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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to ________
Commission File No. 1-7657
American Express Company
(Exact name of registrant as specified in its charter)
New York 13-4922250
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
World Financial Center
200 Vesey Street
New York, New York 10285
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 640-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
------------------- on which registered
Common Shares (par value $0.20 per Share) ---------------------
New York Stock Exchange
Boston Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value, as of June 30, 2003, of voting shares held by
non-affiliates of the registrant was approximately $53.8 billion. Common
shares of the registrant outstanding at March 8, 2004 were 1,290,080,248.
Documents Incorporated By Reference
Parts I, II and IV: Portions of Registrant's 2003 Annual Report to Shareholders.
Part III: Portions of Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 26, 2004.
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TABLE OF CONTENTS
Form 10-K
Item Number
Page
----
PART I
1. Business............................................................................... 1
Introduction........................................................................ 1
Travel Related Services............................................................. 2
American Express Financial Advisors................................................. 26
Financial Planning.................................................................. 27
Competitive Environment............................................................. 31
American Express Bank............................................................... 51
Corporate and Other................................................................. 61
Foreign Operations.................................................................. 64
Important Factors Regarding Forward-Looking Statements.............................. 65
Segment Information and Classes of Similar Services................................. 70
Executive Officers of the Company................................................... 70
Employees........................................................................... 72
2. Properties............................................................................. 72
3. Legal Proceedings...................................................................... 73
4. Submission of Matters to a Vote of Security Holders.................................... 78
PART II
5. Market for Company's Common Equity and Related Stockholder Matters..................... 78
6. Selected Financial Data................................................................ 80
7. Management's Discussion and Analysis of Financial Condition and Results of Operation... 80
7A.Quantitative and Qualitative Disclosures About Market Risk............................. 80
8. Financial Statements and Supplementary Data............................................ 81
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 81
9A.Controls and Procedures................................................................ 81
PART III
10.Directors and Executive Officers of the Company........................................ 82
11.Executive Compensation................................................................. 82
12.Security Ownership of Certain Beneficial Owners and Management......................... 82
13.Certain Relationships and Related Transactions......................................... 82
14.Principal Accounting Fees and Services................................................. 82
PART IV
15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 83
Signatures............................................................................. 85
Index to Financial Statements.......................................................... F-1
Consent of Independent Auditors........................................................ F-2
Exhibit Index.......................................................................... E-1
PART I*
ITEM 1. BUSINESS
INTRODUCTION
American Express Company (including its subsidiaries, unless the context
indicates otherwise, the "Company") was founded in 1850 as a joint stock
association and was incorporated under the laws of the State of New York in
1965. The Company is primarily engaged in the business of providing travel
related services, financial advisory services and international banking services
throughout the world.
The Company maintains an Investor Relations Web site on the Internet at
http://ir.americanexpress.com. The Company's filings with the Securities and
Exchange Commission ("SEC"), including its Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those
reports are available free of charge as soon as reasonably practicable following
the time they are filed with or furnished to the SEC by clicking on the "SEC
Filings" link found on the Investor Relations homepage. Interested persons are
also able to access the Company's Investor Relations Web site through the
Company's main Web site at www.americanexpress.com by clicking on the "About
American Express" link, which is located at the bottom of the Company's
homepage. Information on such website is not incorporated by reference in this
report.
American Express achieved record earnings in 2003, while significantly
increasing its investments in its businesses to generate future growth. The
Company entered the year in a defensive posture and with a cautious view of the
environment as a result of continued weak corporate spending and equity markets,
the war in Iraq and SARS. Nonetheless, during the latter part of the year, the
Company was able to build strong momentum as equity markets gained strength, the
U.S. economy grew and the global travel industry began to grow again from the
depressed levels of the last several years.
Significant growth in the Company's credit and charge card business, strong
credit quality, the success of the Company's ongoing reengineering efforts
(which yielded benefits in excess of $1 billion for the third consecutive year)
and progress at American Express Financial Advisors ("AEFA") all played a role
in 2003 performance. For the year, the Company delivered:
o Revenues of $25.9 billion, up 9% from $23.8 billion in 2002
o Net income of $2.99 billion, up 12% from $2.67 billion in 2002
o Diluted earnings per share of $2.30, up 14% from $2.01 in 2002
o Return on equity of 20.6%, compared with 20.2% in 2002
For a complete discussion of the Company's financial results, including
financial information regarding each of the Company's three operating segments,
see pages 27 through 108 of the Company's 2003 Annual Report to Shareholders
(the "2003 Annual Report"), which are incorporated herein by reference. For
a summary of the Company and its operating segments, and discussion of the
Company's principal sources of revenue, see pages 78 through 80 of the 2003
Annual Report.
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* Various forward-looking statements are made in this Annual Report on
Form 10-K, which generally include the words "believe," "expect,"
"anticipate," "optimistic," "intend," "plan," "aim," "will," "may," "should,"
"could," "would," "likely" and similar expressions. Certain factors that
may cause actual results to differ materially from these forward-looking
statements are discussed on pages 65-70.
1
These results met or exceeded the Company's long-term targets of 12% to 15%
earnings per share growth, 8% revenue growth and 18% to 20% return on equity, on
average and over time.
The Company believes that its 2003 results reflect its ability to
capitalize on the changes it began to initiate in 2001 to build a more flexible
and adaptable business. These changes focused on improving the Company's
economics, diversifying its card business, lowering its risk and investing in
growth. They were designed to help the Company meet its long-term financial
targets in an environment of slower economic growth and market appreciation. In
addition, these changes were intended to help it capitalize quickly on improving
market conditions, which the Company believes it was able to do in 2003 as it
increased expenditures in business building initiatives as the economy and
markets improved during the latter half of the year. These expenditures were
used for the launch of many new Card products, increased marketing efforts and
the successful completion of two targeted acquisitions, all of which helped to
drive substantially higher growth in Cardmember spending and loans at the TRS
operating segment and higher results at the AEFA operating segment.
TRAVEL RELATED SERVICES
American Express Travel Related Services Company, Inc. (including its
subsidiaries, unless the context indicates otherwise, "TRS"), which includes the
Company's card, travel, merchant and network businesses, provides a variety of
products and services worldwide, including, among others, global card network,
issuing and processing services, customized charge card and credit cards for
consumers and businesses worldwide, other consumer and corporate lending and
banking products, American Express'r' Travelers Cheques and prepaid card
products, business expense management products and services, corporate travel
and travel management services, consumer travel services, tax, accounting and
business consulting services, magazine publishing, merchant transaction
processing and point-of-sale and back-office products and services. In certain
countries, partly owned affiliates and unaffiliated entities offer some of these
products and services under licenses from TRS.
TRS' general purpose card network and card issuing businesses are global in
scope. TRS is a world leader in providing charge and credit cards to consumers,
small businesses and corporations. American Express'r' Cards are currently
issued in 47 currencies, including Cards issued by third-party banks and other
qualified institutions. In 2003, TRS' worldwide billed business (spending on
American Express Cards, including Cards issued by third parties) was $352
billion, with approximately $90 billion coming from Cardmembers domiciled
outside the United States. Cards permit Cardmembers to charge purchases of goods
and services in most countries around the world at the millions of merchants
that accept the American Express Card. In 2003, TRS rolled out numerous new Card
products and entered into various cobrand and other Card arrangements. TRS added
a net total of 3.5 million cards in 2003, bringing total worldwide
cards-in-force to 60.5 million (including Cards issued by third parties). As a
result of the global reach of American Express' brand, its card issuing
capabilities and its general purpose card network, the Company is positioned to
take advantage of the growth opportunities in the global payments services
business.
2
Further, the Company believes that its "spend-centric" business model has
significant competitive advantages. Card issuers generate the majority of their
income through some combination of customer spending (which generates payments
from merchants for card transactions), lending (which generates finance charges
on revolving credit balances) and customer fees. The Company has strength in all
three revenue streams, but has a unique edge in spending. On average, U.S.
consumers spend about four times as much on their American Express Cards as they
do on other cards. TRS generates revenue from this spending through the discount
rate charged to merchants for Card transactions. Because of American Express
Cardmembers' spending patterns, TRS can deliver greater value to merchants in
the form of higher spending Cardmembers and therefore earn a premium discount
rate. As a result, TRS can generate higher revenues from spending and has the
flexibility to offer more attractive rewards and other incentives to keep
customers spending more on their Cards. This, in turn, drives more business to
merchants that accept the Card. This business model gives TRS a competitive
advantage that TRS seeks to leverage to provide more value to its customers,
merchants and Card-issuing partners.
TRS' business as a whole has not experienced significant seasonal
fluctuation, although travel sales tend to be highest in the second quarter,
Travelers Cheque sales and Travelers Cheques outstanding tend to be greatest
each year in the summer months, peaking in the third quarter, and Card-billed
business tends to be moderately higher in the fourth quarter than in other
quarters.
TRS places significant importance on its trademarks and service marks and
diligently protects its intellectual property rights around the world.
Global Network Services
TRS operates a global general purpose charge and credit card network.
Network functions include operations, service delivery, systems, authorization,
clearing, settlement and brand advertising and marketing; the development of new
and innovative products for the network; and establishing and enhancing
relationships with merchants globally, both online and offline. Since May 1996,
the Company has been pursuing a strategy of inviting U.S. banks and other
institutions to issue American Express-branded cards on the American Express
merchant network, building on a business strategy it has implemented
successfully in a number of countries outside the United States. By leveraging
its global infrastructure and the appeal of the American Express brand, the
Company aims to gain even broader reach for its network worldwide. American
Express has established 79 card-issuing partnership arrangements in 89
countries. In January 2004, TRS and MBNA America Bank, NA ("MBNA") signed an
agreement under which MBNA will issue its own American Express-branded credit
cards in the United States and confirmed plans for MBNA to issue American
Express-branded credit cards in Canada, Spain and the United Kingdom. As a
result of this agreement, MBNA will become the first major U.S. bank to issue
credit cards that are accepted on the American Express merchant network. MBNA's
issuance of American Express-branded cards is subject to the elimination of VISA
USA, Inc.'s ("VISA") and MasterCard International, Incorporated's ("MasterCard")
rules prohibiting such issuance (see the discussion below describing the
Department of Justice litigation).
3
One of the key assets of the American Express merchant network is the
American Express brand, which is one of the world's most highly recognized and
respected brands. Cards bearing the American Express logo ("Cards") are issued
by TRS and by qualified licensed institutions, and are accepted at ATMs and at
all merchant locations worldwide that accept the American Express Card. TRS
issues the vast majority of Cards on the American Express network.
The Global Network Services business ("GNS") of TRS authorizes third-party
financial institutions to issue American Express-branded cards that are accepted
on the American Express merchant network. While TRS' network arrangements are
customized to the particular market and partner requirements, all GNS
partnerships are designed to help its partners develop products for their
high-spending and best customers. Network arrangements include independent
operator ("IO") arrangements, under which GNS' partner issues local currency
American Express Cards in a particular market and serves as the local merchant
acquirer and processor; joint venture arrangements, under which a joint venture
in which TRS has an ownership stake acts as the merchant acquirer and issues
Cards locally; and non-proprietary license arrangements, under which TRS grants
the partner a license to issue American Express Cards and the partner owns the
customer relationships, provides service, billing, and credit management and
designs the Card product features and TRS processes the transactions and
maintains the merchant acquirer relationship with merchants. In 2003, TRS also
entered into several arrangements outside the United States in which the GNS
partner acts as the local merchant acquirer in a particular market, but does not
issue Cards. TRS chooses GNS partners who share a core set of attributes such as
commitment to high quality standards, strong marketing expertise and
compatibility with the American Express brand, and TRS requires its GNS partners
to adhere to its product, brand and service standards.
In 2003, the Company entered into nine new GNS relationships with financial
institutions. GNS partners launched a total of 30 new products during 2003,
bringing the total number of American Express-branded GNS partner products to
over 350. In 2003, for example, Nedcor Bank launched a Gold credit card and
a Gold corporate card in South Africa, Banco Comercial Portugues launched
Blue V2, the first credit card with a smart chip in Portugal and the Nations
Trust Bank in Sri Lanka issued American Express Personal and Gold credit cards.
GNS is an important strategic business that helps to increase American
Express' market presence, drive more transaction volume onto the American
Express merchant network and increase the number of merchants accepting the
American Express Card. Since the creation of the GNS business in 1997, GNS
partners have added 6.4 million new Cards to the American Express network (net
of attrition). In addition, GNS merchant acquiring partners have added more than
2.5 million new establishments to the American Express network around the world.
Since 1999, Cards-in-force issued by GNS partners have grown at a compounded
annual growth rate of 24%. Spending on these Cards has grown at a compounded
annual rate of 16% and totaled more than $12 billion in 2003.
GNS' sources of revenues in IO arrangements include fees that are largely
driven by the number of Cards issued and spending on those Cards. The credit
risk for the issued cards resides with the local issuer, not with the Company.
In addition, TRS benefits from expanded merchant
4
coverage, which accommodates more inbound spending by Cardmembers from other
parts of the world. In joint venture arrangements, the economics of the joint
venture are similar to TRS' proprietary business, and TRS receives its
contractual portion of the venture's income.
GNS' revenues in non-proprietary license arrangements are derived from the
level of Cardholder spending, royalties and fees charged to the Card issuer
based on transaction volume, and the provision of value-added issuer services
such as insurance products and consulting services. The GNS partner bears the
credit risk for the issued cards, as well as the Card marketing and acquisition
costs, fraud costs and costs of rewards and other loyalty initiatives; however,
TRS does bear the risk arising from the GNS partner's potential failure to meet
its settlement obligations to TRS as a result of the GNS partner's inability or
unwillingness to make payment to TRS in respect of transactions made on the
Company's network. TRS mitigates this risk by selecting GNS partners whom it
believes will meet their obligations and by monitoring its GNS partners'
financial health, their compliance with the terms of their relationship with TRS
and the political and economic environment in which they operate. In certain
instances, TRS may require GNS partners to post a letter of credit, bank
guarantee or other collateral to reduce this risk.
Even though TRS' gross revenues from GNS business volumes are lower than
from TRS' proprietary issuing business, since the GNS partner is responsible
for most of the operating costs and risk, TRS' expenses are lower as well. The
result is a highly attractive earnings stream and risk profile, requiring
modest capital support. The leverage inherent in the GNS business cost
structure is very attractive and will become even more valuable as the GNS
business grows. Since the majority of GNS costs are fixed, the GNS business is
highly scalable. GNS partners benefit from their association with the American
Express brand and their ability to gain attractive revenue streams and expand
and differentiate their product offerings.
Local restrictive regulations governing the issuance of charge and credit
cards have not been a significant factor impacting TRS' arrangements with banks
and qualifying financial institutions in any country in which such arrangements
exist, because such banks and institutions generally are already licensed to
issue cards (e.g., VISA and MasterCard cards) prior to their issuing cards on
the American Express network. Accordingly, TRS' GNS partners have generally not
had difficulty in obtaining appropriate government authorization in the markets
in which TRS has chosen to enter into these partnership arrangements.
In contrast to the situation outside the United States, where banks and
other qualified institutions have issued Cards on the network for many years,
there have been no major U.S. banks issuing Cards on the American Express
network in the United States. This situation is the result of rules and policies
of VISA and MasterCard in the United States calling for expulsion of members who
issue American Express-branded cards. No banks have been willing to forfeit
membership in VISA and/or MasterCard to issue cards on the American Express
network. In a lawsuit filed in October 1998 against VISA and MasterCard, the
U.S. Department of Justice alleged that these rules and policies violate the
antitrust laws of the United States. In October 2001, the trial judge ruled in
favor of the U.S. Department of Justice, holding that these rules and policies
do violate such laws. TRS views this decision as a major victory for U.S.
consumers because it will ultimately lead to more vigorous network competition
and more innovative card products and services.
VISA and MasterCard appealed the decision and obtained a stay of the
court's judgment during the appeals process. In September 2003, the U.S. Court
of Appeals for the Second Circuit affirmed the trial court's decision, and in
January 2004, the Court of Appeals denied VISA and MasterCard's motions for
rehearing. In February 2004, the Court of Appeals continued the stay of the
trial court's judgment while VISA and MasterCard file petitions for certiorari
with the U.S. Supreme Court. However, in light of the Second Circuit's
affirmation of the trial court's decision, followed by its denial of VISA and
MasterCard's motions for rehearing, the Company
5
has renewed its discussions with banks about establishing network partnership
agreements in the United States. In this regard, as stated above, the Company
announced an agreement with MBNA in January 2004 under which MBNA will issue
American Express-branded credit cards in the United States once VISA and
MasterCard's rules are no longer in place.
As a network, TRS competes with other card networks, including, among
others, VISA, MasterCard, Diners Club, Discover Business Services, a business
unit of Morgan Stanley (primarily in the United States), and JCB Co., Ltd.
(primarily in Asia). The principal competitive factors that affect the network
business are (i) the number of cards in force and amount of spending on these
cards; (ii) the quantity and quality of establishments that accept the cards;
(iii) the economic attractiveness to card issuers and merchant acquirers of
participating in the network; (iv) the success of targeted marketing and
promotional campaigns; (v) reputation and brand recognition; (vi) innovation in
systems, technology and product offerings; and (vii) the quality of customer
service.
Global Merchant Services
TRS operates a global merchant services business, which includes signing-up
merchants to accept American Express Cards and receiving, processing and paying
Cardmember charges for merchants that accept Cards. During 2003, TRS continued
its ongoing efforts to encourage consumers to use the American Express Card as
their card of choice for everyday spending at establishments, as well as for
their travel and entertainment spending. TRS also continued to increase the
range of merchants in retail and everyday spending categories that accept the
Card, such as quick-serve restaurants, retail stores, supermarkets and gas
stations.
Other key signings of merchants also helped the Company to bring Card
acceptance to industries where cash or checks are the predominant form of
payment. For example, TRS signed agreements with eight major property management
companies across the United States to accept the Card for rental payments at
their luxury properties bringing the total number to ten. TRS also signed AIG
Marketing, Inc. to accept the Card for insurance premium payments.
TRS' objective is to achieve merchant coverage wherever and however
Cardmembers want to use the Card, as well as to increase coverage in key
geographic areas and new industries that have not, to date, accepted general
purpose credit and charge cards as a means of payment. TRS adds new merchants to
the American Express network through a number of sales channels: a proprietary
sales force, third-party sales agents, strategic alliances with banks, the
Internet, telemarketing and inbound "Want to Honor" calls (i.e., merchants
desiring to accept the Card contacting the Company directly).
As in prior years, during 2003, TRS continued to grow merchant acceptance
of American Express Cards around the world and to refine its approach to
calculating merchant coverage in accordance with changes in the marketplace.
Globally, acceptance of general purpose charge and credit cards continues to
increase, including among merchants that have not traditionally accepted charge
and credit cards. Additionally, as the Global Network Services business signs
partners in countries around the world who help to grow merchant acceptance in
their local markets, and as American Express Card issuance expands in "emerging
markets" outside the
6
United States, TRS has begun to include merchant coverage information from GNS
merchant acquirers and from these "emerging markets". As a result of this
refined approach, TRS estimates that, as of the end of 2003, TRS' merchant
network in the United States accommodated more than 90% of Cardmembers' general
purpose charge and credit card spending, and its international merchant network
accommodated over 80% of Cardmembers' general purpose charge and credit card
spending.
TRS earns "discount" revenue from fees charged to "service establishments"
for accepting Cards. The discount, which is the fee charged to the service
establishment for accepting Cards, is deducted from the amount of the payment
that the "merchant acquirer" (generally TRS) pays to a service establishment for
charges submitted. A service establishment is defined as a merchant that enters
into an agreement to accept Cards as a method of payment for goods and services.
A merchant acquirer is the entity that contracts for Card acceptance with the
service establishment, receives all Card transactions from the service
establishment, pays the service establishment for these transactions and submits
the transactions to TRS, which in turn submits them to the appropriate Card
issuer for billing to the Cardmember. When a Cardmember presents the Card for
payment, the service establishment creates a record of charge for the
transaction and submits it to the merchant acquirer for payment. The discount is
deducted from payment to the service establishment where TRS is the merchant
acquirer and is recorded by TRS as discount revenue at the time the transaction
is captured. Where TRS acts as the merchant acquirer and the Card presented at a
service establishment is issued by a third-party bank or financial institution,
such as in the case of some of TRS' GNS partnership arrangements, TRS will make
financial settlement with the Card issuer. Such shared amounts are recorded by
TRS as a reduction of discount revenue. Where the merchant acquirer is a
third-party bank or financial institution, TRS also receives a portion of the
discount revenue charged to such service establishments. Such amounts shared
with and paid to TRS are recorded by TRS as discount revenue.
The discount rate, which is generally expressed as a percentage of the
amount charged on a Card, is contractually agreed with the service
establishment. The level of the discount rate charged by TRS is principally
determined by the value that is delivered to the service establishment and
generally includes a premium over other card networks. Value is delivered to the
service establishment through higher spending Cardmembers relative to competing
card networks, the volume of spending by all Cardmembers, marketing programs and
the insistence of Cardmembers to use their Cards when enrolled in rewards or
other Card loyalty programs.
The discount rate varies with the industry in which the service
establishment does business, the charge volume, the timing and method of payment
to the service establishment, the method of submission of charges and, in
certain instances, the scope of the Card acceptance agreement signed with TRS
(local or global), the average charge amount and the amount of information
provided. TRS has generally been able to charge higher discount rates to
participating service establishments than its competitors as a result of TRS'
attractive Cardmember base. In 2003, as in prior years, the Company experienced
some erosion in its discount rate, primarily reflecting the impact of stronger
than average growth in the lower rate "everyday spend" merchant categories.
Based on the Company's business strategy, it expects to see continued changes in
the mix of business. This, along with volume-related pricing discounts
7
and selective re-pricing initiatives, will probably continue to result in some
discount rate erosion over time.
While many establishments understand the pricing in relation to the value
provided, TRS has continued to encounter merchants that accept Cards, but prefer
another type of payment and, consequently, suppress use of the Card. TRS
continues to devote significant resources to respond to this issue, and has made
progress by concentrating on acquiring merchants where Cardmembers want to use
the Card, providing better and earlier communication of the American Express
value proposition and, when necessary, by canceling merchants who suppress use
of American Express Cards.
TRS focuses on understanding and addressing key factors that influence
merchant satisfaction, on executing programs that increase Card usage at
merchants and on strengthening its relationships with merchants through an
expanded roster of services that help them meet their business goals. TRS offers
a full range of point-of-sale solutions that allow its merchant partners to
accept American Express Cards as well as bankcards, debit cards and checks. All
proprietary point-of-sale solutions support direct processing (i.e., direct
connectivity) to American Express, which lowers a merchant's cost of Card
acceptance and avoids any payment delays caused by a third party.
In 2003, TRS introduced satellite technology within its point-of-sale
product portfolio to meet the increasing merchant demand for high speed credit
card processing. TRS continues to invest in various broadband connectivity
options, including wireless and IP-based technology in order to facilitate Card
acceptance in new and emerging industries.
TRS continues to support the fast-growing recurring billing industry
through the Automated Bill Payment platform, a product that allows merchants to
bill Cardmembers on a regular basis for repeated charges such as insurance
premiums and subscriptions. In 2003, TRS also made modifications to its host
authorization system in order to approve more transactions and reduce Cardmember
disruption at the point-of-sale without a corresponding increase in fraud or
credit losses. These enhancements were primarily focused on the recurring
billing industry. TRS also introduced address verification improvements, which
assist merchants in reducing the risk of fraud by validating addresses for
shipments to addresses other than the Cardmember's billing address.
Wherever TRS manages both the acquiring relationship with merchants and the
Card-issuing side of the business, there is a "closed loop," which distinguishes
the American Express network from the bankcard networks in that there is access
to information at both ends of the Card transaction. This enables TRS to provide
targeted marketing for merchants and special offers to Cardmembers through a
variety of channels. In addition, the closed loop allows TRS's Card-issuing bank
partners to further customize marketing efforts and to work with TRS to drive
business to merchants who accept the Card.
TRS, as the merchant acquirer, has certain contingent liabilities that
arise in the event that a billing dispute between a Cardmember and a merchant is
settled in favor of the Cardmember. Drivers of this liability are returns in the
normal course of business, disputes over quality or non-
8
delivery, and billing errors. Typically, the amount due to the Cardmember is
offset against current or future submissions from the merchant. TRS can realize
losses when offsetting submissions cease, such as when the merchant commences a
bankruptcy proceeding or goes out of business. TRS actively monitors its
merchant base to assess the risk of this exposure. When appropriate, the Company
will take action to reduce the net exposure to a given merchant by either
holding a set amount of the merchant's funds or lengthening the time between
when the merchant submits a charge for payment and when TRS pays the merchant.
TRS also holds reserves against these contingencies.
In recent years there has been considerable interest on the part of a
number of government regulators around the world regarding the fees involved in
the operation of card networks, including the fees that merchants are charged to
accept cards. Most significantly, regulators in the United Kingdom, European
Union, Australia and Switzerland have conducted, and are continuing to conduct,
investigations into the way that bankcard network members collectively set the
"interchange," which is the fee paid by the merchant acquirer to the
card-issuing bank. The interchange fee is generally the largest component of the
merchant discount rate charged to merchants by the merchant acquirer with
respect to bankcard charges. Although the regulators' focus has for the most
part been specifically on VISA and MasterCard as the dominant card networks,
government regulation of the card associations' pricing could ultimately affect
all card service providers by mandating reduction of the levels of interchange
and merchant discount. Downward movement of interchange and merchant discount
fees may impact the relative economic attractiveness to card issuers and
merchant acquirers of participating in a particular network, and may drive card
service providers to look for other sources of revenue such as annual card fees,
as well as reduction of costs by scaling back or eliminating rewards programs.
In Spain, a parliamentary resolution in 2003 called on the government to take
action to reduce the level of credit card interchange. In October 2003, new
regulations issued by the Reserve Bank of Australia came into force that limit
the interchange fees that VISA and MasterCard may charge to a "cost" basis
formula. American Express and Diners Club were not included in the scope of
these regulations. However, American Express and Diners Club may face increased
pressure on merchant rates in Australia as the VISA and MasterCard rates are
lowered.
Regulators have also considered the industry practice of prohibiting
merchants from passing the cost of merchant discount fees along to consumers
through surcharges on card purchases. As a result of action taken by the Reserve
Bank of Australia, as of January 1, 2003, merchants in Australia are permitted
to surcharge card transactions, including American Express Card transactions. To
date, only limited incidence of surcharging has occurred in Australia. Although
surcharging of credit card purchases has been permitted in other countries, such
as the United Kingdom, for a number of years, there has been relatively low
incidence of surcharging, as merchants do not wish to risk offending customers
or losing customers to competitors who do not surcharge.
In some markets outside the United States, particularly in the United
Kingdom, third party processors have begun to offer merchants the capability of
converting credit card transactions from the local currency to the currency of
the cardholder's residence (i.e., the cardholder's billing currency) at the
point-of-sale, and submitting the transaction in the
9
cardholder's billing currency, thus bypassing the traditional foreign currency
conversion process of the card network and card issuer. The merchant and
processor would retain some or all of the revenue resulting from the
point-of-sale conversion, thus reducing or eliminating revenue for card issuers
and card networks relating to the conversion of foreign charges to the billing
currency. This practice is not widespread, and it is uncertain to what extent
consumers will prefer to have foreign currency transactions converted by
merchants rather than their card issuer in accordance with terms disclosed by
the issuer in the cardholder agreement and elsewhere. American Express is
reviewing the potential impact of point-of-sale foreign currency conversion on
revenues and Cardmembers. American Express' policy generally requires merchants
to submit charges and be paid in the currency of the country in which the
transaction occurs, and American Express itself converts the transaction to the
Cardmember's billing currency.
Consumer Card, Small Business and Consumer Travel Services
TRS' Card business has a significant presence worldwide and serves a range
of customer groups, including consumers and small businesses. TRS' consumer Card
business is complemented by its consumer travel business, which provides travel
services to Cardmembers and other consumers. TRS' Card business is focused on
offering a broad set of card products, including customizing existing products
to reach a greater number of customers. Core elements of TRS' strategy are its
focus on acquiring and retaining high-spending, creditworthy Cardmembers across
multiple groups; its breadth of product offering; the use of strong incentives
to drive spending on the Card; the development and nurturing of wide-ranging
relationships with cobrand, Membership Rewards'r' program and other partners; a
multi-card strategy (having multiple Card products in a customer's wallet); and
high-quality customer service.
TRS and its licensees offer individual consumers charge cards such as the
American Express Card, the American Express'r' Gold Card, the Platinum Card'r',
and the ultra-premium Centurion'r' Card; revolving credit cards such as Blue
from American Express'r', Blue Cash'r' from American Express and the Optima'r'
Card, among others; and a variety of cards sponsored by and cobranded with other
corporations and institutions, such as the Delta SkyMiles'r' Credit Card from
American Express, the American Express'r' Platinum Cash Rebate Card exclusively
for Costco Members and the Hilton HHonors Platinum Credit Card from American
Express.
Charge cards, which are marketed in the United States and many other
countries and carry no pre-set spending limits, are primarily designed as a
method of payment and not as a means of financing purchases of goods or
services. Charges are approved based on a variety of factors including a
Cardmember's account history, credit record and personal resources. Charge Cards
generally require payment by the Cardmember of the full amount billed each
month, and no finance charges are assessed. Charge Card accounts that are past
due are subject, in most cases, to a delinquency assessment and, if not brought
to current status, may be canceled. The no-preset-spending limit and pay-in-full
nature of this product attracts high-spending Cardmembers who want to use a
charge card to facilitate larger payments.
TRS and its licensees also offer a variety of revolving credit cards in the
United States and other countries. These cards have a range of different payment
terms, grace periods and rate and fee structures. Since late 1994, when the
Company began aggressively to expand its credit
10
card business, its lending balance growth has been among the top tier of card
issuers. Much of this growth has been due to the breadth of the Company's
lending products, such as Blue from American Express, Blue Cash from American
Express and the Delta SkyMiles Credit Card from American Express, as well as the
increased number of Charge Cardmembers who have taken advantage of the Company's
"lending on charge" options (such as the Sign & Travel'r' and Extended Payment
Option programs).
The Sign & Travel program gives qualified U.S. Cardmembers the option of
extended payments for airline, cruise and certain travel charges that are
purchased with the Charge Card. The Extended Payment Option offers qualified
U.S. Cardmembers the option of extending payment for certain charges on the
Charge Card in excess of a specified amount. Various flexible payment options
are offered to Cardmembers in international markets as well.
American Express Centurion Bank ("Centurion Bank"), a wholly owned
subsidiary of TRS, issues Blue from American Express, Blue Cash from American
Express, the Optima Card, and all other American Express-branded revolving
credit cards in the United States. In addition, Centurion Bank has outstanding
lines of credit in association with certain Charge Cards and offers unsecured
loans to Cardmembers in connection with its Sign & Travel and Extended Payment
Option programs. Centurion Bank is also the issuer of certain Charge Cards in
the United States.
TRS continued to bolster its proprietary international Card business
through the launch of more than 80 new or enhanced Card products during 2003.
These are cards that American Express issues, either on its own or cobranded
with partnering institutions. They included Centurion cards in Mexico and Japan,
the International Dollar Platinum Card in 43 Latin American and Caribbean
markets, and several Gold Card products in markets including India, Japan and
Indonesia, as well as cards with premier partners like Holt Renfrew in Canada,
BMW in Australia and E-Plus in Germany.
TRS issues Cards under cobrand agreements with selected commercial firms
both in the United States and internationally. Examples of TRS' cobrand
arrangements include agreements with Indian Airlines, KLM, Holt Renfrew,
Aeroplan, a subsidiary of Air Canada, Peninsula Hotel (Hong Kong), AeroMexico,
Air France, Loyalty Management Group Canada, Inc. (Air Miles'r'*), Alitalia,
Delta Air Lines, British Airways, Costco, Hilton Hotels, Shop Rite Supermarkets,
Singapore Airlines and Starwood Hotels and Resorts. The duration of such
arrangements generally range from five to ten years. Cardmembers earn rewards
provided by the commercial firms' respective loyalty programs based upon their
spending on the cobrand cards, such as frequent flyer miles, hotel loyalty
points and rebates. TRS makes payments to its cobrand partners based primarily
on the amount of Cardmember spending and corresponding rewards earned on such
spending, and, under certain arrangements, on the number of accounts acquired
and retained. TRS expenses amounts due under cobrand arrangements in the month
earned. Payment terms vary by arrangement, but are monthly or quarterly. Once
TRS makes payment to the cobrand partner, as described above, the partner is
solely liable with respect to providing rewards to the Cardmember under the
cobrand partner's own loyalty program.
- ----------
* Trademark of AirMiles International Trading B.V. Used under license by Loyalty
Management Group Canada Inc. and American Express Bank of Canada.
11
The Company also issues Cards under distribution arrangements with banks,
primarily outside the United States. Such bank distribution agreements involve
the offering of a standard Company product (issued by TRS or one of its
subsidiaries) to customers of the bank, generally with the bank's logo on the
Card. In a bank distribution arrangement, the Company makes payments to the bank
partners that are primarily based on the number of accounts acquired and
retained through the arrangement and the amount of Cardmember spending on such
Cards. The duration of such arrangements generally range from five to seven
years. During 2003, new distribution agreements were signed with MeesPierson
Asia Limited in Hong Kong, Phillips Securities in Singapore and ING Comercial
America in Mexico.
In addition to the payments to cobrand and bank partners referred to above,
the arrangements with such entities may contain other terms unique to the
arrangement with the partner, including an obligation on the part of TRS to make
payments under certain circumstances.
Many TRS Cardmembers, particularly Charge Card holders, are charged an
annual fee that varies based on the type of Card, the number of Cards for each
account, the currency in which the Card is denominated and the country of
residence of the Cardmember. Many revolving credit Cards are offered with no
annual fee. Each Cardmember must meet standards and criteria for
creditworthiness that are applied through a variety of means both at the time of
initial solicitation or application and on an ongoing basis during the Card
relationship. The Company uses sophisticated credit models and techniques in its
risk management operations and believes that its strong risk management
capabilities provide it with a competitive advantage.
Several products launched or renewed by TRS in the United States in the
last few years continued to make significant contributions to its results in
2003, including the American Express'r' Rewards Green and American Express'r'
Rewards Gold Cards for U.S. consumers. These Cards offer automatic enrollment in
the Membership Rewards program and double points for purchases at supermarkets,
gas stations, drugstores, and other everyday spend locations. Rewards-based
products not only drive higher spending, they also have very favorable economics
in terms of Cardmember attrition, credit and payment performance. These Cards
provide Cardmembers with enhanced opportunities to earn rewards and support TRS'
efforts to drive spending at everyday spend locations. Early in 2003, TRS
introduced Blue Cash from American Express for U.S. consumers. This Card, which
is in large part replacing the Company's Cash Rebate Card in the United States,
carries no annual fee and offers up to five percent cash back on certain types
of spending, based on a Cardmember's annual spending and payment activity.
During 2003, TRS also continued to expand its U.S. Membership Rewards
program - the largest program of its kind. TRS continued to add new Membership
Rewards partners in a range of industries, including Elizabeth Arden Red Door
Salons, Hyatt Hotels and Resorts, Telecharge.com, SeaWorld and Busch Gardens
Adventure Parks, Fortunoff and Escada. TRS also introduced a new offering called
Your Reward'r' that allows enrollees to create their own unique redemption
packages, as well as to select from a diverse menu of ready-made adventures and
experiences. TRS' Membership Rewards program continues to be an important driver
of
12
Cardmember spending and loyalty. The Company believes, based on historical
experience, that Cardmembers enrolled in rewards and co-brand programs yield
higher spend, better retention, stronger credit performance and greater profit
for the Company.
As in the United States, rewards are a strong driver of Cardmember spending
in the international consumer business. In 2003, TRS continued to enhance its
rewards programs in several markets, offering richer and more flexible choices
that enable Cardmembers to earn points more quickly, including the launch in New
Zealand of the American Express Platinum Membership Rewards'sm' Credit Card
and the Rewards Maximiser Card in Australia. TRS also introduced a rewards
"Accelerator" program in ten markets that drives spending by enabling
Cardmembers to earn points faster.
When a Cardmember enrolled in the Membership Rewards program uses the Card,
TRS establishes reserves in connection with estimated future reward redemptions.
When a Membership Rewards program enrollee redeems a reward using the Membership
Rewards program points, TRS makes a payment to the Membership Rewards program
partner providing the reward pursuant to contractual arrangements. Due to higher
charge volumes and greater program participation and penetration, the expense of
Membership Rewards has increased over the past several years and continues to
grow. By offering a broader range of redemption choices, TRS has improved
customer satisfaction with the Membership Rewards program. TRS continually seeks
ways to contain the overall cost of the program and make changes to enhance its
value to Cardmembers.
Throughout the world, Cardmembers have access to a variety of free and
fee-based special services and programs, depending on the type of Card they have
and their country of residence. These include the Membership Rewards program,
Global Assist'r' Hotline, Buyer's Assurance Plan, Car Rental Loss and Damage
Insurance, Travel Accident Insurance, Purchase Protection Plan, Best Value
Guarantee, Emergency Card Replacement, Emergency Check Cashing Privileges,
Automatic Flight Insurance, Premium Baggage Protection, Assured Reservations,
Online Fraud Protection Guarantee, Credit Card Registry, Credit Bureau
Monitoring and Credit Insurance services. Certain Cards provide Cardmembers with
access to additional services, such as a Year-End Summary of Charges Report.
The Platinum Card, a charge card offered to consumers in the United States
and in virtually all other countries in which TRS issues Cards, provides access
to additional and enhanced travel, financial, insurance, personal assistance and
other services. The Centurion Card, which is offered by invitation to consumers
in the United States and five other countries, is an ultra-premium charge card
providing highly personalized customer service and an array of travel, lifestyle
and financial benefits. Personal, Gold, Platinum and Centurion Cardmembers
receive the Customer Relationship Statement, which is used to communicate
special offers for products and services of both merchants and the Company.
Over the past ten years, TRS has significantly expanded the number of
service establishments that accept TRS' card products as well as the kinds of
businesses that accept the Card. As discussed above, in recent years, TRS has
focused its efforts on increasing the use of
13
its Cards for everyday spending. In 1990, 65% of all of TRS' U.S. billings came
from the travel and entertainment sectors and 35% came from retail and other
sectors. By 2003, that proportion was reversed, with retail and non-travel and
entertainment spending in the United States accounting for approximately 65% of
the business billed on American Express Cards. This shift resulted from the
growth, over time, in the types of merchants who began to accept charge and
credit cards in response to consumers' increased desire to use these cards for
more of their purchases, and TRS' focus on expanding Card acceptance to exploit
these opportunities. In recent years, this shift was important because of a
decrease in spending in travel and entertainment resulting from the overall
economic and political environment.
TRS continues to make significant investments, both in the United States
and internationally, in its card processing system and infrastructure to allow
faster introduction and greater customization of products. TRS also is using
technology to develop and improve its service capabilities in order to continue
to deliver a high quality customer experience. For example, TRS maintains a
service delivery platform that its employees use in the card business to support
a variety of customer servicing and account management activities such as
account maintenance, updating of Cardmember information, the addition of new
cards to an account and resolving customer satisfaction issues. In international
markets, TRS is building flexibility and enhancing its global platforms and
capabilities in revolving credit, its full service banking platform called
iWealthview, and consumer payment options. See "Corporate and Other" for a
description of the Company's arrangement regarding the outsourcing of many of
its technology operations to IBM.
The Company continued to leverage the Internet to lower costs and improve
service quality. During 2003, it expanded the number of services and
capabilities available to customers online and increased their utilization. For
example, within the United States, approximately 86% of the Company's card
servicing call volume can now be handled online. The Company now has more online
interactions with U.S. customers than it does by telephone or in person. Online
Card sales grew steadily in 2003 as well.
At year-end, approximately twelve million Cards were enrolled in "Manage
Your Card Account Service". This service enables Cardmembers to review and pay
their American Express bills electronically, view and service their Membership
Rewards program accounts and conduct various other functions quickly and
securely online. The Company now has an online presence in 55 markets.
In addition to its U.S. and international consumer Card businesses, TRS is
also a leading provider of financial and travel services to small businesses
(firms that generally have less than 100 employees and/or sales of $10 million
or less), a key growth area in the United States. OPEN: The Small Business
Network'sm' from American Express ("OPEN Network") offers small business owners
a wide range of tools, services and savings designed to meet their needs,
including charge and credit cards, access to working capital, expense management
reporting, enhanced online account management capabilities and savings on
business services from OPEN Network partners.
During 2003, TRS continued to expand the OPEN Network breadth of products
and
14
services, including the introduction of the Business Cash Rebate Credit Card and
the Platinum Business Credit Card. TRS also expanded its ability to offer
line-of-credit products to U.S. small businesses through SBA Express, an
innovative federal loan program that enables TRS to offer lines of credit backed
by the U.S. Small Business Administration. During 2003, TRS introduced Online
Expense Management Reports, an online tool that helps small business owners
track and manage their business expenses, and Online Upgrades, which provides
Cardmembers a quick and convenient new way to upgrade their Accounts. The OPEN
Network also provides small business Cardmembers with the benefits of its
Everyday Savings program, which provides savings to Cardmembers when they use
their Cards to make purchases at program partners. Everyday Savings partners are
leaders in categories relevant to businesses, including car rental, document
reproduction, office supplies, shipping and wireless phones.
The American Express Consumer Travel Network provides travel, financial and
Cardmember services to consumers through American Express-owned travel service
offices, call centers and participating American Express Representatives
(independently-owned travel agency locations). Consumer Travel's vision and
strategy is to be the premium travel service provider of choice to American
Express Cardmembers. Consumer Travel markets unique travel products and services
in conjunction with the Card to provide an end-to-end experience. U.S. Consumer
Travel has distinguished itself in the luxury marketplace through its Platinum
Travel Services and Centurion Travel Services, which provide programs such as
the International Airline Program, which offers two-for-one fares on
international first and business class tickets, and the Fine Hotels & Resorts
program, a luxury hotel program offering room upgrades and value-added
amenities.
In addition, the Consumer Travel business operates a wholesale travel
business in the United States, which packages American Express Vacations and
distributes travel packages through other retail travel agents, and a cruise
subsidiary in the United States, which markets value-added cruise products
called the Mariner's Club. Consumer Travel also provides Membership Rewards
program cruise and tour fulfillment, fee-free Traveler's Cheques, and foreign
exchange.
TRS' worldwide travel network of more than 1,700 retail travel locations is
important in supporting the American Express brand and providing customer
service throughout the world.
TRS encounters substantial and increasingly intense competition with
respect to the Card-issuing business. As a card issuer, TRS competes in the
United States with financial institutions (such as Citibank, Bank One and
JPMorgan Chase (which announced their plans to merge), MBNA, and Capital One
Financial) that are members of VISA and/or MasterCard and that issue general
purpose cards, primarily under revolving credit plans, on one or both of those
systems, and the Morgan Stanley affiliate that issues the Discover Card on the
Discover Business Services network. Internationally, TRS is also subject to
competition from multinational banks, such as Citibank, HSBC and Banco
Santander, as well as many local banks and financial institutions. TRS also
encounters limited competition from businesses that issue their own cards or
otherwise extend credit to their customers, such as retailers and airline
associations, although these cards are not generally substitutes for TRS' Cards
because of their limited acceptance. As a result of continuing consolidations
among banking and financial services companies and credit
15
card portfolio acquisitions by major card issuers, there are now a smaller
number of significant issuers and the largest issuers have continued to grow
using their greater resources, economies of scale and brand recognition to
compete.
Competing card issuers offer a variety of products and services to attract
cardholders including premium cards with enhanced services or lines of credit,
airline frequent flyer program mileage credits and other reward or rebate
programs, "teaser" promotional interest rates for both credit card acquisition
and balance transfers, and cobranded arrangements with partners that offer
benefits to cardholders. Target customers are segmented based on factors such as
financial needs and preferences, brand loyalty, interest in rewards programs and
creditworthiness, and specific products are tailored to specific customer
segments.
Most financial institutions that offer demand deposit accounts also issue
debit cards to permit depositors to access their funds. Use of debit cards for
point-of-sale purchases has grown as many financial institutions have replaced
ATM cards with general purpose debit cards bearing either the VISA or MasterCard
logo. As a result, the volume of transactions made with debit cards in the
United States has continued to increase significantly and, in the United States,
has grown more rapidly than credit and charge card transactions. Debit cards are
marketed as replacements for cash and checks, and transactions made with debit
cards are typically for small dollar amounts. While debit cards may be used
instead of credit and charge cards for certain kinds of transactions, the
ability to substitute debit cards for credit and charge cards is limited because
the consumer must have sufficient funds in his or her demand deposit account to
cover the transaction in question. For example, larger purchases or delayed
purchases may not be appropriate for debit cards. TRS does not currently issue
point-of-sale debit cards on the American Express merchant network.
The principal competitive factors that affect the Card-issuing business are
(i) the features and the quality of the services and products, including rewards
programs provided to Cardmembers; (ii) the number, spending characteristics and
credit performance of Cardmembers; (iii) the quantity and quality of the
establishments that accept a card; (iv) the cost of cards to Cardmembers; (v)
the terms of payment available to Cardmembers; (vi) the number and quality of
other payment instruments available to Cardmembers; (vii) the nature and quality
of expense management data capture and reporting capability; (viii) the success
of targeted marketing and promotional campaigns; (ix) reputation and brand
recognition; (x) the ability of issuers to implement operational and cost
efficiencies; and (xi) the quality of customer service.
American Express Credit Corporation, a wholly owned subsidiary of TRS,
along with its subsidiaries ("Credco"), purchases the majority of Charge Card
receivables arising from the use of Cards issued in the United States and in
designated currencies outside the United States. Credco finances the purchase of
receivables principally through the issuance of commercial paper and the sale of
medium- and long-term notes. Centurion Bank finances its revolving credit
receivables through the sale of short- and medium-term notes and certificates of
deposit in the United States. TRS and Centurion Bank also fund receivables
through asset securitization programs. The Company utilizes the gains from its
securitization activities to help fund certain marketing and promotion
activities. The cost of funding Cardmember receivables and loans is a major
expense of Card operations. (For a further discussion of TRS' and Centurion
Bank's
16
securitization and other financing activities, see page 27, pages 37 through 38,
page 43, pages 44 through 47 and pages 53 through 57 under the caption
"Financial Review," and Note 4 on pages 88 through 90 of the Company's 2003
Annual Report to Shareholders, which portions of such report are incorporated
herein by reference.)
Centurion Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") for up to $100,000 per depositor. Centurion Bank is a
Utah-chartered industrial loan company regulated, supervised and regularly
examined by the Utah Department of Financial Institutions and the FDIC. Among
the activities of Centurion Bank that are regulated at the federal level are its
anti-money laundering compliance activities. The Company has taken steps to
maintain a compliance program consistent with applicable standards. For further
discussion of the anti-money laundering initiatives affecting the Company, see
"Corporate and Other" below. Centurion Bank is subject to the risk-based capital
adequacy requirements promulgated by the FDIC. Under these regulations, a bank
is deemed to be well capitalized if it maintains a tier one risk-based capital
ratio of at least 6%, a total risk-based capital ratio of at least 10%, and a
leverage ratio of at least 5%. As of December 31, 2003, AECB met the "well
capitalized" standard, with a tier one risk-based capital ratio of 9.00%, a
total risk-based capital ratio of 10.33%, and a leverage ratio of 11.55%.
American Express Bank, FSB ("AEBFSB") is a federal savings bank regulated
and supervised by the Office of Thrift Supervision ("OTS"). In December 2003,
AEBFSB and certain of its affiliates received OTS approval to, among other
things, transfer ownership of the federal savings bank from AEFA to TRS,
relocate its headquarters from Minneapolis, Minnesota to West Valley, Utah, and
amend its business plan to permit AEBFSB to offer certain credit, charge and
consumer lending products, small business loans, mortgages and mortgage-related
products and to operate a transactional Internet site. The implementation of the
changes to AEBFSB's business plan, which will provide more flexibility to the
Company, began in the first quarter of 2004 with the transfer of certain Card
accounts from Centurion Bank to AEBFSB. AEBFSB continues to provide personal
trust, custodial, agency and investment management services to individual
clients of AEFA. AEBFSB is registered with the SEC as an investment adviser.
AEBFSB is authorized to transact business in all 50 states and the District of
Columbia, and utilizes AEFA as its primary distribution channel for these
services.
The charge card, ATM and consumer lending businesses are subject to
extensive regulation in the United States, as well as in foreign jurisdictions.
In the United States, the business is subject to a number of federal laws and
regulations, including the Equal Credit Opportunity Act (which generally
prohibits discrimination in the granting and handling of credit); the Fair
Credit Reporting Act (which, among other things, regulates use by creditors of
consumer credit reports and credit prescreening practices and requires certain
disclosures when an application for credit is rejected); the Truth in Lending
Act (which, among other things, requires extensive disclosure of the terms upon
which credit is granted); the Fair Credit Billing Act (which, among other
things, regulates the manner that billing inquiries are handled and specifies
certain billing requirements); the Fair Credit and Charge Card Disclosure Act
(which mandates certain disclosures on credit and charge card applications); and
the Electronic Funds Transfer Act (which regulates disclosures and settlement of
transactions for electronic funds transfers including those at ATMs). Certain
federal privacy-related laws and regulations govern
17
the collection and use of customer information by financial institutions (see
"Corporate and Other" below). Federal legislation also regulates abusive debt
collection practices. In addition, a number of states, the European Union, and
many foreign countries in which the Company operates have significant consumer
credit protection, disclosure and privacy-related laws (in certain cases more
stringent than the laws in the United States). The application of bankruptcy
and debtor relief laws affect the Company to the extent that such laws result
in amounts owed being classified as delinquent and/or charged off as
uncollectible. Card issuers and card networks are subject to anti-money
laundering and anti-terrorism legislation, including, in the United States,
the USA PATRIOT Act. (For a discussion of this legislation and its effect on the
Company's business see "Corporate and Other" below.) Centurion Bank, AEBFSB
and the Company's other bank entities are subject to a variety of laws and
regulations applicable to financial institutions. Changes in such laws and
regulations or in the regulatory application or judicial interpretation thereof
could impact the manner in which the Company conducts its business and the costs
of compliance. The regulatory environment in which the Company's Card and
lending businesses operate has become increasing complex and robust. The
Company regularly reviews and, as appropriate, refines its business practices
in light of existing and anticipated developments in laws, regulations and
industry trends so that it can continue to manage its business prudently and
consistent with regulatory requirements and expectations.
In January 2003, the Federal Financial Institutions Examination Council
(the "FFIEC"), an interagency body composed of the principal U.S. federal
entities that regulate banks and other financial institutions, issued in final
form its guidance on Credit Card Account Management and Loss Allowance Practices
(the "Guidance"). The Guidance covers five areas: (i) credit line management,
(ii) over-limit practices, (iii) minimum payment and negative amortization
practices, (iv) workout and forbearance practices, and (v) certain income (fee)
recognition and loss allowance practices. The Guidance is generally applicable
to all institutions under the supervision of the federal bank regulatory
agencies that comprise the FFIEC, although it is primarily the result of the
identification by bank regulators in their examinations of other credit card
lenders practices deemed by them to be inappropriate, particularly, but not
exclusively, with regard to subprime lending programs. The Company does not have
any lending programs that target the subprime market. The Guidance has not had
any material impact on the Company's businesses or practices and the Company
does not believe that the Guidance will have any material impact on its
practices in the future, nor does the Guidance mandate any changes to the
Company's practices.
Global Corporate Services
TRS' Global Corporate Services business ("GCS") helps companies around the
world better manage the costs and processes associated with a range of expenses,
including travel and entertainment and everyday business products and services.
GCS offers three primary products and services: Corporate Card, issued to
individuals through a corporate account established by their employer and
designed primarily for travel and entertainment spending; Corporate Purchasing
Solutions, an account established by a company to pay for everyday business
expenses such as office and computer supplies; and Corporate Travel, a large
corporate travel agency, which helps businesses manage their travel expenses
through a variety of travel-related products and services.
18
The American Express'r' Corporate Card is a charge card issued to
individuals through a corporate account established by their employer for
business purposes. Through the Corporate Card program, companies can monitor
travel and entertainment expenses and improve negotiating leverage with
suppliers, among other benefits. American Express uses its direct relationships
with merchants that accept the Card to offer Corporate Card clients superior
data about company spending, as well as streamlined dispute resolution. American
Express issues local currency Corporate Cards in 37 countries (both through
proprietary operations and partner banks), and international dollar Corporate
Cards in other countries.
Corporate Purchasing Solutions ("CPS") provides large and middle market
companies with tools to better manage their everyday spending. CPS is used by
corporations to buy everyday goods and services, such as office supplies and
industrial supplies and equipment, in 24 markets around the world. This type of
spending by corporations is less susceptible to economic downturns than
traditional travel and entertainment spending and helps to diversify the
spending mix on the Company's Cards.
GCS is a leading provider of expense management services to global,
multinational and large businesses worldwide. GCS established the Global
Business Partnerships group which serves a highly select group of Fortune 100
companies that have globalized their approach to travel and entertainment
expense management and have structured their purchasing requirements in a global
manner to more effectively manage and optimize their investments in travel and
entertainment, as well as everyday corporate expenses.
In addition, GCS provides Corporate Card and travel expense management
services to middle market companies (defined in the United States as firms with
annual revenues of $10 million to $1 billion) in mature economies worldwide,
including the United States, Canada, the United Kingdom, France, Sweden,
Germany, Australia, Singapore and Mexico. GCS is focused on continuing to expand
its business with midsize companies and believes this market offers a strong
growth opportunity, as it encompasses a segment of customers that typically do
not have corporate card programs. In 2003, GCS invested in a wide range of
marketing programs and product enhancements, and added sales staff to generate
more Card and travel business with midsize firms. To enhance the card product
for midsize and certain large market firms in the United States, in 2003 GCS
expanded its Savings at Work'sm' program, which provides companies with
discounts on everyday products and services, such as office supplies, and a
range of business services.
During 2003, GCS added several major clients in the United States and
internationally for the Corporate Card, including Oracle, Merrill Lynch, Sony
Corporation of America and BearingPoint. Raytheon and Novartis became CPS
clients during the year.
In 2003, TRS announced a new partnership with American Airlines in the U.S.
Corporate Card business. The American Express Business ExtrAA Corporate Card, a
cobranded Card for midsize and certain large market companies, delivers savings
in the form of cash rebates on a company's airline spending, as well as bonus
points and discounts on everyday business spending. The new partnership with
American Airlines adds a new level of premium value to
19
TRS' Corporate Card portfolio, providing a growth opportunity in attracting
and cultivating the loyalty of midsize companies. TRS also announced similar
cobrand issuing arrangements with Qantas Airways, KLM Royal Dutch Airlines and
Aeroplan, a wholly owned subsidiary of Air Canada.
With the increased focus on cost containment by firms, GCS has seen
significant growth over the past few years in the Corporate Meeting Card, which
helps U.S.-based companies control company meeting expenses. The Corporate
Meeting Card provides clients with a tool to capture such spending and provides
company meeting planners with a tool to simplify the meetings payment process
and access to data to negotiate with suppliers. GCS also launched the Corporate
Defined Expense Program in 2003. This product allows companies to set a maximum
amount to be charged on a Card before expiration and permits them to segregate
spending data for specific purposes on projects. It is designed for companies
that want to allocate funds for a specific purpose, such as employee relocations
or training.
In 2003, GCS expanded sales of American Express @ Work'r', a secure,
web-based suite of online tools that enables Corporate Card, CPS and Corporate
travel customers to perform account review and servicing and access management
reports on a 24/7 basis through a single user interface. This suite helps
companies manage expenses and manipulate spend data more efficiently than
offline alternatives, while decreasing the costs associated with servicing.
These products enable companies to review, combine and manipulate Corporate
Card, Corporate Travel and Corporate Purchasing Solutions data. One of the
products also allows companies to reconcile the data with its internal
accounting system.
Competition in the commercial card (Corporate Card and CPS) business is
increasingly intense at both the card network and card issuer levels. At the
network level, Diners Club remains a significant global competitor. In addition,
both VISA and MasterCard have increased efforts to support card issuers such as
U.S. Bank, JPMorgan Chase, GE Capital Financial Inc. and Citibank (in the United
States and globally), who are willing to build and support data collection and
reporting necessary to satisfy customer requirements. In the past few years,
MasterCard has promoted enhanced web-based support for its corporate card
issuing members, and VISA International supported the creation of a joint
venture by a number of its member banks from around the world to compete against
GCS and Diners Club for the business of multinational companies. The key
competitive factors in the commercial card business are, in addition to the
factors cited on page 16, (i) the ability to capture and deliver detailed
transaction data and expense management reports; (ii) the number and types of
businesses that accept the cards; (iii) pricing; (iv) the range and
innovativeness of products and services to suit business needs; (v) quality of
customer services; and (vi) global presence.
GCS also provides a wide variety of travel services to customers traveling
for business and is one of the world's largest corporate travel management
companies. American Express Corporate Travel provides travel reservation advice
and booking transaction processing; travel expense management policy
consultation; supplier negotiation and consultation; management information
reporting, data analysis and benchmarking; and group and incentive travel
services. Corporate Travel services customers in 37 key markets worldwide, of
which 31 are proprietary operations and six are managed through joint ventures.
In 2003, GCS was awarded the corporate
20
travel business of companies including BearingPoint, British Telecom and the
French Government's Ministry of Defense.
In October 2003, the Company continued pursuing its growth strategy and
expanded its global reach by completing the acquisition of Rosenbluth
International, a corporate travel company that was the fifth-largest travel
management company in the United States. The Rosenbluth acquisition added nearly
400 servicing locations and, as of year-end, approximately 2,700 employees in
the United States, Canada, and the United Kingdom, as well as other strategic
markets in Europe, Asia and the Pacific Rim. The Company believes that the
Rosenbluth acquisition helps the Company expand an advantage over other
competitors and online travel agencies that do not offer similar worldwide
servicing capabilities. The Rosenbluth acquisition also has increased customer
volume in both the large and middle market segments and will enable the
continued development of a high quality product and services portfolio by
integrating the technology and customer solutions from both companies.
GCS continues to modify its economic model and invest in new technologies
to address ongoing travel industry challenges. For example, GCS has been
successful in its efforts to diminish its reliance on commission revenues from
suppliers, such as airlines or hotels, and now relies more on customers to pay
transaction or management fees for its travel services. In 2003, a smaller
portion of U.S. corporate travel revenues came from airlines, hotels, rental car
companies and other suppliers, and a majority came from customers. A few years
ago, that mix was the reverse. In addition, GCS has moved many of its business
processes and customer servicing for corporate travel online. Key initiatives
included the acceleration of the use of interactive travel processes in the
United States and other key markets, which streamlines processes, increases
productivity, enhances the quality of customer service and satisfaction and
improves overall GCS profitability. By the end of 2003, in the United States,
25% of all of GCS' corporate travel transactions were processed online, and
online penetration rates in the United Kingdom, Canada, Mexico and Australia
achieved levels within the 5% to 10% range.
The corporate travel division of GCS faces vigorous competition in the
United States and internationally from numerous traditional and online travel
management companies, as well as from direct sales by airlines and other travel
suppliers. Competition among travel management companies is mainly based on
price, service, convenience, global capabilities and proximity to the customer.
In addition, competition comes from corporate customers themselves, as some
companies have become accredited as in-house corporate travel agents.
In 2003, several U.S.-based online travel agencies strategically expanded
their offerings and marketing efforts beyond their traditional target customer
set, which had formerly been primarily the leisure traveler, with increasing
focus on small or middle market companies in the United States. Orbitz, Expedia
and Travelocity have all begun to pursue midsized and larger corporate travel
customers in North America. While the majority of the online agencies' efforts
to penetrate the managed corporate travel sector has to date occurred in the
United States, it is likely that these efforts will be expanded to Canada, the
United Kingdom and other mature European markets in 2004. Competition for these
larger corporate travel customers will intensify as a result of these efforts.
21
Airlines have continued their efforts to reduce distribution expenses.
Following the industry-wide action in March 2002 when U.S. airlines and some
international carriers announced they would no longer pay "base" commissions to
travel agents for tickets sold in the United States and Canada on all domestic
and international travel, airlines in other markets followed suit. During late
2002 and throughout 2003, in the United Kingdom, Scandinavia, the Netherlands,
Australia, Mexico, Brazil, and some Asia Pacific countries, the leading market
airline has discontinued or drastically reduced base commission payments to
travel agencies. Similar actions are expected in France and Germany in 2004.
The impact in 2003 of global macro events, including the continued
worldwide economic uncertainty, the war in Iraq, fear of terrorism and other
geopolitical uncertainty and SARS, adversely impacted the travel industry and
caused some travel agencies to go out of business and encouraged others to seek
consolidation opportunities. For example, the North American Airlines Reporting
Corporation ("ARC") reported 13% fewer ARC-accredited agencies operating in
North America in 2003 versus the number of agencies in 2002.
This year also saw the continued rise in popularity, relevance and
profitability of the low-cost air carrier segment in the United States, Europe
and Asia, including the successful launch of several new low-cost carriers, some
of which are subsidiaries of financially troubled U.S. "mainline" carriers.
While this segment has focused in the past primarily on leisure travelers, 2003
saw a continued rise in the number and percentage of business travelers using
these low-cost airlines.
Until the last few years, GCS had received commissions and fees for
ticketing and reservations from airlines and other travel suppliers, and
management and transaction fees from corporate travel customers. The ongoing
trends of airline alliances, airline websites permitting travelers to book
business directly and ongoing rate reductions in airline commissions continue to
reduce revenue for travel companies and raise costs for travelers. In 2003, GCS
announced its TravelBahn'r' Distribution Solution in North America, a
proprietary distribution network alternative that provides access to best
airline inventory and fares for American Express Corporate Travel customers with
a number of carriers. The Company continues its negotiations with additional
airline carriers to finalize similar distribution agreements.
In response to the changing operating environment and the accelerated
fluidity in airline and hotel pricing caused by unsteady capacity and demand,
GCS has consulted with customers regarding the growing need to develop new, more
fluid purchasing models. These new models attempt to utilize negotiated annual
corporate fares for airline and hotel inventory often on short notice or on a
last-minute basis. Late in 2003, GCS launched the PreferredExtras'sm' Hotel
Program, designed to guarantee North American corporate travel customers the
lowest available hotel rates at 1,400 locations globally among a select
portfolio of preferred hotel partners.
GCS, through its Consumer Travel International and Foreign Exchange
Services Group ("CTI & FES"), provides leisure travel services outside the
United States and retail and wholesale currency exchange and Cardmember services
worldwide through a global retail network of American Express-owned and
franchised offices. The division experienced material
22
volume decreases due to the war in Iraq, the impact of the SARS virus on global
travel volumes and the fear of terrorism, all of which were particularly
detrimental to leisure travel spending.
CTI & FES expanded its retail presence in the airports with new signings at
New Delhi, Newark and Munich airports, and with contract expansions or
extensions at Rio de Janeiro, Mexico City and Sao Paolo airports. CTI & FES also
provides electronic funds transfer services, primarily in the United States,
Canada, the United Kingdom and Australia. These services offer small and midsize
businesses an Internet-based solution to transfer, record and track payments to
international suppliers and banks. CTI & FES also offers wholesale currency
services to financial institutions and key corporate clients from its
distribution and processing centers in the United Kingdom and Australia.
In retail consumer travel, the group significantly expanded its number of
retail locations in Australia and China through large partner franchise
agreements in those markets. Membership Travel Services ("MTS") provides Card,
travel and lifestyle servicing to the Company's premium Cardmembers, including
Gold, Platinum and Centurion Cardmembers outside the United States, with the
majority of operations in the United Kingdom, France, Italy, Germany, Spain,
Belgium, Japan, Australia, Hong Kong, Singapore and Mexico. In 2003, MTS focused
on rationalizing its customer servicing platforms and standardizing its service
delivery, as well as investing in exclusive Cardmember benefits for travel,
entertainment, recreation and dining offers through a network of preferred
suppliers.
Global Travelers Cheques and Prepaid Services
The Company, through its Global Travelers Cheques and Prepaid Services
Group ("TCPS"), is a leading issuer of travelers checks. In 2001, the Company
made the decision to stop offering Money Order and Official Check products and
will be fully exited from this business by August 2004. The Company will,
however, continue to honor all previously issued and sold Money Orders and
Official Checks. TCPS also offers the TravelFunds Direct'r' service, which
provides direct delivery of foreign bank notes and Travelers Cheques in selected
markets.
The American Express Travelers Cheque ("Travelers Cheque" or "Cheque") is
sold as a safe and convenient alternative to currency. The Travelers Cheque is a
negotiable instrument, has no expiration date and is payable by the issuer in
the currency of issuance when presented for the purchase of goods and services
or for redemption. During 2003, TCPS launched a new Travelers Cheque product in
Russia and Argentina, the American Express Cheque - Secure Funds. This product
offers the same functionality and security as a Travelers Cheque and addresses
consumers' desire to keep extra funds available at home. Gift Cheques, another
type of travelers check, are used for gift-giving purposes.
Travelers Cheques are issued in eight currencies, including a
Euro-denominated Travelers Cheque, both directly by the Company and through a
joint venture company in which the Company holds an equity interest. American
Express Cheque - Secure Funds is issued in two currencies, U.S. dollars and
Euros. Gift Cheques are issued in U.S. dollars and Canadian dollars.
23
American Express Travelers Cheques are sold through a broad network of
selling outlets worldwide, including travel offices of the Company, its
affiliates and representatives; travel agents; commercial banks; savings banks;
savings and loan associations; credit unions; and other financial, travel and
commercial businesses. The Company sometimes compensates selling outlets for
their sale of Travelers Cheques.
Arrangements with sellers continue to be critical to TCPS' expansion of its
sales distribution network. In 2003, TCPS gained a number of new distributors,
including AARP in the United States, TUI in Germany, Aeromexico in Mexico and
the Thomas Cook UK Limited website. In addition, the Company's sale of Travelers
Cheques and Gift Cheques over the Internet continued to grow.
TCPS has also grown its prepaid card business. In 2003, TCPS introduced the
TravelFunds'sm' Card ("TFC"), a prepaid, reloadable travel money card. The TFC
is available in U.S. Dollars, British Pounds Sterling and Euros, and can be used
worldwide at all merchants and ATMs that accept the American Express Card. The
TFC offers the same customer service and security of the Travelers Cheque,
including passport and credit card replacement assistance. The group also
continued to expand the distribution channels for prepaid products with the
addition of retail, airline, car rental, hotel and travel agency sellers, as
well as postal services in Australia, Canada and the United States. In 2003,
TCPS also continued to offer two prepaid gift products, the American Express
Gift Card, which can be used at retail as well as restaurant establishments that
accept American Express Cards, and the Be My Guest'r' Card, specifically
designed for restaurant dining. TCPS is continually evaluating additional
prepaid products to offer a variety of consumer segments.
During the year, overall Travelers Cheque sales (including TFC sales)
decreased 13.7% globally, and consumer Gift Product sales (including sales of
paper Gift Cheques and Gift Cards) increased 28%. Gift Cheque growth, which is
off a much lower base than Travelers Cheques, is primarily the result of new
advertising and marketing programs. The lag in Travelers Cheque sales was
primarily driven by the continuing global economic slowdown, the loss of the AAA
account and by increasing competition from other forms of payment (including the
convenient access to cash through ATMs).
The proceeds from sales of Travelers Cheques and prepaid cards issued by
TRS are invested predominantly in highly rated debt securities consisting
primarily of intermediate- and long-term state and municipal obligations.
Issuers of travelers checks are regulated in the United States under most
states' "money transmitter" laws. Some states also regulate issuers of prepaid
cards in the same manner. These laws require travelers check (and, where
applicable, prepaid card) issuers to obtain licenses, to meet certain safety and
soundness criteria, to hold outstanding proceeds of sale in highly rated and
secure investments, and to provide detailed reports. Many states audit licensees
annually. In addition, travelers check issuers are required to comply with state
unclaimed and abandoned property laws. The U.S. state laws require issuers to
pay to states the face amount of any travelers check that is uncashed or
unredeemed after 15 years. A few states have amended their abandoned property
laws to apply to prepaid cards. On December 31, 2001, new federal anti-
24
money laundering regulations became effective. These regulations required, among
other things, the registration of traveler check issuers as "Money Service
Businesses" and compliance with anti-money laundering recording and reporting
requirements by issuers and selling outlets. At this time, stored value issuers
and redeemers, while considered to be "Money Service Businesses", are not
required to register. Outside the United States, there are varying anti-money
laundering requirements, including some that are similar to those in the United
States.
Travelers Cheques compete with a wide variety of financial payment
products. Consumers may choose to use their credit or charge cards when they
travel instead of carrying Travelers Cheques, although a Travelers Cheque would
not typically be an acceptable substitute for most transactions made with credit
or charge cards. Other payment mechanisms that might substitute for Travelers
Cheques include cash, checks, other brands of travelers checks, debit cards and
cards accepted at ATM networks. The principal competitive factors affecting the
travelers check industry are (i) the availability to the consumer of other forms
of payment; (ii) the amount of the fee charged to the consumer; (iii) the
availability and acceptability of travelers checks throughout the world; (iv)
the compensation paid to, and frequency of settlement by, selling outlets; (v)
the accessibility of travelers check sales and refunds; (vi) the success of
marketing and promotional campaigns; and (vii) the ability to service the check
purchaser satisfactorily if the checks are lost or stolen.
Other Products and Services
Interactive Enterprise Development ("IED") leverages interactive
technologies to develop new businesses and enhance existing businesses. IED
leads and coordinates the deployment of the Company's enterprise-wide
interactive strategy with a focus on providing Internet and interactive
capabilities to meet customer needs.
American Express Tax and Business Services Inc. ("TBS") is a tax,
accounting, consulting and business advisory firm that primarily provides
services to small and middle market companies. TBS delivers a wide range of
services, including tax planning and accounting, litigation support, business
reorganization, business management advisory, business technology, internal
audit outsourcing and other accounting, advisory and consulting services. TBS is
not licensed to practice public accounting, but employs certified public
accountants who deliver, along with professionals, the non-attest services
described above. TBS has a continuing professional services relationship with
several independent, licensed public accounting firms to which it leases
personnel. These public accounting firms offer attest services to their clients.
TBS has more than 50 offices in 17 states with approximately 2,700 employees.
TRS, through American Express Publishing, also publishes luxury lifestyle
magazines such as Travel+Leisure'r', T+L Family, a supplement to Travel+Leisure,
T+L Golf'r', Food & Wine'r' and Departures'r'; travel resources such as
SkyGuide'r'; business resources such as the American Express Appointment Book,
Fortune Small Business magazine and SkyGuide Executive Travel, a business
traveler supplement; a variety of general interest, cooking, travel, wine,
financial and time management books; branded membership services; a growing
roster of international magazine editions; as well as directly sold and licensed
products. American Express Publishing also has a custom publishing group and is
expanding its service-driven
25
websites such as: travelandleisure.com, foodandwine.com, departures.com,
tlgolf.com, tlfamily.com and skyguide.net.
AMERICAN EXPRESS FINANCIAL ADVISORS
The Company, through its American Express Financial Advisors operating
segment ("AEFA"), makes available a variety of financial products and services
to help individuals, businesses and institutions establish and achieve their
financial goals. Financial planning is at the core of AEFA's business, which
helps clients meet their long-term financial goals. The AEFA operating segment
principally includes American Express Financial Corporation ("AEFC") and its
subsidiaries and affiliates described below. AEFA's business consists of three
principal components: Retail Distribution, Asset Management and Insurance and
Annuities.
Retail Distribution
AEFA strives to help clients achieve their financial objectives prudently
and thoughtfully through a long term relationship based on trusted,
knowledgeable advice. AEFA's financial advisors work with retail clients to
develop strong relationships and long-term financial strategies. AEFA's
financial advisors also provide each client access to a broad array of
proprietary and non-proprietary product and service solutions to meet their
individual needs, including annuities; a variety of insurance products,
including life insurance, disability income insurance, long term care insurance,
and property and casualty insurance; a variety of investment products, including
investment certificates and mutual funds; investment services, including wrap
programs; a variety of tax-qualified products, including individual retirement
accounts, employer-sponsored retirement plans and Section 529 college savings
plans; personal trust services; and retail securities brokerage. AEFA also
offers online direct brokerage services.
Sales Force
At December 31, 2003, AEFA maintained a nationwide field sales force of
over 12,100 financial advisors, which represented a 4% increase over 2002
and served more than 2.5 million clients throughout the United States.
AEFA's organizational structure provides advisors several choices in how they
affiliate with the organization, each having separate levels of service and
compensation. The employee advisor platform provides compensation as a draw
against commission. The employee advisors receive a higher level of support in
exchange for a lower payout rate. In the branded independent franchisee advisor
platform, advisors earn a higher payout rate, but cover their own expenses,
including real estate and staff. AEFA also operates a non-American Express
branded independent platform, Securities America, Inc., a broker-dealer owned by
AEFC. Securities America distributes mutual funds, annuities and insurance
products, as well as individual securities and wrap products.
Approximately 25% of AEFA's financial advisors are American Express
employees; approximately 62% are American Express-branded franchisees; and
approximately 13% are in the unbranded platform. As discussed below, AEFA
receives a variety of fees and expenses in connection with the products sold by
its financial advisors. In turn, AEFA pays a significant portion of the revenue
received in the form of sales charges and 12b-1 distribution fees to
26
advisors for their role in serving clients. The rate of commission paid to each
advisor is determined by a schedule that takes into account the type of product
sold, the manner in which the advisor is affiliated with AEFA (as discussed
above) and other criteria.
During 2003, AEFA continued to focus on improved recruiting and selection
of employee advisors to drive higher retention of first year advisors. AEFA
further improved the service and tools provided to franchisee advisors. AEFA
also continued efforts to increase the size of its dedicated field force to
further enhance its ability to attract and serve new clients and to compete
effectively with the large sales forces of certain competitors. In attracting
and retaining members of the field force, AEFA competes with financial planning
firms, insurance companies, securities broker-dealers and other financial
institutions.
Financial Planning
AEFA's financial planning services are intended to help clients meet
important financial goals, such as providing an education to their children,
purchasing a home and providing for their retirement years. The financial
planning process generally begins with a written analysis and plan based on the
client's personal information, goals and needs. Advisors typically recommend a
range of proprietary and non-proprietary financial products and services based
on such plan and work with the client to obtain such products and services for
the client's account.
For its financial planning services, AEFA generally receives fees based
upon the services that the client selects and the complexity of the client's
financial situation. Clients may be charged a flat fee, an hourly rate or a
combination of the two. The fee is not based on or related to the performance of
a client's funds or assets. Depending on what is most appropriate for their
situation, clients may select a limited engagement period or may elect to
receive ongoing financial planning services from their American Express
financial advisor. The fees paid in connection with financial planning services
are separate from and in addition to fees paid for any financial products and
services purchased from or through AEFA or its affiliates.
AEFA achieved record financial planning sales and fee revenue in 2003. Plan
sales increased by 13% and fees from financial plans and other fee-based advice
increased by 6% over 2002. During 2003, nearly 51% of new retail clients had a
financial plan developed for them by an AEFA advisor, up 4% from 2002. As has
been the case historically, clients with plans tend to buy more products. On
average, they own almost three times as many accounts as non-planning clients
and have more than twice as much cash invested with AEFA. In 2003, product sales
generated through financial planning services were 75% of total advisor sales,
an increase of 2% over 2002. Also in 2003, AEFA reached a significant milestone,
exceeding one million current clients with a financial plan.
AEFA continues to invest in the development of tools and training for its
advisors to further strengthen its ability to offer sound advice and ongoing
financial planning services. In December 2002, AEFA contracted with Morningstar
Associates, LLC to provide investment advice tools that serve both retail and
workplace markets. As a complement to AEFA's own proprietary suite of financial
planning tools, the Morningstar'r' tools are intended to enable advisors to meet
the ongoing financial and investment planning needs of more affluent clients.
AEFA launched the research and illustration features of these tools in November
2003.
27
Brokerage Services
AEFA has taken steps to integrate its direct retail distribution channel
with the advisor channel. AEFA's online brokerage business, American Express
Brokerage, allows clients to purchase and sell securities online, obtain
research and information about a wide variety of securities, use self-directed
asset allocation and financial planning tools, contact an advisor, as well as
have access to more than 3,000 proprietary and non-proprietary mutual funds,
among other services.
AEFA's American Express One'r' Financial Account is an integrated financial
management account that combines clients' investment, banking and lending
relationships into a single account. The American Express One Financial Account
enables clients to access a single cash account to fund a variety of financial
transactions, including investments in mutual funds and other securities.
Additional features of the American Express One Financial Account include
unlimited check writing with overdraft protection, an American Express Gold
Card, online bill payments, ATM access and a high-yield savings account.
In 2003, AEFA launched an incentive program that pays Membership Rewards'r'
program Bonus Points and American Express Gift Cheques to persons opening and
funding an American Express One Financial Account and who then take additional
steps to transfer funds into the account on an ongoing basis through direct
deposit or bank authorization.
AEFA also launched its Financial Accounts data aggregation service, which
is an online capability that enables clients to view and manage their entire
American Express relationship (i.e., brokerage, Card, 401(k), banking, financial
advisor) in one place via the Internet. The Financial Accounts Service also
allows clients to add third party account information, providing a consolidated
view of their financial services account relationships.
In recent years, AEFA has increased its sale of non-proprietary products,
particularly mutual funds, to meet the demands of clients for a broader choice
of investment products. During the past year, AEFA created the Select Group
Program for mutual funds. As of year end 2003, this program consisted of twelve
fund families, including American Express Funds, offering more than 700 mutual
funds. Fund families are selected to participate in the Select Group Program
based on several criteria including brand recognition, product breadth,
investment performance and training and wholesaling support. In exchange for
certain benefits, such as broader access to American Express financial advisors,
fund families in the Select Group Program are required to pay AEFA for
participation in the program by sharing with AEFA a portion of the revenue
generated from the sales and ongoing management of fund shares. AEFA may also
receive payment from other non-proprietary fund families whose products are
available through American Express financial advisors and online brokerage. AEFA
also receives administrative services fees from most funds sold through its
distribution network. Sales of non-proprietary products on a stand-alone basis
generally are less profitable than proprietary sales.
In addition to purchases of non-proprietary products on a stand-alone
basis, clients may purchase mutual funds in connection with fee-based programs
or services and pay a fee based on a percentage of assets. One such program
28
sponsored by AEFA is American Express'r' Strategic Portfolio Service Advantage,
a non-discretionary wrap program for investments in proprietary and
non-proprietary mutual funds and individual securities built around
asset-allocation strategies. A substantial portion of AEFA's non-proprietary
mutual fund sales are made in these programs, and they tend to be more
profitable than the sale of non-proprietary mutual funds alone.
During 2003, AEFA launched American Express'r' Premier Portfolio Services
("Premier"), a service that allows customers to receive consolidated reporting
and information on one or more fee-based accounts. The fee-based accounts
available in Premier include non-discretionary brokerage accounts, for which
clients pay a flat asset-based fee in lieu of individual commissions on
transactions executed in mutual funds and individual securities. Also available
in Premier is the Separately Managed Account Program, a wrap fee program in
which clients select one or more professional investment managers to provide
discretionary asset management services. Clients in American Express'r' Wealth
Management Service ("WMS"), another professionally managed discretionary wrap
service sponsored by AEFA that is being discontinued, have been given the option
to transition to the Separately Managed Account Program within Premier.
AEFA financial advisors also sell real estate investment trusts sponsored
by other companies. AEFA also services, but does not sell, managed futures
limited partnerships in which an AEFC subsidiary is a co-general partner, which
subjects AEFA and its affiliated co-general partner to regulation by the CFTC.
Additional Capabilities
In 2003, AEFA continued to expand its securities brokerage services.
American Enterprise Investment Services Inc. ("AEIS"), a wholly owned subsidiary
of AEFC, provides securities execution and clearance services for retail and
institutional clients of AEFA. As of December 31, 2003, AEIS held over $60
billion in assets for clients, an increase of $18 billion from December 31,
2002. AEIS is registered as a broker-dealer with the SEC, is a member of the
National Association of Securities Dealers, Inc. ("NASD") and the Chicago Stock
Exchange and is registered with appropriate states.
American Express Financial Advisors Inc. ("AEFAI"), AEFC's principal
marketing subsidiary, does business as a broker-dealer and investment adviser in
all 50 states and the District of Columbia. AEFAI is registered as a
broker-dealer and investment advisor regulated by the SEC and is a member of the
NASD. AEFA's financial advisors must obtain all required state and NASD licenses
and registrations.
AEFA also acts as custodian and broker for Individual Retirement Accounts,
Tax-Sheltered Custodial Accounts and other retirement plans for individuals and
small and mid-sized businesses. As of December 31, 2003, these tax-qualified
assets equaled $77.5 billion, which is in excess of 21% of total institutional
and retail assets owned, managed and administered by AEFA.
29
AEFA is the primary distribution channel for The Personal Trust Services
Division ("PTS") of American Express Bank, FSB ("AEBFSB"), which provides
personal trust, custodial, agency and investment management services to
individual clients. AEBFSB is a federal savings bank regulated and supervised by
the Office of Thrift Supervision (the "OTS") and registered with the SEC as an
investment adviser. As disclosed above (in "Travel Related Services") in
December, 2003, AEBFSB and certain of its affiliates received OTS approval to
amend its business plan to permit it to offer certain credit, charge and
consumer lending products, small business loans, mortgages and mortgage-related
products and to operate a transactional Internet site.
Business Development
Consistent with the Company's goal of leveraging business development
across all of its units, AEFA continues to increase its sales to customers from
other American Express businesses. AEFA's Financial Education and Planning
Services ("FEPS") group provides workplace financial education and advisory
services programs to the 401(k) client base of American Express Retirement
Services ("AERS") and American Express Trust Company and to other major
corporations and small businesses. Focused on the goal of creating advisor
relationships with individual employees of client companies, FEPS trains and
supports advisors working on-site at company locations presenting educational
seminars, conducting one-on-one meetings and participating in company
educational events. In 2003, AEFA expanded its on-site activities with 401(k)
clients and had significant increases in sales of financial education
relationships to companies that do not have a 401(k) relationship with AERS.
During 2003, AEFA also provided financial advice service offerings tailored
to discrete employee segments, such as FEPS Executive Financial Services. The
growth and success of FEPS is consistent with industry research and AEFA's
belief that marketplace demand for employee financial education is expected to
remain high, particularly given the continuing trend toward increased employee
responsibility for selecting retirement investments. As this service need grows,
so too does the number of competitors seeking to provide employee education and
planning services.
In 2003, AEFA continued to leverage other American Express relationships
with major companies to create alliances that help generate new financial
services clients. AEFA continued its relationship with Costco Wholesale in 2003.
The Costco Wholesale/AEFA relationship offers advisors an opportunity to market
financial planning and advice services to millions of Costco Wholesale members,
through various marketing channels. In 2003, AEFA entered into a new marketing
alliance with Delta Air Lines. The Delta/AEFA marketing alliance provides AEFA
with the opportunity to market to the millions of consumers who have a
relationship with Delta through its Delta SkyMiles'r' program, including those
consumers who already carry the cobranded American Express/Delta SkyMiles credit
card. AEFA also has a marketing agreement with Sallie Mae, Inc., the educational
loan company. The agreement, which was executed in July 2003, allows Sallie Mae
customers to take advantage of special financial advice and product offerings
through AEFA Internet, e-mail, direct mail and newsletter promotions.
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The Internet also continues to be an important and cost effective tool for
acquiring new customers. Advisor leads are generated via the Internet at a
substantially reduced cost versus alternative channels. Additionally, the
Internet continues to represent an important vehicle for customer service across
all channels of distribution.
Competitive Environment
Competition in the financial services industry focuses primarily on cost,
investment performance, yield, convenience, service, reliability, safety,
innovation, distribution systems, reputation and brand recognition. Also,
reputation and brand integrity are becoming increasingly more important as the
mutual fund industry generally and certain firms in particular have come under
regulatory and media scrutiny. See " - Regulation of Retail Distribution and
Asset Management" below. Competition in this industry is very intense. AEFA
competes with a variety of financial institutions such as banks, securities
brokers, mutual funds and insurance companies. Some of these institutions are
larger, have greater resources and are more global than AEFA. Many of these
financial institutions also have products and services that increasingly cross
over the traditional lines that previously differentiated one type of
institution from another, thereby heightening competition for AEFA. The ability
of certain financial institutions to offer online investment and information
services has also affected the competitive landscape over the past few years.
AEFA believes that its focus on financial planning and advice, coupled with
an ability to provide broad-based products and services on a relationship basis,
is a competitive advantage. Management believes this business model is more
relevant today than in the past as a result of the significant market volatility
experienced during the past few years.
Unlike many of AEFA's competitors, whose field forces typically comprise
brokers who focus on completing transactions, many of AEFA's advisors are
Certified Financial Planner'r'* practitioners who work closely with clients to
develop long-term financial plans. AEFA believes that this has contributed to an
annual client retention rate that exceeds 94%. Many major brokerage firms are
attempting to move away from their historical transaction orientation and toward
financial planning and advice, AEFA's historical focus and longstanding
strength.
AEFA's business does not, as a whole, experience significant seasonal
fluctuations.
Asset Management
AEFA's asset management business offers a range of products and services,
including investment management services for fixed income, equity and
international investment strategies. AEFA affiliates provide asset management
and related services to two major groups of retail investment products, the AXP
Funds, American Express's family of proprietary mutual funds, and American
Express Certificate Company, an issuer of face amount investment certificates.
Additionally, AEFA provides asset management products and services to its
insurance companies' general and separate accounts. The separate accounts are
organized as unit investment trusts, which in turn invest in various proprietary
and non-proprietary registered
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* Registered trademark of Certified Financial P