AmEx: Higher Merchant Revenue, Lower Discount Fee

Worldwide discount-fee income jumped 18% for American Express Co. on sharply higher cardholder spending in the second quarter, though the card network's average discount rate drifted slightly downward. The company's U.S. card billings hit $75.7 billion in the quarter, a 17% increase over the year-ago period. Even faster card spending outside the U.S. drove total billings up 19% to $102.4 billion. Billings outside the U.S. totaled $26.7 billion, a 23.9% increase from 2003's second quarter, representing 26% of worldwide card spending, up slightly from 25% a year ago. AmEx attributed the double-digit rise in volume to significantly higher spending on loyalty and rewards marketing. Card-marketing expenses jumped 33% for the second quarter to $1.23 billion, helping to increase average consumer spending per non-premium card 14% to $2,339. Except for total charge volume and cards in circulation, AmEx does not break out U.S. and non-U.S. numbers. The statistics on cards in force include results from partnerships AmEx has established with banks overseas to issue its cards. Total AmEx cards went up 7.3% to 62.5 million. Of these, U.S. cards accounted for 37.5 million, up 5.8%, while non-U.S. cards grew 9.5% to 25 million. Driven by the increase in charge volume, AmEx' s discount-fee revenue climbed 17.5% to $2.53 billion for the quarter. Discount income is by far the company's largest source of revenue, accounting for 35% of total revenue in the second quarter. But the company's push to win acceptance at a broader array of merchants has caused a long-term downward trend in its average discount rate, which was 2.56% in the second quarter, down 3 basis points from the year-ago period. The discount rate is the fee AmEx charges merchants to accept its card, and is computed as a percentage of sales on the card. “We're gaining market share in retail segments, which results in a downward shift in our discount rate,” Gary L. Crittenden, chief financial officer at AmEx, said in a conference call with securities analysts yesterday. “A downward trend [in the discount rate] of 3 to 4 basis points per year is something we've lived with for a long time, and something we're very comfortable with.” Crittenden also noted that AmEx's partnership with MBNA Corp., under which MBNA would issue AmEx-branded cards, is on track and that the company is in discussions with other banks to issue its cards. “MBNA continues to make superb progress toward launching a card,” he noted. AmEx has 79 such issuing arrangements with banks overseas, but the one with MBNA is the first it has established in the U.S. A Visa and MasterCard rule prohibiting such deals was struck down in federal court in 2001, a decision the bank card associations have appealed before the U.S. Supreme Court. Crittenden in yesterday's meeting had no further information about the case before the high court. Earlier this year, when it announced its partnership with MBNA, AmEx said it expected to have cards in circulation by year's end but that the partnership would hold marketing in abeyance pending the outcome of the card associations' appeal (Digital Transactions News, Jan. 30). Overall, AmEx reported record net income for the second quarter amounting to $876 million, up 15%. Of this amount, $732 million came from the travel-related services unit, which manages the company's card business. TRS's profit was up 16%.