A Slumping Economy Hits AmEx’s Merchant-Acquiring Machine

With the economy losing steam, American Express Co.'s lucrative merchant business is slowing down. U.S. card-billed business grew only 4% to $120.3 billion in the third quarter from $115.2 billion a year earlier, and many of the other numbers related to AmEx's U.S. merchant-acquiring business showed little growth. AmEx's core cardholder base of business people and affluent consumers are pulling back on travel. U.S. airline-related charge volume, which represented about 9% of total U.S. volume during the quarter, increased 6% due to a 6% increase in the average airline charge while transactions were flat, AmEx said in its earnings release. In all, travel-and-entertainment volumes rose just 2% compared with 7% for non-T&E spending. Non-T&E expenditures account for 70% of AmEx's U.S. charge volume. Average quarterly spending on AmEx-issued “basic cards” in the U.S. decreased by 1% to an average of $2,950. International spending proved to be AmEx's saving grace. Card-billed business outside the U.S. grew 17% to $55.2 billion from $47.3 billion in 2007's third quarter, giving AmEx worldwide charge volume of $175.5 billion, up 8% from $162.5 billion in the year-earlier quarter. But total discount revenue generated from that cardholder spending grew only 5% to $3.85 billion from $3.66 billion in 2007's third quarter, and U.S. discount revenue was flat at $2.62 billion. AmEx cited as reasons higher cash-back rewards costs and volume growing faster on AmEx-branded cards issued by its so-called Global Network Services bank partners. AmEx shares discount revenue with those partners. Transactions on GNS cards travel on the AmEx network. Spending on GNS cards increased 29% to $18.2 billion from $14.1 billion a year earlier. Cards in force issued by bank partners increased 25% to 24.0 million from 19.2 million a year earlier and now account for 26% of AmEx's 92.1 million total cards. AmEx said an increase in the merchant sales force accounted for part of the 11% increase in expenses in the Global Network and Merchant Services segment. But AmEx increased its provision for merchant losses by 87% to $43 million from $23 million in 2007's third quarter. AmEx's average discount rate in the quarter was 2.56% in the third and second quarters compared with 2.57% in 2007's third quarter. “As indicated in prior quarters, selective repricing initiatives, changes in the mix of business and volume-related pricing discounts will likely result in some erosion of the average discount rate over time,” AmEx's release says. In all, AmEx reported net income of $861 million in the third quarter, down 23% from $1.07 billion in 2007's third quarter, on revenues net of interest expense of $7.16 billion, up 3% from $6.96 billion. Analysts are watching loan quality in AmEx's big credit card portfolio. “We saw clear signs earlier this year of a weakening environment and the recent volatility in the financial markets has reinforced our view that consumer and business sentiment is likely to deteriorate further, translating into weaker economies around the globe well into 2009,” Kenneth I. Chenault, AmEx chairman and chief executive, said in the earnings release. “Cardmember spending is likely to remain soft.”