How American Express Has Navigated the Financial Crisis and Government Regulation

KEN CHENAULT : Yes. I think – what I feel very strongly about, and I think people have often talked about brands in a – in a soft way, and it becomes an accepted thing to say that I believe in customer service, and I believe in brands. Let me just give you a concrete example that really brought it to life within our company, is, we take our brands very seriously. I've got three operating principles – provide superior value, provide best in class economics in everything we do, must support enhanced brand.

When the financial crisis hit and we were faced, as with other financial services companies, a myriad of challenges, the wholesale funding market collapsed. We were dependent on the wholesale funding market. Obviously, billings dropped dramatically as consumers said, we've got to be very careful about our spending. Credit spiked. And so, I developed what I called a mantra that we followed in the company, which was to stay liquid, stay profitable, and selectively invest in growth.

Where the brand helped us in staying liquid is, we were able to gather, in the face of a financial crisis, with the reputation of financial services companies at a low point, we were able to gather $26 billion in deposits in less than a year, because consumers had faith in the American Express brand. That is – can't get more tangible than that.

And so, because of the 160 year reputation we built for integrity, trust and service in the most serious crisis in the last ten years, we had consumers choosing our brand, despite the fact that we had no historic experience in accepting deposits, they accepted doing that with us.

So I think that financial services companies clearly have to – some of them have to rebuild their brand, and engage the customer so that there is really a trusting relationship that's built.

EVANS : In response to concerns over industry practices, Congress passed the CARD Act last year, with the final provisions going into effect, actually, on Monday.

CHENAULT : Right.

EVANS : What's the impact going to be on the card industry, and how is AmEx adjusting to the legislation?

CHENAULT : Here's what I would say is, I think that the end of the day, the card industry needed to be reformed. I think that there were certain practices – two of the practices that I think were very concerning that we never engaged in was universal default, and double-cycle billings. And I think that part of the regulation tries to address some of the abuses of the credit card industry, to increase transparency and disclosure.

For our company, only 13% of our billings are derived from lending products, so we will not be as impacted as the rest of the industry. And if you look at a bar chart of how earnings are driven in different card institutions, what you will see is that we have a very low percentage of our earnings that are driven from spread income. And you will see for our competitors, the majority of their earnings are driven by spread income.

So that's going to have a major impact on the economics. It will mean that you will see an increase in a movement from free products to fee products. You will also see, in some cases, a reduction in features and services on some products, particularly those that are for free or at a very low fee.

The other important, I think, unintended consequence that does concern me is that risk-based pricing has been restricted to a substantial level. And some of that is appropriate. Some of it will result – and I don't think that's the intent – in less credit being available for consumers, and in a number of cases, they will be higher prices and higher rates, because people will not be able to target and segment out that risk.

But we have, from an operational standpoint, we have had people working 24 by 7 to comply with the regulations. We're confident that we will do that. We're also confident that we will be able to operate an attractive business financially, going forward. But I think it will have an impact on the product constructs, and it will have an impact on pricing and the availability of credit to broad segments of the community.

EVANS : That's fantastic, Ken. We really appreciate your time today. A lot of great insights. I wish both you and AmEx the best for 2010.

CHENAULT : Well, we are certainly feeling that we are building a lot of momentum in our business. Obviously, we're going to be in a slower growth economic environment, but we frankly like the cards that we hold.

EVANS : Sounds great. Thank you very much.

CHENAULT : Thank you.

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