American Express 2005 Annual Report Download - page 21

In certain countries where regulations have forced our competitors to lower their fees, we have lowered our
merchant discount rates to reflect competitive trends, but not as much as the associations. At the same time,
we have increased billed business and locations-in-force in these countries, further illustrating the advantages
of our spend-centric model and the clear value we provide to merchants.
In the United States, the activity around interchange has focused on private litigation, following a long pat-
tern of rising interchange fees on the part of Visa and MasterCard. We are confident that the legal theories
advanced in these cases do not apply to us because of the fundamental differences between our business
model and that of the bank card associations.
We will continue to closely monitor the regulatory and legal developments that can affect our discount rate,
which we expect will take some time to play out fully.
UNCERTAIN ECONOMIC ENVIRONMENT ■Another issue facing American Express and the payments
industry as a whole is the impact of a potential economic slowdown. No company is insulated from the effects
of economic cycles. However, the actions we have taken since 2001 to become more flexible and improve our
risk profile have made us better able to manage through them. We have a diverse range of products, customer
groups and revenue sources. We can direct investment spending with increased precision and speed, enabling
us to adapt quickly to changing economic conditions. And our ongoing reengineering efforts should continue
to generate cost savings and revenues across our business that we can either reinvest or let flow to the bottom
line, depending on market circumstances. In short, we have a variety of levers available to respond to short-
term conditions while managing our business for the long term.
INDUSTRY SATURATION ■The last issue I’d like to address is a perception that the market for charge and
credit cards, particularly in the United States, is fully mature. Industry observers who hold this view cite
declining response rates to myriad card offers and slowing receivables growth among many issuers. While we
acknowledge that competition in the payments industry is greater than ever, we think there is significant room
for growth.
Our cardmembers spent a record $484 billion on their American Express cards last year, more than on any
other card issuer’s products, but this represents only a small portion of the total opportunity. Consider the
following:
■ Of the estimated $28 trillion dollars that consumers worldwide spend annually, only 14 percent takes place
on credit, charge and debit cards. Therefore, the potential to grow is substantial.
AXP / AR.2005
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MEMBERSHIP REWARDS AS PAYMENT
Cardmembers can now use Membership
Rewards points to pay for any airline
ticket, hotel room or cruise available on
our redesigned travel Web site. This
service, called Membership Rewards as
Payment, gives customers more ways to
redeem their points. In just a few short
months, it has become one of the most
popular options on our Web site.