the last year, we've announced that we're closing our Greensboro site. We're also closing a number of smaller sites. And we also started consolidating a lot of our processing hubs around the world.

We then looked at sharing best practices around the world from a process perspective and from a technology perspective, not only do we focus on capability building, but we really focused on eliminating duplicate platforms. And so from that, what we wound up getting was not only the operating leverage to continue to invest in the core business and in marketing and so forth, but we also wound up with a better set of capabilities that led to not only lower cost but higher satisfaction.

The second piece of the expense base that Ken gave me to manage was all the technology investment. And technology investment, if you remember from Dan Henry's slides when he goes through the quarterly numbers, that's the number that's sort of out there on the right and growing. And all the things that you see today from a capabilities perspective, we've been able to really make our overall infrastructure much more approachable, much more flexible, introduce web services and enable things that you've seen from a Foursquare perspective and a Facebook perspective. But I think one thing to keep in mind when you look at that expense base, it's a very flexible expense base. We have a business model where pretty much more than half of our technology development is outsourced. So I may spend $100 this month, I can ramp that down to $10 next month without, in fact, any penalties or anything like that. So we do have the ability, depending on what capabilities, the prioritization on where we want to put the money, to bring that technology spend up-and-down from an investment perspective. And that's a roadmap -- as Dan said, that's a roadmap that we established in 2009 and one that we're taking all the way through to 2012.

Unknown Executive

We go here and then we'll go in the back.

Unidentified Analyst

How do you think about possibly competing with or against Apple or Google?

Kenneth Chenault

I think the reality is all the time what we've been dealing with, whether it's the traditional Payments business or it's nontraditional competitors, we are competing and partnering. We have bank partnership relationships with a range of banks around the world. They compete with us in the proprietary business, and they also are our GNS partners. So we're used to managing those types of relationships. What we got to be clear about is what's the net strategic gain for us in having relationships. PayPal, we compete with PayPal. They're also a strong partner with us. So I think at the end of the day, we've been able to do, I think, some interesting things with Apple. I might ask Ed for a second to just go into the program that we did with Apple. But that's an example, I think, that the complimentary attributes of Apple and ourselves, I think, present some attractive opportunities. Google, I think there are potential opportunities to work with them. As I said before, as this industry changes, I think you're going to have some nontraditional competitors who are not necessarily focused in payments in the same way as a traditional competitor, but the same payments as a connective tissue. Payments provides me information. Payments is a way that I could be more effective in my advertising business. So that's why I want to get into payments. And so part of what we've got to do is to continue to differentiate payments. Demonstrate to some of those providers that while there may be areas that we can compete in, we actually have a set of capabilities and features where you need to have a relationship with us that can be mutually beneficial. And we've done these types of analysis on a range of nontraditional and traditional competitors to figure out where are those points of cooperation that we can work that can be for mutual advantage and where are some paying points that we have to protect ourselves against. But I think one of the things I feel very good about is if you think about the last 15 years, that's what we've been doing in our business. We've been working with people -- I go through this all the time, frankly, both inside and outside the company is, how can you work with banks who compete with us, with MasterCard and Visa, and what's that going to do? I went through that 10 or 15 years ago. We got through those issues. And when I said the net benefit is, the scale and relevance that we're able to do. We're doing the same thing with the PayPals of the world, and I think we'll do it with a range of companies.

So I don't want to be dismissive, I want to be clear. You got to be aware of the competitive environment. Those are issues, but I have a lot of confidence because of this end-to-end model. I mean if you're now, as a payment provider, if you're stuck just in one side that you're an issuer alone and you're seeing people who can connect this value chain, you got to be a little bit clutched because you can be reduced to just a commodity. And so what our job is, using the analytics and our information, is to show how we can impact the different business levers of the Googles and the Amazons and the Apples of the world. Ed, why don't you just talk briefly? Again, it's not a gigantic deal, but I think it was an interesting promotion of how we've leveraged some of our capabilities.

Edward Gilligan

So we look at Apple, look at Google first, they're both big merchants. They accept the card, and our volumes on there are growing as you might imagine as you see both their top lines are growing. And we want our cards to be accepted, and they are, right? So they're strong merchant relationships. With all of these partners, we look to see -- add value to our customers. That's what guides us. We're obsessed with customer value and with merchant value bringing our business model to life, but not compromising our business model, right. So we look at Apple and what we're able to demonstrate with Apple is that, yes, they have incredibly growth, but our best customers are their best customers, strong overlap. And we did our promotions around iTunes to see could we get customers to put their Amex card in wallet targeting. We did this in Q1, we had very good results.

And Apple liked it. And their comments, to me, were we want more Amex cards in iTunes because your customers spend more. So you got it. You got it, right? There's a connection now, right? Because you're about the customer experience and so are we. Come at it from different angles, but as we stay focused on customer value, we go where our customers are, a lot of the roads lead to Apple. With Google as well, very big merchant, growing a lot of our small-business customers or advertising, buying AdWords on Google. You can see Google has motives that bring them into the payment space with the wallet, but it's an open wallet as they described it. The key here is information, right? So our guiding principle again is go where the customers are, but maintain our unique business model, closed loop information, customers see that it's us, that are bringing them value.

We have a direct relationship with merchants. That's critical to us. So when those conditions exist, you see us going where the customers are and bringing our business model to life to surprise and delight customers and to add value to merchants, so they can grow their business. And what you've seen over the past few months from us is doing exactly that.

Kenneth Chenault

The only way to pass it up is if you go back years ago to the relationship we developed with Costco, which is really an example of what we're doing with some of the nontraditional customers, we've been calling on Costco for years to get them to accept the card. They kept on saying the discount rate was too high. What we did was we disaggregated their entire model of how they made money, not just, "What are you doing in the card business?" But we looked at their entire model and what we were able to do was put together a proposal saying, using all the assets and capabilities of American Express, here's how we're going to improve your business. Here's how we're going to improve your metrics. That's why we have such a long-term relationship with Costco. That's the same type of approach that we're taking to a number of the technology companies. I have a 2-page presentation. And 1 of the things that's been most impactful is to say we're end-to-end. Let me show you the competitive frame. American Express is the only payments company that spans from issuing to merchant acquiring. Here's how we use the data. Here's how we use the capabilities. I don't talk about payments per se. I talk about how we're going to impact some of their key drivers. And that's very important as we move into this world.

Unknown Analyst -

Could you talk a little bit about how the merchant discount on that is going to look relative to your existing merchant discount? And whether the fact that if it's lower at a given merchant, I think, that will probably be the first time in the history of the company that you've had differentiated merchant discounts at an individual merchant. Does that present any the challenges as you go forward?

Kenneth Chenault

The answer is it's not the first time. We've had a prepaid rate for merchants for years. That's worked very well. And so it's...

Unknown Analyst -

The purchase card rate [indiscernible] information, as an example.

Kenneth Chenault

Purchase card rate was -- yes. So the reality is we're on that same rate that we've had for years, prepaid rate works. It's lower than the rate. And what's important is if you go back to one of the points I made in the presentation, and it's been true of how we've operated the business, is we create different products for different customer needs. If you’re a prepaid customer and some of your Serve customers, we are not only going after different types of segments again with customer, but they're more cash dependent, check dependent and debit dependent. We price on value. The average spend in some cases we know in prepaid is not going to be the average spend that it is on a credit card. So merchants understand that for a different value, there should be different pricing, so we frankly don't have a concern there.

Daniel Henry

I'd have to say for both prepaid and Serve, think about it as primarily going after new customer segments that we weren't able to address before, staying true to our brand attributes, but driving incremental profitable volume onto the American Express network. And so prepaid with the proposition we had plays right into not only tremendously fast growing marketplace here in the U.S. but internationally as well. And Serve allows us to move into or potentially move into international markets where things like charge and credit are not a large part of the overall payments infrastructure there. And so the combination of Serve and prepaid opens up new geographies to us, new customer segments to us through these new products that we think can provide a significant amount of incremental value to us.

Kenneth Chenault

The way we analogize this a little bit if you go back in the history of the company is the raging debate when I first came to the company in the 80s, should we go into everyday spend, that, that was going to cannibalize our brand, and in that case it would lower our average discount rate because we're going into categories with different value propositions. What we said, those of us who argued, that we should expand into that everyday spend is it brings us a very strong opportunity and gives us a greater share of our customers' overall spending, which is going to help us with our G&E [ph] customer. But that was a big issue and there were a set of concerns of how that was going to be done. I think that was a far more challenging issue than the one we're facing with Serve and prepaid, where these are really discrete customer segments that we're going after. That said, I'd still do the same thing all over again because I think the net opportunity is quite strong.

Unknown Executive

So we had someone over here?

Unknown Analyst -

First going back to your comments before about controlling data. It seems like we are whiteboarding the mobile payments industry. It seems like the question of data was going to be harnessed by whether it be Apple or Verizon. And in the spectrum of who is going to own the data changed dramatically. Where are we in that debate? I mean, clearly you have articulated the first mover advantage, but has that debate changed at all and have those people who thought that they were going to retain the data acquiesced and changed their perspective as we move forward?

Kenneth Chenault

I think what we won't do is go through all the specific issues there, but I think -- that's fine, let's talk about iSYS. But let's also talk a little bit about some of the principles we have around the data that we want to control. So Dan can cover iSYS, but I think it'll be good at given this important issue for the existing business is how we think about the restrictions that we want to put on the data that we share. Because you're absolutely right, we think data is king.

Daniel Schulman

There are a lot of these evolving models right now, and a lot of people are trying out exactly what the model is going forward. And data, as I mentioned in my presentation, is a crucial element of digital commerce, as you go forward. There's no question about it. And the transaction data is essential to closing the marketing return on investment. Transaction is really -- when somebody purchases something that's the moment when they've gone from consideration and intent to actual purchase that is where you close the loop. And so we think that, that data is absolutely essential. And as we look into the future and we see kind of the initial headstart we have and the platform we can develop. And by the way, trust and security come into where our consumers are going to store that data, what data are they going to expose to merchants in a real-time basis. And so we think we've got a good headstart on that and a strong platform to move forward with that.

You're also seeing a number of models changing. iSYS would be a good example of that as people who had intentions to move into payments understand just how difficult it really is to go and do that. It is not easy, as Steve mentioned, with all the technologies and investment you need to make to move into payments to keep pace with all the regulatory changes that are going on, the fraud and risk management, all the assets that we have, tremendously valuable as we move into the digital world.

And so iSYS has really gone from being a closed sort of system in which the carriers were thinking about, creating their own infrastructure, their own payments infrastructure, their own data. Really, iSYS right now is a container, if you will, for multiple networks and cards to come in to NFC-enable all that, and that's sort of the control point that they have. And they have no intention of keeping the data. They will absolutely pass that through. It's not even a shared model, and so we feel pretty comfortable in those models. There are other models that we've really got to take a close look at because we do think that data, especially as we look forward, is critical for our success going forward.

Kenneth Chenault

I thought it might be useful again to go through some of the principles, and also in some of the deals that we've done, how we have protected ourselves and the customer.

Unknown Executive

And as Dan just said, just to finish that iSYS story, when they opened up and the information belongs to the network whose rails that transaction resides on, like AMEX card and iSYS wallet, it's our information, our closed loop is intact. We signed an agreement to be interoperable with them. And that's great. And if our customers want to be in an iSYS wallet, then that works for us, right, because we still have complete control of our business model. So we care a lot, as I've mentioned before. We have a number of principles at work.

We talk about what go where customers are, anticipate where they will go, but preserve our business model. So that customers see that we're giving value from them. We get attribution for the value we deliver, and merchants see that we're helping them grow their business because that's what makes our business model work. And when we do a deal like Facebook, which we've done. We've done some great things over the past few months of bringing our business model to life on Facebook. The first thing we worry about is the data and privacy, and we have a very high bar. So we were able to make personalized offers to our customers based on their social graph without giving any personally identifiable information to Facebook, so we're not giving them anything on card, accounts or spend data, and we are not taking anything from them on what you like and what your friends like. But we're putting that information to work without exchanging data, between us and Facebook, vice versa, same thing with Foursquare. So that's critical. That brings our business model to life, unique value to customers, taking friction out of commerce, personalized offers, coupon lists, works for the merchants, works for the card member, very simple, elegant and incredibly powerful. To that point, for those of you who have AMEX cards and Facebook accounts or Foursquare, you can sync your cards out here. And we have a present for all of you, because if you do so, you'll see offers around here. Now the open bar here is only good for an hour, so we have P.J. Clarke's spend $10 right downstairs, The Grill Room, Starbucks if you feel like a caffeine shot. The point was you should -- you will see this, -- syncing your card you will see the power of bringing our unique business model to life in simple yet elegant ways on Facebook and Foursquare. Then it will get real for you and you will see that we are innovating, and you'll see why TechCrunch said a 160-year-old company is out innovating Groupon and Google, right? That wasn't our intent. Our intent was to add value to customers and bring our business model to life. And I would encourage all of you to take a look at it, and you will see the power of what we've done.

Daniel Henry

I think the other thing that's important is because of the quality of the offer and the value, our customers are opting in. That's what's very important. And so as we think about the privacy issues and regulatory issues, the more obviously you can get customers to opt in to what you're doing, the better off you are.

Daniel Schulman

The thing that we can start to do right now is we can -- because we have online and off-line capabilities, if somebody loads an offer -- a merchant loads an offer onto our platform and that person today then goes off-line and swipes a card on that, we actually can close that loop. We can tell that merchant, you put that offer out there, somebody came off-line, swiped the card, made this purchase, and here are the other things or here's the size of the basket that they bought. Closing that marketing loop is incredibly powerful. If you think about it from a Google perspective, 70% of online advertising searches end in an off-line purchase, and there's no link in terms of that digital closed loop or that marketing return on investment. So what we have is extremely powerful when you combine online and off-line, in terms of the information and reporting we can give back to merchants.

Unknown Executive

Someone on this side.

Unknown Analyst -

With this digital revolution, are you seeing trends toward a more efficient use of points by the client or will that impact rewards economics in the future?

Kenneth Chenault

You want to take that, Dan?

Daniel Henry

To the extent we provide enhancements to our program that provides more options, some of which can be done digitally. And certainly we think there will be more engagement and higher redemption rates. But as we've talked about while that creates some additional expense in this period, when customers are engaged and do redemptions, they spend more, they attrite [ph] less and the overall economics of the membership awards program is really very, very good. So these enhancements are designed to encourage spend and redemption. So yes, it will drive up the redemption rate. But economically, over the long-term for the franchise, we think it's a very good thing.

Unknown Executive

Yes, someone was -- yes, Bob?

Unknown Analyst -

Can you graft the digital payments and relevance into GNS, particularly in those banks and countries where underserved consumers are underneath the underlying customer base at these institutions, so you really could create functionality inside the GNS platform?

Kenneth Chenault

I would say, and I'll let Dan talk about this, but we think there are clearly internationally opportunities with GNS and our Serve capabilities. We are having conversations for exactly the reasons that you said. I think that given, in some markets, the reliance on cash and checks and debit, the types of capabilities that are in existence, we think we're going to do some interesting things in a number of markets. And it's a really good complement for existing business.

Daniel Henry

The GNS customers are just a small cohort or subset of the underlying net, potential network customers that could be captured through the American Express lines.

Kenneth Chenault

You're absolutely right. And I think what's important is, one of the points that Dan made in his presentation, I'll let you talk, is that the scale issue is very, very important. What we can -- what we believe is that we can use Serve to help dramatically expand our scale and relevance in payments.

Daniel Schulman

Ken covered probably 85% of the points there. But I will say 2 things. One, scale in the digital world is extraordinarily important because the more scale you have, the more data that you acquire and the better your data, the better your algorithms that you can provide to consumers. The most famous algorithm is if you like this, you like that. So if you only have 2 people, and that's the amount of data you have from that, that algorithm isn't very effective. When you have a tremendous amount of scale and data from that, that algorithm becomes more and more valuable. And so in software models, the more scale you have, the better your algorithms can be and the more efficient your cost can be. Second thing is that we do think that in many developing countries that there is going to be a skip. It's going to go from cash to digital as opposed to from cash to checks to plastic to digital as it did here. And it's just leapfrogging because if you look at India and China, the amount of mobile phones they have right now is staggering, actually, and the amount of plastic they have is extremely small. And as the government that pushes debit and prepaid or the growing piece of it is still smaller elements of the overall transaction pine. As governments push to reduce the reliance on cash because of the leakage associated with it, they're really moving to stored value increasingly linked to prepaid mobile phones. So we think we have a large opportunity to penetrate markets that we never could have penetrated before. And we do that either working with GNS partners, and we are working quite closely with our GNS group to introduce this to a number of different partners or where we may have additional opportunities where we may not be as strong in GNS. We're working straight with a number of different potential partners in a number of different countries.

Daniel Henry

It certainly gives us more to talk to these banks about, particularly the franchise markets in India, China, but also places like South Korea, Indonesia, Brazil. Now it's up to us to pick and choose the right spots, right? But there is a wide range of opportunities.

Unknown Executive

Any other questions, comments from people? Yes?

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

I don't know if you guys can provide this, but do you have a volume update just quarter-to-date? Second quarter.

Kenneth Chenault

No. We're not going to project. The only thing I would say, Sanjay, in this case is we're not seeing anything in July that's inconsistent with what we've seen in prior months. That's about far as I'll go.

Okay, well thank you very much. Before we totally disband, I think Ed covered it, but we would really invite you to, in addition to having drinks and talking more, is to test run some of our products. It's an easy sign-up, and there are people out there who can help you sign up to Foursquare and Facebook.

Daniel Schulman

Serve card as well.

Kenneth Chenault

And Serve. All right.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!