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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, 2004
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:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS 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, 2004, of voting shares held by
non-affiliates of the registrant was approximately $64.0 billion. Common shares
of the registrant outstanding at February 28, 2005 were 1,248,000,259.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and IV: Portions of Registrant's 2004 Annual Report to Shareholders.
Part III: Portions of Registrant's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the Annual Meeting of
Shareholders to be held on April 27, 2005.
TABLE OF CONTENTS
FORM 10-K
ITEM NUMBER
PART I PAGE
1. Business.................................................................................. 1
Introduction.......................................................................... 1
Travel Related Services............................................................... 3
American Express Financial Advisors................................................... 33
American Express Bank................................................................. 61
Corporate and Other................................................................... 73
Foreign Operations.................................................................... 76
Important Factors Regarding Forward-Looking Statements................................ 76
Segment Information and Classes of Similar Services................................... 82
Executive Officers of the Company..................................................... 82
Employees............................................................................. 84
2. Properties................................................................................ 84
3. Legal Proceedings......................................................................... 85
4. Submission of Matters to a Vote of Security Holders....................................... 91
PART II
5. Market for Company's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities........................................................ 91
6. Selected Financial Data................................................................... 93
7. Management's Discussion and Analysis of Financial Condition and Results of Operation...... 93
7A. Quantitative and Qualitative Disclosures About Market Risk................................ 93
8. Financial Statements and Supplementary Data............................................... 93
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 93
9A. Controls and Procedures................................................................... 93
9B. Other Information......................................................................... 94
PART III
10. Directors and Executive Officers of the Company........................................... 94
11. Executive Compensation.................................................................... 94
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters................................................................... 94
13. Certain Relationships and Related Transactions............................................ 94
14. Principal Accounting Fees and Services.................................................... 95
PART IV
15. Exhibits and Financial Statement Schedules............................................... 95
Signatures................................................................................ 96
Index to Financial Statements............................................................. F-1
Consent of Independent Auditors........................................................... F-2
Exhibit Index............................................................................. E-1
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PART I*
ITEM 1. BUSINESS
INTRODUCTION
Overview
American Express Company, together with its consolidated subsidiaries
("American Express", the "Company", "we", "us" or "our"), is a leading provider
of travel related services, payment services, financial advisory services and
international banking services throughout the world. We were founded in 1850 as
a joint stock association. We were incorporated in 1965 as a New York
corporation.
Our headquarters are located in New York, New York in lower Manhattan. We
also have offices in other locations in North America, as well as throughout the
world. We have three operating segments: Travel Related Services ("TRS"),
American Express Financial Advisors ("AEFA") and American Express Bank ("AEB"),
each of whose businesses we will describe below.
Securities Exchange Act Reports And Additional Information
We maintain an Investor Relations Web site on the Internet at
http://ir.americanexpress.com. We make available free of charge, on or through
this Web site, our annual, quarterly and current reports and any amendments to
those reports as soon as reasonably practicable following the time they are
electronically filed with or furnished to the Securities and Exchange
Commission. To access these, just click on the "SEC Filings" link found on our
Investor Relations homepage.
You can also access our Investor Relations Web site through our main Web
site at www.americanexpress.com by clicking on the "About American Express"
link, which is located at the bottom of our homepage. Information contained on
our Web site is not incorporated by reference into this report or any other
report filed with the SEC.
2004 Highlights
We achieved record revenues and earnings in 2004, driven by growth in our
credit and charge card businesses, gains in our financial services business and
a rebound in travel activity. We began the year with good momentum built during
the latter half of 2003, and as the year progressed, our performance
strengthened.
* Some of the statements in this report constitute forward-looking statements.
In some cases, you can identify forward-looking statements by words such as
"believe," "expect," "anticipate," "optimistic," "intend," "plan," "aim,"
"will," "may," "should," "could," "would," "likely", "estimate," "predict,"
"potential," or "continue" or the negative of these terms or other similar
expressions. We discuss certain factors that may cause our actual results to
differ materially from these forward-looking statements under "Important
Factors Regarding Forward Looking Statements" below.
1
We were able to achieve record revenues and net income while at the same
time continuing to invest in our future by significantly increasing our spending
on business-building activities, which resulted in growth in spending on our
card products and cards-in-force, higher sales and asset levels at AEFA and
higher private banking holdings at AEB.
Compared with 2003, we delivered:
- Revenues of $29.1 billion, up 13% from $25.8 billion
- Net income of $3.4 billion, up 15% from $3.0 billion
- Diluted earnings per share of $2.68, up 17% from $2.30
- Return on equity of 22.0%, compared with 20.6%
These results exceeded our 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.
For a complete discussion of our financial results, including financial
information regarding each of our three operating segments, see pages 26-123
of the Company's 2004 Annual Report to Shareholders, which are incorporated
herein by reference. For a summary of the Company and our operating segments,
and a discussion of our principal sources of revenue, see pages 26-29 and
pages 82-84 of the 2004 Annual Report to Shareholders.
Spin-off of AEFA
On February 1, 2005, we announced our intention to pursue a spin-off of
our AEFA operating unit to our shareholders. In the transaction, American
Express shareholders would receive 100% of the common shares of American Express
Financial Corporation ("AEFC"), the wholly-owned subsidiary that directly and
through its subsidiaries and affiliates conducts our AEFA business. The
transaction is intended to be tax free to shareholders and is expected to be
completed in the third quarter of 2005, subject to certain conditions.
Upon completion of the spin-off, our shareholders would have a separate
interest in two distinct corporate groups - the American Express group and the
AEFC group. The American Express group would consist primarily of the network,
charge and credit card, Travelers Cheque and prepaid services and travel
businesses of the TRS operating segment. It would also include the consumer
financial services, private banking and financial institutions businesses of the
AEB operating segment. The AEFC group would be comprised primarily of the asset
accumulation and investments and insurance businesses, whose products are
offered principally through AEFA's network of over 12,300 financial advisors.
The two groups would be independent, have separate public ownership, boards of
directors and management. To facilitate AEFC's separation from American Express,
the companies presently intend to continue certain existing arrangements for a
transitional period following completion of the transaction.
At the time of the spin-off, we intend to provide additional capital to
AEFC that will enable it to achieve a senior debt rating that permits it
efficient access to the capital markets. Additionally, American Express intends
to capitalize the AEFC group's insurance business in a manner that would confirm
its current financial strength ratings.
2
Following the spin-off, we plan to raise our return on equity target from
18-20 percent to 28-30 percent, on average and over time, and maintain our
current dividend.
We anticipate that we will incur spin-off related expenses associated with
establishing an independent company. Cumulatively, these expenses could be
significant. We expect to disclose these transitional operating expenses in our
future filings with the SEC, as well as in the announcements of our quarterly
results.
The spin-off is subject to conditions, including the necessary regulatory
approvals, the receipt of a favorable tax ruling from the Internal Revenue
Service and/or a favorable tax opinion from outside counsel and final approval
by our Board of Directors. We have not yet determined the final terms of the
transaction and plan to disclose these in our future filings with the SEC.
This report describes American Express as presently structured and
operated. Where appropriate, we make reference to the proposed spin-off
transaction.
TRAVEL RELATED SERVICES
The TRS operating segment includes our card, merchant, network, Travelers
Cheque and travel businesses. It provides a variety of products and services
worldwide, including, among others:
- - global card network services;
- - charge card and credit cards for consumers and businesses worldwide;
- - consumer and small business lending products;
- - American Express(R) Travelers Cheques and prepaid card products;
- - business expense management products and services;
- - business travel and travel management services;
- - consumer travel services;
- - merchant acquiring and transaction processing;
- - point-of-sale and back-office products and services for merchants;
- - tax, accounting and business consulting services; and
- - magazine publishing.
In certain countries we have granted licenses to partially-owned affiliates and
unaffiliated entities to offer some of these products and services.
Our general purpose card network and card issuing businesses are global in
scope. We are a world leader in providing charge and credit cards to consumers,
small businesses and corporations. American Express(R)-branded Cards ("Cards")
are currently issued in over 45 currencies. This includes Cards issued by
third-party banks and other institutions. In 2004, TRS' worldwide billed
business (spending on American Express cards, including our branded cards issued
by third parties) was $416 billion, with approximately $111 billion coming from
Cardmembers domiciled outside the United States. Our Cards permit Cardmembers to
charge purchases of goods and services in most countries around the world at the
millions of merchants that accept cards bearing our logo. TRS added a net total
of 4.9 million cards in 2004, bringing
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total worldwide cards-in-force to 65.4 million (including our branded Cards
issued by third parties).
We believe that our "spend-centric" business model (in which we focus
primarily on generating revenues by driving spending on our Cards and
secondarily by finance charges and fees) 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. We have strength in all three revenue streams, and
we have a competitive edge in spending. On average, U.S. Cardmembers spend about
four times as much on their American Express Cards as they do on other cards.
For merchants, our Cardmembers' higher spending represents greater value to them
in the form of higher sales and loyal customers, which gives us the ability to
earn a premium discount rate. As a result, we can generate higher revenues from
spending and have 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 our Card products. This business model
gives us a competitive advantage that we seek to leverage to provide more value
to Cardmembers, merchants and Card-issuing partners.
TRS' business as a whole has not experienced significant seasonal
fluctuations, 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 servicemarks and
diligently protects its intellectual property rights around the world.
GLOBAL NETWORK SERVICES
TRS operates a global general purpose charge and credit card network
through its Global Network Services ("GNS") business. 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, we have 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 we have implemented
successfully in a number of countries outside the United States, where we have
many banks and other financial institutions issuing Cards on the American
Express network. By leveraging our global infrastructure and the appeal of the
American Express brand, we aim to broaden our Cardmember and merchant base for
our network worldwide. Our GNS business has established 87 card-issuing or
merchant acquiring partnership arrangements with banks and other institutions in
over 95 countries.
A key asset of our merchant network is the American Express brand, which
is one of the world's most highly recognized and respected brands. Cards bearing
our logo are issued by TRS
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and by qualified licensed institutions, and are accepted at all merchant
locations worldwide that accept American Express-branded Cards. In addition,
depending on the product, Cards bearing our logo may also be accepted at all ATM
locations worldwide that accept American Express-branded cards. TRS issues the
vast majority of Cards on our network.
GNS focuses on partnering with qualified third-party financial
institutions to issue American Express-branded Cards accepted on our global
merchant network. While TRS' network arrangements are customized to the
particular market and partner requirements, as well as to our strategic plans in
that marketplace, all GNS partnerships are designed to help our partners develop
products for their highest-spending and most affluent customers and to support
the value of American Express Card acceptance to merchants. We choose 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 we require our GNS partners to adhere to our product, brand
and service standards.
Our GNS arrangements fall into three main categories. The first and most
common type of GNS partnership arrangement is known as a network card license
("NCL") (which we formerly referred to as a non-proprietary license). At the end
of 2004, we had 45 of these arrangements in place. In an NCL arrangement, we
grant the partner a license to issue American Express-branded cards. We
generally pursue these arrangements in markets where we already have a strong,
well-established local business. In an NCL arrangement, American Express
maintains the responsibility to acquire and service the merchants in the local
market that accept Cards. Our NCL partner owns the customer relationships for
all Cards it issues, provides service, billing and credit management, and
designs the Card product features, subject to meeting certain standards. We
operate the merchant network and route and process Card transactions from the
merchant's point of sale through submission to the issuing partner, and settle
with issuing partners. The NCL is the model that we are discussing with banks in
the United States. Examples of NCL arrangements include our partnerships with
MBNA America Bank, N.A. ("MBNA") and Banco Popular in Puerto Rico.
GNS' revenues in NCL arrangements are derived from the level of Cardmember
spending, royalties and fees charged to the Card issuer based on charge volume,
and our provision of value-added services for the issuer's cards such as
Cardmember insurance products and other Card features and benefits. As indicated
above, the NCL 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. We bear the risk arising from the GNS partner's
potential failure to meet its settlement obligations to us. We mitigate this
risk by selecting GNS partners whom we believe are financially sound and will
meet their obligations, and by monitoring our GNS partners' financial health,
their compliance with the terms of their relationship with us and the political
and economic environment in which they operate. In addition, we generally
require GNS partners to post a letter of credit, bank guarantee or other
collateral to reduce this risk.
The second type of GNS partnership is known as an independent operator
("IO") arrangement. As of the end of 2004, we had over 30 of these arrangements
around the world. Under this type of arrangement, our bank partner issues local
currency Cards in the particular market(s) in which it is located and also
serves as the local merchant acquirer and processor.
5
Our local IO partner owns the customer relationships and credit risk for the
issued Cards, and makes the decisions about which customers will be issued
Cards. GNS' sources of revenues in IO arrangements include fees paid by the IO
partner that are largely driven by the number of Cards issued by our IO
partners, by the subsequent spending on those Cards and by total charge volume
on all Cards at merchants with whom the GNS partner has an agreement to accept
our branded Cards. Our IO partner is responsible for transaction authorizations,
billing, pricing, Cardmember servicing and funding Card receivables. In
addition, all issuers on the American Express network benefit from the expanded
merchant coverage driven by our IO partner, which accommodates inbound spending
by Cardmembers from other parts of the world. That, in turn, generates
additional revenue for the issuer in the Cardmember's home market.
We typically establish IO arrangements in markets where we have not built
a significant local currency Card business of our own. The IO partner's local
presence and relationships help the American Express network reach merchant
coverage goals more quickly, and operate at economic scales and cost levels that
would be difficult for us to achieve on our own. Examples of countries where we
have entered into IO arrangements include Denmark, Ecuador, Pakistan, Croatia,
Peru and Vietnam.
The third type of GNS partnership is a joint venture. We have utilized
this type of arrangement in Switzerland, Belgium and several other countries. In
these markets, TRS joins with a third party to establish a separate business in
which TRS has a significant ownership stake. The joint venture typically signs
new merchants to the American Express network and issues local currency Cards
locally that carry our logo. In a joint venture arrangement, the joint venture
assumes the Cardmember credit risk, and bears the operating and marketing costs.
The economics of the joint venture are similar to our proprietary card issuing
business, which we discuss below under "Consumer Card, Small Business and
Consumer Travel Services," and we receive a portion of the joint venture's
income depending on the level of our ownership interest.
Gross revenues we receive per dollar spent on a Card issued by a GNS
partner are lower than those from our proprietary card issuing business.
However, because the GNS partner is responsible for most of the operating costs
and risk of its card issuing business, our expenses are lower than those in our
proprietary card issuing business. The GNS business model generates an
attractive earnings stream and risk profile that requires a lower level of
capital support. The return on equity in our GNS business can thus be
significantly higher than that of our proprietary card issuing business. Because
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 with innovative marketing programs.
In 2004, we signed new GNS relationships with 14 financial institutions.
GNS partners launched a total of 67 new products during 2004, bringing the total
number of American Express-branded GNS partner products to over 400. During the
year, we also implemented two 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.
6
Some of the highlights of our GNS business outside the United States in
2004 include:
- an agreement with the Industrial & Commercial Bank of China, the
largest bank in China (with 20,000 branch locations), to issue the
first American Express-branded credit cards in China, denominated in
both local Chinese currency and U.S. dollars, including the first
issuance of those Cards in December 2004;
- an agreement with CorpBanca in Chile to issue American
Express-branded Gold charge and credit cards denominated in Chilean
pesos and U.S. dollars;
- a partnership with Westpac Banking in Australia to issue the
cobranded Altitude American Express Credit Card, a companion card to
qualified Westpac Altitude cardmembers;
- the launch of two SN Brussels Airlines American Express Charge Cards
from SN Brussels Airlines and our joint venture partner, Fortis
Bank, which combines the features of the American Express Card with
the benefits of SN Brussels Airlines frequent flyer program.
In addition, we entered into an agreement with HSBC Bank International Limited
to market HSBC-branded American Express International Currency Gold and Platinum
charge cards in both Euros and U.S. dollars to HSBC's offshore banking
customers.
In contrast to the situation outside the United States, where banks and
other qualified institutions have issued Cards on our network for many years,
until 2004 no major U.S. banks had issued Cards in the United States on the
American Express global merchant network. This situation was the result of rules
and policies of Visa U.S.A. and Visa International Service Association
(together, "VISA") and MasterCard, Incorporated and MasterCard International,
Inc. (together, "MasterCard") in the United States, which mandated expulsion of
members who issued American Express-branded cards. No bank was willing to risk
forfeiting membership in VISA and/or MasterCard to issue cards on our network.
In a lawsuit filed in October 1998 against VISA and MasterCard, the U.S.
Department of Justice alleged that these rules and policies violated the
antitrust laws of the United States. The lawsuit went to trial in the summer of
2000, and in October 2001, the trial judge ruled in favor of the U.S. Department
of Justice, holding that these rules and policies violate the antitrust laws.
VISA and MasterCard appealed the decision and were able to obtain a stay of the
court's judgment throughout the appeals process.
After the U.S. Court of Appeals for the Second Circuit affirmed the trial
court's decision, we renewed our discussions with banks about establishing NCL
partnership arrangements in the United States. In January 2004, we announced an
agreement with MBNA under which MBNA would issue American Express-branded Cards
in the United States once the legal process was concluded and the restrictive
rules were finally struck down.
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In October 2004, the Supreme Court declined to hear VISA's and
MasterCard's appeal. This decision marked the end of the VISA and MasterCard
rules that prevented their member banks from issuing cards on competitive
networks and cleared the way for implementation of the trial court's order
requiring the repeal of the illegal rules. We view this decision as a major
victory for U.S. consumers as well as U.S. banks because it opens the door to
more vigorous network competition and more innovative card products and
services.
For American Express, the Supreme Court's decision means that we are now
able to open our network to other card issuers in the United States, just as we
have done internationally. Building a network business in the United States that
operates in addition to our proprietary card business provides us with new and
substantial opportunities for growth.
In early November 2004, MBNA launched its first American Express-branded
credit cards through more than 1,000 affinity groups affiliated with MBNA,
including alumni associations, professional groups and recreational and
philanthropic organizations. In December 2004, we announced an agreement with
Citibank (South Dakota) to issue cards that will be accepted on our global
merchant network. We expect that Citibank will begin to issue American
Express-branded cards in the fourth quarter of 2005.
In November 2004, we filed a lawsuit against VISA, MasterCard and certain
of their member banks seeking monetary damages resulting from the illegal rules
that were struck down in the U.S. Department of Justice lawsuit discussed above.
(You can read more about this lawsuit in the "Legal Proceedings" section of this
report below.)
With more than 400 different card products launched so far by our bank
partners, GNS is an increasingly important business that is strengthening our
market presence, driving more transaction volume onto our merchant network and
increasing the number of merchants accepting the American Express Card. Since
the creation of the GNS business unit, GNS partners have added over 8.6 million
new Cards to our network (net of attrition). Since 1999, Cards-in-force issued
by GNS partners have grown at a compound annual growth rate of 25%. Outside the
United States, one of every two cards acquired in 2004 was a card issued by one
of our GNS partners, and GNS partners brought nearly one of every three
merchants into our network. Spending on these Cards has grown at a compound
annual rate of 18% since 1999 and totaled more than $17.7 billion in 2004.
Local government 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 general purpose cards. Accordingly, our GNS partners have generally not
had difficulty in obtaining appropriate government authorization in the markets
in which TRS has chosen to enter into GNS partnership arrangements.
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Competition
Our network competes with other card networks, including, among others,
VISA, MasterCard, Diners Club (which, in the United States, is being folded into
the network operated by MasterCard), 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
include:
- the number of cards in force and amount of spending on these cards;
- the quantity and quality of the places where the cards can be used;
- the economic attractiveness to card issuers and merchant acquirers
of participating in the network;
- the success of marketing and promotional campaigns;
- reputation and brand recognition;
- innovation in systems, technology and product offerings; and
- the quality of customer service.
GLOBAL ESTABLISHMENT SERVICES
TRS operates a global merchant services business, which includes signing
merchants to accept our branded Cards (merchant acquisition) and accepting and
processing Card transactions and paying merchants (transaction processing) that
accept Cards for purchases made by Cardmembers with Cards ("Charges"). TRS also
provides point-of-sale and back office products and services to merchants.
Our objective is to achieve merchant coverage so that Cardmembers are able
to use the Card wherever and however they desire, as well as to increase
coverage in key geographic areas and in new industries that have not, to date,
accepted general purpose credit and charge cards as a means of payment. We add
new merchants to our 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 us directly).
Since the early 1990's, we have significantly expanded the number of
merchants that accept our card products as well as the kinds of businesses that
accept the Card. In recent years, we have focused our efforts on increasing the
use of our Cards for everyday spending. In 1990, 65% of our U.S. billings came
from the travel and entertainment sectors and 35% came from retail and other
sectors. That proportion has now been more than reversed. In 2004, U.S.
non-travel and entertainment billings represented 67% of the U.S. billed
business 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 our focus on expanding Card acceptance to meet Cardmembers'
needs. 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.
During 2004, TRS continued its ongoing efforts to encourage consumers to
use the Card for everyday spending. TRS continued to increase the number and
types of merchants in retail
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and everyday spending categories that accept the Card, such as quick-serve
restaurants, retail stores, supermarkets and gas stations.
Key signings of merchants in 2004 brought Card acceptance to industries
where cash or checks are the predominant form of payment. For example, TRS
signed agreements this past year with Transport for London Underground, Metrogas
Utilities in Argentina, Sigma Pharmaceuticals in Australia and Safeway Inc. and
Allstate Group in the United States. In addition, Card acceptance at hotels and
conference centers for business meetings and events, business-to-business
purchases and apartment rentals are other examples of new industries in which
the Card is now accepted, and which have the potential to contribute to
increasing our average Cardmember spending.
As in prior years, during 2004, we continued to grow merchant acceptance
of our card products around the world and to refine our 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 in industries that have not traditionally accepted
charge and credit cards. Additionally, as our GNS partners help grow merchant
acceptance in their local markets, and as American Express Card issuance expands
in emerging markets outside the United States, we have begun to include merchant
coverage information data from GNS merchant acquirers and from these emerging
markets. As a result of this refined approach, management estimates that, as of
the end of 2004, TRS' merchant network in the United States accommodated more
than 90% of Cardmembers' general purpose charge and credit card spending, and
our international merchant network accommodated over 80% of our Cardmembers'
general purpose charge and credit card spending.
We earn "discount" revenue from fees charged to merchants for accepting
Cards as payment for goods or services sold. The merchant discount is the fee
charged to the merchant for accepting Cards and is generally expressed as a
percentage of the amount charged on a Card. The merchant discount rate is
generally deducted from the amount of the payment that the "merchant acquirer"
(in most cases, TRS) pays to a merchant for charges submitted. A merchant
acquirer is the entity that contracts for Card acceptance with the merchant,
accepts transactions from the merchant, pays the service establishment for these
transactions and submits the transactions through the American Express network
to the appropriate Card issuer for billing to the cardmember. When a cardmember
presents the Card for payment, the merchant creates a record of charge for the
transaction and submits it to the merchant acquirer for payment. The merchant
discount is generally deducted from payment to the service establishment where
TRS is the merchant acquirer and is recorded by us as discount revenue at the
time the transaction is captured. Where we act as the merchant acquirer and the
Card presented at a merchant is issued by a third-party bank or financial
institution, such as in the case of some of our GNS partnership arrangements, we
will make financial settlement to the merchant and receive the discount revenue.
We will also receive financial settlement from the Card issuer, who receives an
issuer rate (i.e., the amount that card issuers receive for transactions charged
on our network with Cards that they issue, which is usually expressed as a
percentage of the charged amount). The difference between the discount revenue
and the issuer rate generates a return to the network. Where we are the Card
issuer and the merchant acquirer is a third-party bank or financial institution,
we receive an issuer rate in our settlement with the merchant acquirer.
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The level of the merchant discount rate that we charge is principally
determined by the value we deliver to the merchant and generally represents
a premium over other card networks. We deliver value to the merchant through
higher spending Cardmembers relative to cards issued on competing card networks,
the overall higher 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 merchant discount rate varies with the industry in which the merchant
does business, the charge volume, the timing and method of payment to the
merchant, the method of submission of charges and, in certain instances, the
scope of the Card acceptance agreement signed with us (local or global), and the
average charge amount. In 2004, as in prior years, we have experienced some
reduction in our global weighted average merchant discount rate, primarily
reflecting the impact of stronger than average growth in the lower rate
"everyday spend" merchant categories. Based on our business strategy, we expect
to see continued changes in the mix of business. This, along with volume-related
pricing discounts and selective repricing initiatives, will likely continue to
result in some erosion over time of the weighted average merchant discount rate.
Over the past few years, VISA and MasterCard have announced a number of
increases in their U.S. credit card interchange rates, which can increase the
cost to merchants of accepting VISA and MasterCard cards.
While most merchants understand our merchant discount rate pricing in
relation to the value provided, we do encounter a relatively small number of
merchants that accept our Cards, but tell their customers that they prefer to
accept another type of payment and, consequently, suppress use of the Card. We
devote significant resources to respond to this issue. We have made progress by:
concentrating on acquiring merchants where Cardmembers want to use the Card;
continuing to enhance the value we provide by programs such as "American Express
Selects", which enables merchants to gain valuable exposure and additional sales
by making online offers, such as discounts on purchases available to Cardmembers
on a Web site maintained by us; providing better and earlier communication of
our value proposition; and when necessary, by canceling merchants who suppress
the use of our Card products.
Merchant satisfaction is a key goal of our Global Establishment Services
business. We focus on understanding and addressing factors that influence
merchant satisfaction, executing programs that increase Card usage at merchants
and strengthening our relationships with merchants through an expanding roster
of services that help them meet their business goals. We offer a full range of
point-of-sale solutions, including terminals, integrated point-of-sale terminals
and direct links that allow our 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. During 2004, we also launched
Business Savings for all U.S. merchants that accept American Express Cards,
which provides them with ways to reduce expenses for office supplies, cellular
phone service, temporary staffing and shipping through pre-negotiated discounts
at select partners.
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We continue 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 recurring Charges such as insurance premiums,
newspaper subscriptions, health club memberships, commutation costs and cable TV
service. We have also made modifications to our host authorization system to
approve more transactions and reduce Cardmember inconvenience at the
point-of-sale without a corresponding increase in fraud or credit losses.
Wherever we manage both the acquiring relationship with merchants and the
Card-issuing side of the business, there is a "closed loop," which distinguishes
our network from the bankcard networks in that there is access to information at
both ends of the Card transaction. This enables us to provide targeted marketing
for merchants and special offers to Cardmembers through a variety of channels,
subject to applicable legal requirements. We work closely with our Card issuing
bank partners to maintain key elements of this closed loop, which permits them
to customize marketing efforts, deliver greater value to their Cardmembers and
help us to direct increased business to merchants who accept the Card.
As the merchant acquirer, we have certain contingent liabilities that
arise if 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 fraudulent charges, the quality or
non-delivery of goods and services and billing errors. Typically, we offset the
amount due to the Cardmember against the merchant's current or future
submissions for payment. We can realize losses when offsetting submissions
cease, such as when the merchant commences a bankruptcy proceeding or goes out
of business. We actively monitor our merchant base to assess the risk of this
exposure. When appropriate, we will take action to reduce the net exposure to a
given merchant by either holding cash reserves funded through cash holdbacks
from a merchant or lengthening the time between when the merchant submits a
charge for payment and when we pay the merchant. We also establish reserves on
our balance sheet for these contingencies.
In some markets outside the United States, particularly in the United
Kingdom, third party processors and some bankcard acquirers 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
cardholder's billing currency, thus bypassing the traditional foreign currency
conversion process of the card network. This practice is known as "dynamic
currency conversion." If a merchant utilizes a dynamic currency conversion
process, the merchant and processor share any fee assessed or spread earned for
converting the transaction at the point of sale, thus reducing or eliminating
revenue for card issuers and card networks relating to the conversion of foreign
charges to the cardholder's 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 in this way. Our policy generally
requires merchants to submit charges and be paid in the currency of the country
in which the transaction occurs, and we convert the transaction to the
Cardmember's billing currency. We are reviewing the potential impact of dynamic
currency conversion, including considering whether and to what extent we should
develop our own dynamic currency conversion process.
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Regulation
In recent years, regulators in several countries have focused on the fees
involved in the operation of card networks, including the fees merchants
are charged to accept cards. Regulators in the United Kingdom, European Union,
Australia, Mexico and Switzerland, among others, have conducted, and are
continuing to conduct, investigations into the way bankcard network members
collectively set the "interchange," which is the fee paid by the bankcard
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 for bankcard charges. Although the regulators' focus has
primarily been on VISA and MasterCard as the dominant card networks, government
regulation of the bankcard associations' pricing could ultimately affect all
card service providers by requiring reduction of the levels of interchange,
which will drive down merchant discount rates. Downward movement of interchange
and merchant discount fees may affect the relative economic attractiveness to
card issuers and merchant acquirers of participation in a particular network.
Loss of merchant discount revenue may lead card service providers to look for
other sources of revenue such as annual card fees, as well as to reduce costs by
scaling back or eliminating rewards programs. Reductions in bankcard interchange
mandated by the Reserve Bank of Australia in 2003 have resulted in lower
merchant discount rates for VISA and MasterCard. As a result of changes in the
marketplace, we have reduced our own merchant discount rates in Australia
although we continue to believe that we have strong economics in that market. In
addition, under legislation recently enacted in Argentina, a merchant acquirer
is required to charge the same merchant discount rate to all merchants in the
same industry category, and merchant discount rates cannot exceed 3%. In the
event governmental or regulatory activity to limit interchange continues or
increases, our revenues and profitability could be adversely affected.
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. Although some countries, such as the
United Kingdom, and more recently, Australia, permit merchants to levy a
surcharge on credit card purchases, there has been a relatively low incidence of
surcharging, as merchants do not want to risk offending customers or losing
customers to those competitors that do not assess surcharges for credit card
purchases.
CONSUMER CARD, SMALL BUSINESS AND CONSUMER TRAVEL SERVICES
As a significant part of its proprietary Card issuing business, TRS issues
a wide range of Card products and services to consumers around the world and to
small businesses primarily in the United States. Our consumer travel business,
which provides travel services to Cardmembers and other consumers, complements
our Card business. The proprietary Card business offers a broad set of card
products to attract a greater number of customers. Core elements of our strategy
are:
- focusing on acquiring and retaining high-spending, creditworthy
Cardmembers across multiple groups;
- designing card products with features that appeal to specific
customer segments;
- the use of strong incentives to drive spending on our various card
products, including our Membership Rewards(R) program and other
rewards features;
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- the use of loyalty programs such as Delta SkyMiles, sponsored by our
cobrand and other partners to drive spending;
- the development and nurturing of wide-ranging relationships with
cobrand and other partners;
- a multi-card strategy (having multiple card products in customers'
wallets); and
- high-quality customer service.
We and our licensees offer individual consumer 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 and True
Earnings Card exclusively for Costco Members and the Hilton HHonors Platinum
Credit Card from American Express.
Charge Cards
Our 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. Cardmembers
generally must pay 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 these products attract
high-spending Cardmembers who want to use a charge card to facilitate larger
payments.
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 our charge cards. 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.
Revolving Credit Cards
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
we began aggressively to expand our credit card business, our lending balance
growth has been among the top tier of card issuers. Much of this growth has been
due to the breadth of our 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 our "lending on charge" options (such as the Sign & Travel(R) and
Extended Payment Option programs described above).
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Among other products introduced in 2004, we launched the IN:NYC card, a
fee-free credit card that helps Cardmembers get the most out of New York City by
providing exclusive offers for Cardmembers and double points through a unique
loyalty program, INSIDE REWARDS.
American Express Centurion Bank and American Express Bank, FSB as Issuers of
Certain Cards
Our revolving credit cards in the United States are issued by American
Express Centurion Bank ("Centurion Bank"), and American Express Bank, FSB
("AEBFSB"), each of which is a wholly owned subsidiary of American Express
Travel Related Services Company, Inc. Centurion Bank issues Blue from American
Express, Blue Cash from American Express, the Optima Card, and certain 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 the Sign & Travel and Extended Payment Option programs. Centurion Bank is
also the issuer of certain Charge Cards in the United States.
In 2004, AEBFSB acquired certain credit card accounts and receivables from
Centurion Bank and TRS and home equity loans, deposits and other lending
portfolios from Centurion Bank. In addition, AEBFSB became the issuing bank of
the related American Express charge and credit card accounts, including the
consumer and small business credit cards cobranded with Delta Air Lines and
Costco Wholesale and certain charge cards issued to small business customers.
International Proprietary Card Business
TRS continued to bolster its international proprietary Card business
through the launch of more than 80 new or enhanced Card products during 2004.
These are cards that we issue, either on our own or, as further described below,
as cobrands with partnering institutions. This past year, among other new
proprietary products, we introduced:
- Centurion Cards in The Netherlands, Sweden, France, Italy, Spain and
Australia;
- a Platinum Card in Austria;
- a new American Express Credit Card in Thailand; and
- new Platinum Credit Cards in the Philippines, Puerto Rico, Singapore
and Taiwan.
Cobrand Cards
TRS issues Cards under cobrand agreements with selected commercial firms
both in the United States and internationally. Examples of new or enhanced
cobrand products introduced in 2004 include:
- agreements with Costco Wholesale to issue the True Earnings Card for
consumers and the True Earnings Business Card for small businesses;
- a cobranded credit card with BMW in Thailand;
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- a cobranded charge card with Hotel Okura Co., Ltd., featuring the
Okura Club Point program; and
- a cobranded credit card with Indian Airlines.
During 2004, we also extended our existing cobrand arrangements in the United
States with two of our largest cobrand partners, Delta Air Lines and Costco
Wholesale.
The competition among card issuers and networks for attractive cobrand
card partnerships is quite intense because they can generate high-spending loyal
cardholders. The duration of our cobrand arrangements generally range from five
to ten years. Cardmembers earn rewards provided by the partners' respective
loyalty programs based upon their spending on the cobrand cards, such as
frequent flyer miles, hotel loyalty points and cash back. We make payments to
our cobrand partners, which can be significant, 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. We
expense amounts due under cobrand arrangements in the month earned. Payment
terms vary by arrangement, but are monthly or quarterly. Once we make 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. As the issuer of the cobrand card, we retain all the credit
risk with the Cardmember and bear the receivables funding and operating expenses
with respect to such cards. The cobrand partner retains the risk associated with
the miles, points or other currency earned by the Cardmember under the partner's
loyalty program.
Bank Distribution of Proprietary Cards
We also issue Cards under distribution arrangements with banks, primarily
outside the United States. Such bank distribution agreements involve the
offering of a standard 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, we make 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 ranges from five to seven years.
We also signed an agreement to distribute American Express Platinum and
Gold Cards to customers of Banco Banif, the private banking division of Grupo
Santander in Spain, and a distribution agreement with Alandsbanken in Finland to
distribute American Express-branded products as part of that bank's new Premium
service.
Another example of our distribution partnerships is affinity cards with
fraternal, professional, educational and other organizations. For instance, we
have been successful in penetrating the affinity card segment in Australia,
where we issue cards with the majority of the largest professional associations
in that country. In Australia, affinity cards are a substantial part of our
total revolving portfolio and contribute to our proprietary consumer lending
activities.
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Card Pricing and Account Management
Certain of our Cards, particularly charge Cards, charge 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. We also offer many revolving credit Cards with no annual fee but on
which we assess finance charges for revolving balances. Depending on the
product, we also charge Cardmember fees to participate in rewards programs, in
respect of account performance (e.g., late fees) or for certain services (e.g.,
additional copies of account statements). We apply standards and criteria for
creditworthiness to each Cardmember through a variety of means both at the time
of initial solicitation or application and on an ongoing basis during the Card
relationship. We use sophisticated credit models and techniques in our risk
management operations and believe that our strong risk management capabilities
provide us with a competitive advantage.
Membership Rewards(R) Program
During 2004, we also continued to expand our U.S. Membership Rewards
program - - the largest program of its kind. Customers enrolled in the
Membership Rewards program earn points toward a variety of travel,
entertainment, and retail rewards. Customers earn one point for virtually every
dollar they spend. Membership Rewards points have no expiration date as long as
the customer maintains a Membership Rewards account with an eligible, enrolled
Card. There is no limit to the number of points earned, and bonus point
opportunities help our customers earn rewards faster. We continued to add new
Membership Rewards partners to the U.S. program, including JetBlue Airways,
Fairmont Hotels, Wyndham Hotels and Resorts, Bloomingdale's, Restoration
Hardware and Benihana. Our Membership Rewards program continues to be an
important driver of Cardmember spending and loyalty.
As in the United States, rewards programs are a strong driver of
Cardmember spending in the international consumer business. We have over 1,200
Membership Rewards partners that participate in our international Membership
Rewards programs with an average of 70 partners in each country; fewer than 30%
of these partners are in the travel industry. Cardmembers can redeem their
points with 35 airlines and over 275 hotel chains. Our non-travel redemption
options include retail - ranging from The Gap to Takashimaya, an upscale
Japanese department store. Other redemption categories include dining, spas,
charities, movie theatres, automobiles, and special events like the MTV Music
Video Awards in Europe. In 2004, we signed 50 new Membership Rewards partners
and continued to enhance our rewards programs in several markets, offering more
flexible choices that enable Cardmembers to redeem points more quickly. In this
vein, during 2004 we launched the Membership Rewards Direct Ticket in New
Zealand, which lowered the amount of money Cardmembers need to spend in order to
earn free travel and allows the Cardmember to redeem points directly with us to
purchase a travel award rather than having to first transfer points to a
Membership Rewards partner. We launched Double Points Membership Rewards in
Indonesia and an enhanced Membership Rewards program in Japan that allows
Cardmembers to carry over their earned Membership Plus points indefinitely.
When a Cardmember enrolled in the Membership Rewards program uses the
Card, we establish balance sheet reserves in connection with estimated future
reward redemptions. When a Membership Rewards program enrollee redeems a reward
using Membership Rewards points, we make a payment to the Membership Rewards
program partner providing the
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reward pursuant to contractual arrangements. Because of higher charge volumes
and greater redemption rates, the expense of the program has increased both in
the United States and internationally over the past several years and continues
to grow. Despite the increasing costs of Membership Rewards as penetration and
usage expand, this program plays a vital role in our profitability. We believe,
based on historical experience, that Cardmembers enrolled in rewards and cobrand
programs yield higher spend, better retention, stronger credit performance and
greater profit for us. By offering a broader range of redemption choices, we
have improved customer satisfaction with the Membership Rewards program and
lowered our average cost per point. We continually seek to contain the overall
cost of the program and make changes to enhance its value to Cardmembers.
Cardmember Special Services and Programs
Throughout the world, Cardmembers have access to a variety of free and
fee-based special services and programs, depending on the type of Cards they
have and their country of residence. We recently introduced American Express
Selects, a new benefit for Cardmembers worldwide, providing shopping, dining and
travel values from merchants in 11 countries. During 2004, we also launched
Identity Theft Assistance, a new benefit available to all Cardmembers at no
extra cost provide dedicated support that can help Cardmembers safeguard their
personal information and determine if their identity has been stolen. Other
special services and programs 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 we issue Cards, provides access to
additional and enhanced travel, financial, insurance, personal assistance and
other services. We offer the Centurion Card by invitation to consumers in the
United States and 11 other countries. The Centurion Card is an ultra-premium
charge card providing highly personalized customer service and an array of
travel, lifestyle and financial benefits. We send the Customer Relationship
Statements to Personal, Gold, Platinum and Centurion Cardmembers, to communicate
both our and merchants' special offers for products and services.
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Service and Technology Infrastructure
We continue to make significant investments, both in the United States and
internationally, in our card systems and infrastructure to allow faster
introduction and greater customization of products. We also are using technology
to develop and improve our service capabilities to continue to deliver a high
quality customer experience. For example, we maintain a service delivery
platform that our 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, we
are building flexibility and enhancing our global platforms and capabilities in
revolving credit, our full service banking platform called iWealthview, and
consumer payment options. You can find a description of our arrangement
regarding the outsourcing of many of our technology operations to IBM in the
"Corporate and Other" section of this report.
We continued to leverage the Internet to lower costs and improve service
quality. During 2004, we expanded the number of services and capabilities
available to customers online and increased their utilization. For example,
within the United States, approximately 90% of our card servicing call volume
can now be handled online. We now have more online interactions with U.S.
customers than we do by telephone or in person. Our Online Card sales grew
steadily in 2004 as well.
At year-end, customers enrolled approximately 15 million Cards in our
"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. We now have an online presence in 48 markets.
OPEN: The Small Business Network(SM) from American Express
In addition to its U.S. and international consumer Card businesses, TRS is
also a leading provider of financial 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 from
American Express(SM) ("OPEN") offers small business owners a wide range of
tools, services and savings designed to meet their evolving needs, including
charge and credit cards, access to credit lines and loans up to $100,000,
expense management reporting, enhanced online account management capabilities
and travel services.
During 2004, we continued to expand the breadth of products and services
offered by OPEN. We also introduced the Business Green Rewards Card, Blue
Cash(R) for Business credit card, the Costco TrueEarnings(SM) Business card from
Costco and American Express and new travel benefits for the Executive Business
Card. We also introduced OPEN Savings(SM), a new program for OPEN customers,
offering automatic savings at AT&T, FedEx, Hertz, Staples and others simply by
using their American Express Business card. These savings may be combined with
any existing discounts or offers. In addition, we introduced enhanced electronic
management reports, improved information concerning categories of spend and
limits on supplemental Cards (the ability to set a spending limit on Cards
issued on a cardmember's account to persons authorized by the Cardmember).
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In 2004, we sold the leasing product line of OPEN's small business financing
unit, American Express Business Finance Corporation, with a loan portfolio of
approximately $1.5 billion.
American Express Consumer Travel Network -- USA
The American Express Consumer Travel Network -- USA 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 that operate under
the American Express brand). 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. Other premium programs developed by
Consumer Travel for Centurion and Platinum cardmembers include Cruise
Privileges, Centurion and Platinum Destinations Vacations and the Private Jets
Program.
In addition, the Consumer Travel business operates a wholesale travel
business in the United States. (A wholesaler purchases inventory, such as hotel
rooms or airline seats, from suppliers and then resells the services to the
customer at retail prices that the wholesaler determines.) Our wholesale travel
business 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 American Express Travelers Cheques, and foreign exchange
services.
In 2004, we enhanced our Consumer Travel Web site with private-label
versions of the Travelocity Inc. booking service for air, hotel and car rental
reservations, and a private-label online cruise booking service from
OurVacationStore.com. Our Web site now offers consumers fares and rates that are
competitive with other leading travel Web sites, along with value-added benefits
for cardmembers, including double Membership Rewards points.
We also attracted 13 new members last year to our representative network,
including Cruise Planner, Inc., the first cruise franchiser to join the American
Express Travel Network.
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.
Competition
Our proprietary Card business encounters substantial and intense
competition. As a card issuer, we compete in the United States with financial
institutions (such as Citibank, Bank of America, JPMorgan Chase, MBNA and
Capital One Financial) that are members of VISA and/or MasterCard and that issue
general purpose credit cards, primarily under revolving credit plans, on one or
both of those systems, and the Morgan Stanley affiliate that issues the Discover
Card
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on the Discover Business Services network. Internationally, we are also subject
to competition from multinational banks, such as Citibank, HSBC and Banco
Santander, as well as many local banks and financial institutions. Globally, we
view Citibank and HSBC as our strongest competitors as they offer card products
in a large number of markets. We also encounter 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 our Cards because of their limited acceptance. As
a result of continuing consolidations among banking and financial services
companies and credit 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, cash rebates 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.
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 most 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. We do 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:
- the features and the quality of the services, including rewards
programs, provided to Cardmembers;
- the number, spending characteristics and credit performance of
Cardmembers;
- the quantity and quality of the establishments that accept a card;
- the cost of cards to Cardmembers;
- pricing, payment and other card account terms and conditions;
- the number and quality of other payment instruments available to
Cardmembers;
- the nature and quality of expense management data capture and
reporting capability;
- the success of targeted marketing and promotional campaigns;
- reputation and brand recognition;
- the ability of issuers to implement operational and cost
efficiencies; and
- the quality of customer service.
21
American Express Consumer Travel competes with traditional "brick and
mortar" travel agents, online travel agents and travel suppliers that distribute
their products to consumers directly via the internet or telephone-based
customer service centers. In recent years we have experienced increasing
competition from online travel agents utilizing the merchant business model
under which the agent receives inventory (hotel rooms, airline seats, car
rentals, destination services) from suppliers at negotiated rates. The agent
then determines the retail price paid by the customer and processes the
transactions as the merchant of record for the transaction. We believe the
merchant model was particularly effective during the years following the
September 11, 2001 terrorist attacks when travel volumes were depressed and
suppliers tended to make greater amounts of their inventory available to
agencies utilizing this model.
New competition has also emerged in the past year in the form of several
software companies that offer robotic searches of other Web sites to direct
consumers to the site that offers the lowest prices according to the customer's
search parameters.
Financing Activities
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
certain 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 and AEBFSB finance their revolving
credit receivables through the sale of short- and medium-term notes and
certificates of deposit in the United States. TRS, Centurion Bank and AEBFSB
also fund receivables through asset securitization programs. The cost of funding
Cardmember receivables and loans is a major expense of Card operations. (You can
find a discussion of TRS' and Centurion Bank's securitization and other
financing activities on pages 26-27, page 35, pages 37-40, page 41, pages 45-47,
and pages 51-56 under the caption "Financial Review," and Note 4 on pages 97-98
of the Company's 2004 Annual Report to Shareholders, which portions we
incorporate herein by reference.)
Regulation
Centurion Bank is a Utah-chartered industrial loan company regulated,
supervised and regularly examined by the Utah Department of Financial
Institutions and the Federal Deposit Insurance Corporation ("FDIC"). Centurion
Bank is an FDIC-insured depository institution. AEBFSB is a federal savings bank
regulated and supervised by the federal Office of Thrift Supervision ("OTS"), a
division of the United States Department of the Treasury. AEBFSB is an
FDIC-insured depository institution. Among the activities of Centurion Bank and
AEBFSB that are regulated at the federal level are their respective anti-money
laundering compliance activities. We have taken steps to maintain compliance
programs for anti-money laundering and other requirements consistent with
applicable standards. You can find a further discussion of the anti-money
laundering initiatives affecting us under "Corporate and Other" below.
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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%. Based on Centurion Bank's tier one risk-based capital, total
risk-based capital and leverage ratios, Centurion Bank was considered to be
well-capitalized as of December 31, 2004.
AEBFSB is subject to the risk-based capital adequacy requirements
promulgated by the OTS. Under these regulations, a federal savings 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
tier one core capital ratio of at least 5%. Based on AEBFSB's tier one
risk-based capital, total risk-based capital and tier one core capital ratios,
AEBFSB was considered to be well-capitalized at December 31, 2004.
In 2003, AEBFSB and certain of its affiliates received OTS approval to,
among other things, 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 provides more flexibility for us, began in the first
quarter of 2004 with the transfer of certain Card accounts and other assets 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 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 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 we operate 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 us 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 our business see, "Corporate and Other" below.)
23
Centurion Bank, AEBFSB and our 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 we conduct our business
and the costs of compliance. The regulatory environment in which our Card and
lending businesses operate has become increasing complex and robust. More
recently, regulators (as well as various consumer advocacy groups) have begun to
focus increasing attention on the types and levels of fees charged by card
issuers for, among other things, late payments, returned checks, payments by
telephone, copies of statements and the like. We regularly review and, as
appropriate, refine our business practices in light of existing and anticipated
developments in laws, regulations and industry trends so we can continue to
manage our 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 new
guidance to the industry 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. At present, we do not
have any lending programs that target the subprime market. The Guidance has not
had any material impact on our businesses or practices and we do not believe
that the Guidance will have any material impact on our practices in the future,
nor does the Guidance mandate any changes to our 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, entertainment and everyday purchases of 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
- Business Travel, which helps businesses manage their travel expenses
through a variety of travel-related products and services.
Corporate Card and Corporate Purchasing Solutions
The American Express(R) Corporate Card is a charge card that individuals
may obtain through a corporate account established by their employer for
business purposes. Through the Corporate Card program, companies can manage
their travel, entertainment and purchasing
24
expenses and improve negotiating leverage with suppliers, among other benefits.
We use our direct relationships with merchants to offer Corporate Card clients
superior data about company spending, as well as streamlined dispute resolution.
We issue local currency Corporate Cards in 36 countries, which we distribute
through proprietary operations and partner banks, and international dollar
Corporate Cards in 85 countries. Additionally, with the launch of our Global
Dollar Card offering, we have the capability to offer our products to customers
in over 200 countries. In 2004, we launched the American Express Gold Corporate
Card in Brazil and the Platinum Card in Canada.
Corporate Purchasing Solutions ("CPS") helps large and middle market
companies 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 our 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, our GCS business 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 developed 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, which we believe present us with
significant growth opportunities. Businesses of this size often do not have
corporate card programs. However, once enrolled in the program, midsized
companies, which usually do not have well-defined purchasing programs, will
typically put a significant portion of their business spending (both travel and
entertainment and non-T&E, such as office supplies) on the Card because they can
gain control, savings and employee benefits. In 2004, our GCS business 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. GCS also
offers the Savings at WorkSM program in the United States, as well as similar
programs globally, which provides companies with discounts on everyday products
and services, such as office supplies, and a range of business services.
During 2004, we added or retained several major clients in the United
States and internationally for the Corporate Card, including Johnson & Johnson,
Motorola, ICI, Avaya, Owens Corning, Schering-Plough, Medtronic, and Siemens.
In 2004, we also announced a new business alliance with CorpVat under
which it provides certain value added tax (VAT) recovery services to GCS
commercial card clients. We also announced a new alliance with Deutsche Bank to
launch a jointly-branded Corporate Card and Business Travel Account program to
Deutsche Bank's corporate customers. TRS also
25
entered into a cobrand card alliance with Paradigm Total Salary Management in
Australia for both employees and employers to benefit from outsourced salary
packaging administration.
In addition, in 2004, we entered into an agreement with Navigant
International, Inc., a leading provider of travel management services in the
United States, to distribute our Corporate Cards to its clients in the United
States.
With the increased focus on cost containment by firms, we have experienced
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 offers the Corporate
Defined Expense Program. 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.
GCS also offers 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 - Global Commercial Card Business
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 (which, as mentioned above, is being folded into the
network operated by MasterCard in the United States) 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 us 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 above under "Consumer Card, Small Business and
Consumer Travel Services -- Competition":
- the ability to capture and deliver detailed transaction data and
expense management reports;
- the number and types of businesses that accept the cards;
- pricing;
26
- the range and innovativeness of products and services to suit
business needs
- quality of customer services; and
- global presence.
Global Travel Services
GCS Global Travel Services consists of American Express Business Travel
(BT) and Consumer Travel International & Foreign Exchange Services (CTI&FES).
American Express Business 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.
Business Travel services customers directly in 36 key markets worldwide,
of which 31 are proprietary operations and five are managed through joint
ventures. In addition, Business Travel also serves customers in numerous other
markets through franchise partnerships. We continued to expand our global reach
with our 2003 acquisition of Rosenbluth International, the integration of which
was completed in the second half of 2004. We believe that the Rosenbluth
acquisition has helped us expand an advantage over other competitors by
enhancing our servicing capabilities, the integration of superior customer
products and services, adding high performing talent and creating economies of
scale.
In 2004, we were awarded the corporate travel business of, among other new
clients, General Motors, Electronic Data Systems A.T. Kearny, the European
Aeronautic Defence and Space Company, DHL and the U.K. Ministry of Defence.
Business Travel continues to modify its economic model and invest in new
products, services and technologies to address ongoing travel industry
challenges and opportunities. For example, we have substantially reduced our
reliance on commission revenues from suppliers (such as airlines or hotels), and
now generate revenues primarily from customers who pay for the services that we
provide. We announced a comprehensive cost-saving travel management offering for
the small- and mid-sized business travel segment in the United States, featuring
webfare guarantees, a new travel management loyalty program with double
Membership Rewards(R) points for individual travelers and automatic ticket
refunds. In addition, Business Travel launched the Preferred Extras Hotel
Program and Preferred Savings Programs for our North America customer base.
Business Travel also offers the TravelBahn(R) Distribution Solution, a
proprietary distribution solution alternative that provides access to the best
airline inventory and fares for American Express Business Travel customers with
a number of carriers, in North America and in select international markets.
Business Travel has moved many of its business processes and customer
servicing online, which streamlines processes, reduces costs, increases
productivity and enhances the quality of customer service. To this end, we
launched a redesign of our Business Travel website at the end of 2004. By the
end of 2004, in the United States, 33% of all of GCS' corporate travel
27
transactions were processed online, and online penetration rates in the United
Kingdom, Canada, Mexico and Australia achieved levels within the 6% to 18%
range.
Global Travel Services, through its CTI&FES organization, provides
American Express customers around the globe with travel related products and
services. CTI&FES encompasses four key areas of business: Premium Travel and
Lifestyle Services, Travel Service Network, Retail Foreign Exchange, and
Corporate Foreign Exchange.
Premium Travel and Lifestyle Services provides concierge services, a
unique benefit that exemplifies the world-class customer experience provided to
Platinum and Centurion Card customers through 22 exclusively dedicated
international call centers. Our retail leisure travel service network manages
customer relationships on our behalf worldwide through more than 1,700 travel
office locations in more than 130 countries. We are aggressively expanding our
retail presence worldwide through franchising, nearly tripling the size of our
international franchise network in the past three years alone.
Our retail foreign exchange business has a presence in many of our travel
offices, as well as in 26 of the world's major international airports, including
London's Heathrow, the Aeroports de Paris and Changi Airport in Singapore.
Today, American Express is the third largest currency provider in airports. For
corporate clients, our International Payments online payment product allows
companies and banks to make cross-border payments in more than 110 foreign
currencies at competitive rates. Wholesale banknote services are also provided
to select financial institutions and travel-related companies.
Competition - Travel Services
Business Travel faces intense 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 2004, several U.S.-based online travel agencies expanded their
offerings and marketing efforts beyond their traditional target customer set,
with increasing focus on corporate travel. 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 they will focus more of their efforts to expand into key, developed
international markets like Canada, the United Kingdom and other European markets
in 2005.
Since 1995, travel agents have received reduced levels of revenue from
airlines, and this trend is expected to continue. The airline industry has been
under severe financial pressure in recent years and, as a result, has increased
its efforts to reduce distribution expenses. In March 2002, U.S. airlines and
some international carriers stopped paying "base" commissions to travel
28
agents for tickets sold in the United States and Canada on all domestic and
international travel. Subsequently, airlines in many international markets
followed suit. In addition, low-cost carriers have begun to target business
travelers to help fuel their growth, putting further strain on the ability of
the traditional carriers to remain competitive. Low-cost carriers do not rely on
travel agents to distribute their products and services. The traditional
carriers have also increased the number of transactions they book directly
through their Web sites and other means. These trends have reduced the revenue
opportunities for travel agents who do not receive distribution revenue from
directly booked transactions.
Overall, the ongoing trends of airline direct transactions, rise of
low-cost carriers and ongoing reductions in airline commissions continue to put
pressure on revenue for travel agents. We believe that the restructuring of the
business model over the last few years, transitioning many of our services
online and reducing other costs has helped us to balance these revenue
pressures.
GLOBAL TRAVELERS CHEQUES AND PREPAID SERVICES
We have been in the business of issuing and selling travelers checks for
well over 100 years. Today, that business is operated through our Global
Travelers Cheques and Prepaid Services Group ("TCPS"). TCPS also offers the
TravelFunds Direct(R) service, which provides direct delivery of foreign bank
notes and Travelers Cheques in selected markets.
We sell the American Express Travelers Cheque ("Travelers Cheque" or
"Cheque") as a safe and convenient alternative to cash. The Travelers Cheque 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. Travelers
Cheques are available in nine currencies, including Euros. We also issue and
sell other forms of travelers checks: American Express Gift Cheques are designed
for gift-giving purposes, and the American Express-Secure Funds is offered in
certain countries as a safe way to keep cash at home. American Express Gift
Cheques are available in U.S. and Canadian dollars. American Express
Cheques-Secure Funds are issued in U.S. dollars and Euros.
Since 2002, we began to expand our prepaid offerings beyond paper into
plastic cards. In 2004, TCPS continued to offer two prepaid gift cards in the
United States: the American Express Gift Card, which can be used in the United
States at retail as well as restaurant establishments that accept American
Express Cards, and the Be My Guest(R) Card, specifically designed for restaurant
dining. Also in 2004, TCPS expanded sales of gift cards through shopping malls
and a limited number of retail establishments in the United States. At the end
of 2004, TCPS began to sell a Japanese Yen-denominated American Express Gift
Card in Japan for use in that country at selected retail locations that accept
our Cards.
In October 2003, we launched the American Express TravelFunds Card
("TFC") in the United States, and in 2004, we launched TFC in Germany under the
name "Travelers Cheque Card." The TFC is a reloadable, prepaid card that we
market as a plastic form of our Travelers Cheque. The TFC is available in U.S.
dollars, British pounds sterling and Euros, is sold in the
29
United States, the United Kingdom and Germany 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.
TCPS is continually evaluating additional prepaid products to offer to our
customers.
As noted, we sell American Express paper and plastic prepaid card products
through a variety of channels. We sell these products ourselves directly to
consumers via phone and the Internet, and these sales, while representing a
relatively small portion of all sales, continued to grow in 2004. Paper
Travelers Cheques and Gift Cheques are sold primarily through a broad network of
selling outlets worldwide, including American Express travel offices;
independent travel agents; financial institutions; and many other financial,
travel and commercial businesses. Many of the same sellers also sell our prepaid
cards. We sometimes compensate selling outlets for their sales. We are
increasingly seeking new travel and commercial sellers for our prepaid cards. We
also continued to expand the distribution channels for prepaid products with the
addition of retail, airline, car rental, and hotel sellers, as well as postal
services in Australia, Canada and the United States.
Arrangements with a diverse group of sellers continue to be critical to
TCPS' expansion of its sales distribution network. In 2004, TCPS gained a number
of new distributors, including department stores and convenience stores.
During the year, overall Travelers Cheque sales (including TFC sales)
increased 2% globally, and consumer Gift Product sales (including sales of paper
Gift Cheques and Gift Cards) increased 49%. Gift Cheque growth, which is
calculated from a much lower base than Travelers Cheques, is primarily the
result of new advertising and marketing programs. An improved travel environment
contributed to an increase in both Traveler's Cheque and TFC sales.
We invest the proceeds from sales of our Travelers Cheques and prepaid
cards issued by TRS predominantly in highly rated debt securities consisting
primarily of intermediate- and long-term state and municipal obligations.
Regulation - Travelers Checks and Prepaid Cards
As an issuer of travelers checks, TRS is regulated in the United States
under the "money transmitter" laws of most states. 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 by the laws of many states to comply with state unclaimed and abandoned
property laws under which issuers must 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. Some states
have recently enacted laws pertaining to the issuance and the sale of gift
certificates, which may also cover the gift cards we issue. Some of these laws
restrict the fees that consumers can be charged and the expiration dates of the
cards. We continue to monitor state legislative activity in this area very
closely to ensure we comply with all applicable
30
regulation, which varies from state to state. Federal anti-money laundering
regulations require, 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.
Competition - Travelers Checks and Prepaid Cards
Travelers Cheques compete with a wide variety of financial payment
products, including cash, foreign currency, checks, other brands of travelers
checks, and, increasingly, debit and ATM cards, as well as credit and charge
cards (even though travelers checks and prepaid cards are not substitutes for
charge and credit cards) and, to a limited extent, competing prepaid cards. The
principal competitive factors affecting the travelers check and prepaid card
industry are:
- the number and location of merchants willing to accept the form of
payment;
- the availability to the consumer of other forms of payment;
- the amount of fees charged to the consumer;
- the compensation paid to, and frequency of settlement by, selling
outlets;
- the accessibility of sales and refunds for the products;
- the success of marketing and promotional campaigns; and
- the ability to service the customer satisfactorily, including for
lost or stolen instruments.
Our prepaid cards (cards that can be used at many different unaffiliated
locations) compete with all of the same payment methods; however, gift cards
compete primarily with cash and checks.
OTHER PRODUCTS AND SERVICES
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 to its
customers. TBS is not licensed to practice public accounting, but employs
certified public accountants who deliver, along with other 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 35 offices in 12 states with approximately
2,400 employees.
Through American Express Publishing, we also publish 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
and SkyGuide Executive Travel, a business traveler supplement; a
31
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 Web sites such as: travelandleisure.com, foodandwine.com,
departures.com, tlgolf.com, tlfamily.com and skyguide.net.
32
AMERICAN EXPRESS FINANCIAL ADVISORS
Our American Express Financial Advisors operating segment ("AEFA")
principally includes American Express Financial Corporation ("AEFC") and its
subsidiaries and affiliates described below. AEFA has two principal businesses:
- ASSET ACCUMULATION AND INVESTMENTS provided by AEFC and certain of
its subsidiaries; and
- INSURANCE products issued by IDS Life Insurance Company ("IDS Life")
and its subsidiaries (collectively, the "IDS Life Companies"), as
well as IDS Property Casualty Insurance Company ("IDS Property
Casualty") and its subsidiaries.
The products and services of these businesses are principally offered through
AEFA's network of over 12,300 financial advisors. Through this business model,
AEFA builds long-term relationships with clients based on trusted, knowledgeable
advice.
For discussion of the Company's plans to pursue a spin-off of AEFA, see
the "Introduction" to this report above.
ASSET ACCUMULATION AND INVESTMENTS
Through its asset accumulation and investments business, AEFA offers a
broad array of proprietary and non-proprietary investment products and services
to help retail and institutional clients meet their financial goals. For retail
clients, AEFA's financial advisors are guided by the financial planning process
as defined by the "Principles for Financial Planning," issued by the Certified
Financial Planner Board of Standards, Inc. Retail clients, including clients
with an AEFA financial plan, and institutional clients select among investment
products such as mutual funds, annuities, face-amount certificates, collective
funds, real estate investment trusts, collateralized debt obligations and hedge
funds; and investment services including wrap programs, financial planning
services and separately managed accounts. Additionally, AEFA offers 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 through American
Express Financial Advisors Inc. ("AEFAI"), an AEFC subsidiary.
Approximately 76% of AEFA's revenues and 70% of AEFA's pre-tax income in
2004 were attributable to its asset accumulation and investments business. Our
asset accumulation and investments business primarily derives revenues from the
fees we receive from the asset management, financial planning and distribution
services we provide, along with the spread income earned on annuity assets held
in fixed accounts. AEFA currently has over $410 billion in assets owned, managed
and administered.
One of our primary goals is to increase the competitiveness of AEFA's
proprietary products and services for both retail and institutional customers.
In furtherance of this goal, there were several key accomplishments during 2004
that helped to enhance product and retail service offerings,
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improve our competitive position, strengthen our asset management capabilities,
and improve investment management performance, including:
- continued development of our AXP family of mutual funds, including
the merger of several equity funds and the launch of a series of
strategic asset allocation funds;
- nationwide rollout of American Express Gold Financial Services,
designed for retail clients with more than $100,000 in assets with
AEFA;
- broadening of our asset management reach internationally through the
successful integration of Threadneedle Asset Management Holdings
Limited ("Threadneedle"), an AEFC subsidiary, and the creation of a
global fund of hedge funds platform; and
- enhancing investment management leadership, talent and
infrastructure.
We achieved record financial planning sales and fee revenue in 2004. Our
investment management business benefited in 2004 from an increase in management
fee revenue resulting from higher average assets under management. This
reflected, in large part, the full-year impact of the Threadneedle acquisition
in the fall of 2003, along with improved equity market performance and overall
net asset inflows for AEFA. Outflows from the AXP retail mutual funds (the "AXP
Funds") and non-Threadneedle institutional assets partially offset the gains in
assets under management. Since most fees that AEFA receives for asset management
and related services are based on assets under management, market appreciation
results in increased revenues, and inversely, market depreciation will act to
depress revenues. Revenues will also fluctuate due to net inflows or outflows of
assets.
RETAIL PRODUCTS AND SERVICES
AXP Family of Mutual Funds
AEFAI acts as the principal underwriter (distributor of shares) for the
AXP family of mutual funds. In addition, AEFC acts as investment manager and
AEFC and its subsidiaries perform various services for the funds, including
accounting, administrative, transfer agency and custodial services. As of
December 31, 2004, the AXP family of mutual funds consisted of two groups of
funds: (1) the AXP Funds, a group of retail mutual funds offered to the public
primarily through proprietary channels, and (2) the AXP Variable Portfolio Funds
("VP Funds"), which are a series of variable product portfolios. The VP Funds
are available only as underlying investment options in our proprietary variable
annuity and variable life products and through certain non-proprietary variable
annuity products. Both the AXP Funds and the VP Funds include domestic and
international equity, fixed income, cash management and balanced funds with a
variety of investment objectives.
The AXP family of mutual funds has increased its use of subadvisors over
the last few years to diversify and enhance investment management expertise. As
of June 2004, Threadneedle International Limited ("TINTL"), a Threadneedle
company and an indirect wholly owned subsidiary of AEFC, began subadvising the
international equity funds within the AXP family of funds. Previously, these
mutual funds were managed by Threadneedle personnel through an arrangement with
American Express Asset Management International, Inc. ("AEAMI"). Kenwood Capital
Management LLC ("Kenwood"), another AEFC affiliate, also
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provides sub-advisory services to one small cap AXP Fund and one small cap VP
Fund. In addition to TINTL and Kenwood, 20 unaffiliated sub-advisors provide
investment management services to the AXP Partners Funds, part of the AXP Funds.
Eight new AXP Funds and four new VP Funds were launched during 2004:
- six AXP(R) Portfolio Builder Series mutual funds, a collection of
strategic asset allocatio