American Express 2012 Annual Report Download - page 29

AMERICAN EXPRESS COMPANY
2012 FINANCIAL REVIEW
compared to $1.2 billion in 2010, primarily due to lower
purchases of investments and a decrease in restricted cash,
partially offset by lower sales, maturity and redemption of
investments and increases in cardmember loans and receivables.
Cash Flows from Financing Activities
The Company’s financing activities primarily include issuing and
repaying debt, taking customer deposits, issuing and
repurchasing its common shares, and paying dividends.
For the year ended December 31, 2012, net cash used in
financing activities of $3.3 billion increased $2.6 billion
compared to $0.7 billion in 2011, due to a decrease in short-term
borrowings, and an increase in the repurchase of common shares
in 2012, which more than offset a decrease in principal payments
on long-term debt.
For the year ended December 31, 2011, net cash used in
financing activities of $0.7 billion decreased $7.2 billion
compared to $7.9 billion in 2010, due to increases in customer
deposits and issuances of long-term debt during 2011 as
compared to 2010, partially offset by increases in principal
payments on long-term debt and repurchases of common shares
and a decrease in short-term borrowings in 2011.
CERTAIN LEGISLATIVE, REGULATORY AND OTHER
DEVELOPMENTS
As a participant in the financial services industry, the Company
is subject to a wide array of regulations applicable to its
businesses. As a bank holding company and a financial holding
company, the Company is subject to comprehensive examination
and supervision by the Federal Reserve and to a range of laws
and regulations that impact its business and operations. In
addition, the extreme disruptions in global capital markets that
commenced in mid-2007 and the resulting instability and failure
and near failure of numerous financial institutions, as well as
reports of widespread consumer abuse, led to a number of
changes in the financial services industry, including more intense
supervision, enhanced enforcement activity, significant
additional regulation and the formation of additional regulatory
bodies. In light of recent legislative initiatives and continuing
regulatory reform implementation, compliance requirements
and expenditures have risen for financial services firms,
including the Company, and the Company expects compliance
requirements and expenditures will continue to rise with
continuing implementation of these reforms.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection
Act (Dodd-Frank), which was enacted in July 2010, is
comprehensive in scope and contains a wide array of provisions
intended to govern the practices and oversight of financial
institutions and other participants in the financial markets.
Among other matters, the law created an independent Consumer
Financial Protection Bureau (the CFPB), which has broad
rulemaking authority over providers of credit, savings, payment
and other consumer financial products and services with respect
to certain federal consumer financial laws. Moreover, the CFPB
has examination and enforcement authority with respect to
certain federal consumer financial laws for some providers of
consumer financial products and services, including the
Company’s insured depository institution subsidiaries. The
CFPB is directed to prohibit “unfair, deceptive or abusive” acts
or practices, and to ensure that all consumers have access to fair,
transparent and competitive markets for consumer financial
products and services. The review of products and practices to
prevent unfair, deceptive or abusive conduct will be a continuing
focus of the CFPB and banking regulators more broadly, as well
as by the Company itself. The ultimate impact of this heightened
scrutiny is uncertain, but internal and regulatory reviews have
resulted in, and are likely to continue to result in, changes to
pricing, practices, products and procedures. Such reviews are
also likely to continue to result in increased costs related to
regulatory oversight, supervision and examination, additional
restitution to cardmembers and possible additional regulatory
actions which could include civil money penalties. In July 2012,
the CFPB issued a bulletin regarding its review of marketing
practices with respect to credit card add-on products, including
debt cancellation, identity theft protection, credit reporting and
monitoring, and other supplementary products. The Company is
cooperating with regulators in their ongoing regulatory
examination of credit card add-on products. For a description of
the settlements reached with, and ongoing reviews by, several
bank regulators, including the CFPB, relating to certain aspects
of the Company’s U.S. consumer card practices, see “Legal
Proceedings” in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2012.
Dodd-Frank prohibits payment card networks from restricting
merchants from offering discounts or incentives to customers to
pay with particular forms of payment, such as cash, check, credit
or debit card, or restricting merchants from setting certain
minimum and maximum transaction amounts for credit cards,
as long as any such discounts or incentives or any minimum or
maximum transaction amounts do not discriminate on the basis
of the issuer or network and comply with applicable federal or
state disclosure requirements.
Under Dodd-Frank, the Federal Reserve is also authorized to
regulate interchange fees paid to financial institutions on debit
card and certain general-use prepaid card transactions to ensure
that they are “reasonable and proportional” to the cost of
processing individual transactions, and to prohibit payment card
networks and issuers from requiring transactions to be processed
on a single payment network or fewer than two unaffiliated
networks. The Federal Reserve’s rule provides that the
regulations on interchange and routing do not apply to a three-
party network like American Express when it acts as both the
issuer and the network for its prepaid cards, and the Company is
therefore not a “payment card network” as that term is defined
andusedforthespecificpurposesoftherule.
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