American Express 2007 Annual Report Download - page 28

2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
FINANCIAL REVIEW
The financial section of American Express Company’s (the
Company) Annual Report consists of this Financial Review,
the Consolidated Financial Statements and the related notes
that follow. The following discussion is designed to provide
perspective and understanding to the Company’s consolidated
financial condition and results of operations. Certain key terms
are defined in the Glossary of Selected Terminology, which
begins on page 62.
EXECUTIVE OVERVIEW
American Express Company is a leading global payments and
travel company. The Company’s principal products and services
are charge and credit payment card products and travel-related
services offered to consumers and businesses around the world.
The Company’s businesses are organized into two customer-
focused groups, the Global Consumer Group and the Global
Business-to-Business Group. The Global Consumer Group
offers a range of products and services including charge and
lending (i.e., credit) card products; consumer travel services; and
stored value products such as Travelers Cheques and prepaid
products. The Business-to-Business Group offers business
travel, corporate cards and other expense management products
and services; network services and merchant acquisition and
merchant processing for the Company’s network partners
and proprietary payments businesses; and point-of-sale, back-
office, and marketing products and services for merchants.
The Company’s various products and services are sold globally
to diverse customer groups, including consumers, small
businesses, middle-market companies, and large corporations.
These products and services are sold through various channels
including direct mail, on-line applications, targeted sales forces,
and direct response advertising.
The Company’s products and services generate the following
types of revenue for the Company:
•฀Discount revenue, which is the Company’s largest revenue
source, represents fees charged to merchants when
cardmembers use their cards to purchase goods and services
on the Company’s network;
•฀Cardmember lending finance revenue, which represents
interest income earned on outstanding balances related to
the cardmember lending portfolio;
•฀Net card fees, which represent revenue earned for annual
memberships;
•฀Travel commissions and fees, which are earned by charging
a transaction or management fee for airline or other travel-
related transactions;
•฀Other commissions and fees, which are earned on foreign
exchange conversion fees and card-related fees and
assessments;
•฀Securitization income, net, which is the net earnings related
to cardmember loans financed through securitization
activities; and
•฀Other revenue, which represents insurance premiums earned
from cardmember travel and other insurance programs,
revenues arising from contracts with Global Network
Services’ (GNS) partners including royalties and signing
fees, publishing revenues, and other miscellaneous revenue
and fees.
In addition to funding and operating costs associated with these
types of revenue, other major expense categories are related to
marketing and reward programs that add new cardmembers
and promote cardmember loyalty and spending, and provisions
for anticipated cardmember credit and fraud losses.
The Company believes that its “spend-centric” business
model (which focuses on generating revenues primarily by
driving spending on its cards and secondarily by generating
finance charges and fees) has significant competitive advantages.
Average spending per cardmember, which is substantially higher
for the Company versus its competitors, represents greater value
to merchants in the form of loyal customers and higher sales.
This enables the Company to earn a premium discount rate and
thereby invest in greater value-added services for merchants
and cardmembers. As a result of the higher revenues generated
from higher spending, the Company has the flexibility to offer
more attractive rewards, other incentives to cardmembers, and
targeted marketing programs to merchants, which in turn create
an incentive to spend more on their cards.
The Company creates shareholder value by focusing on the
following elements:
•฀Driving growth principally through organic opportunities
and related business strategies, as well as joint ventures and
selected acquisitions;
•฀Delivering returns well in excess of the Company’s cost of
capital; and
•฀Distributing excess capital to shareholders through dividends
and stock repurchases.
Overall, it is management’s priority to increase shareholder
value over the moderate to long term by achieving the following
long-term financial targets, on average and over time:
•฀Earnings per share growth of 12 to 15 percent;
•฀Revenues net of interest expense growth of at least 8 percent;
and
•฀Return on average equity (ROE) of 33 to 36 percent.
The ROE target reflects the success of the Company’s spend-
centric business model and its effectiveness in capturing
high spending consumer, small business, and corporate
cardmembers.
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