American Express 2013 Annual Report Download - page 54

AMERICAN EXPRESS COMPANY
2013 FINANCIAL REVIEW
card purchases more than the merchants’ cost of acceptance in those
member states that permit surcharging.
Although neither a legislative nor regulatory initiative, the
settlement by MasterCard and Visa in a U.S. merchant class litigation
required, among other things, MasterCard and Visa to permit U.S.
merchants, subject to certain conditions, to surcharge credit cards,
while allowing them to continue to prohibit surcharges on debit and
prepaid card transactions. In December 2013, we announced the
proposed settlement of a number of U.S. merchant class action
lawsuits, which if approved, would change certain surcharging
provisions in our U.S. card acceptance agreements. For a further
description of the proposed settlement, see Item 1. “Legal
Proceedings” in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2013.
Also, other countries in which the Company operates have been
considering, and in some cases adopting similar legislation and rules
that would impose changes on certain practices of card issuers,
merchant acquirers and payment networks. Governments in several
countries have established or are proposing to establish payment
system regulatory regimes. Broad regulatory oversight over payment
systems can include rules regarding fees involved in the operation of
card networks and, in some cases, requirements for international card
networks to be locally licensed and/or to localize aspects of their
operations. The development and enforcement of regulatory regimes
may adversely affect our ability to maintain or increase our revenues
and extend our global network.
Refer to “Consolidated Capital Resources and Liquidity” for a
discussion of capital adequacy requirements established by federal
banking regulators.
RECENTLY ISSUED ACCOUNTING STANDARDS
Refer to the Recently Issued Accounting Standards section of Note 1
to the Consolidated Financial Statements.
GLOSSARY OF SELECTED TERMINOLOGY
Adjusted average loans — Represents average Card Member loans
excluding the impact of deferred card fees, net of direct acquisition
costs of Card Member loans and certain other immaterial items.
Adjusted net interest income — Represents net interest income
attributable to the Company’s Card Member loans portfolio excluding
the impact of interest expense and interest income not attributable to
the Company’s Card Member loans portfolio.
Asset securitizations — Asset securitization involves the transfer
and sale of receivables or loans to a special-purpose entity created for
the securitization activity, typically a trust. The trust, in turn, issues
securities, commonly referred to as asset-backed securities, that are
secured by the transferred receivables or loans. The trust uses the
proceeds from the sale of such securities to pay the purchase price for
the underlying receivables or loans. The receivables and loans of the
Company’s Charge Trust II and Lending Trust being securitized are
reported as assets on the Company’s Consolidated Balance Sheets.
Average discount rate — This calculation is designed to reflect
pricing at merchants accepting general purpose American Express
cards. It represents the percentage of billed business (both proprietary
and GNS) retained by the Company from merchants it acquires, prior
to payments to third parties unrelated to merchant acceptance.
Basel III supplementary leverage ratio — Refer to the Capital
Strategy section under “Consolidated Capital Resources and
Liquidity” for the definition.
Basic cards-in-force — Proprietary basic consumer cards-in-force
includes basic cards issued to the primary account owner and does not
include additional supplemental cards issued on that account.
Proprietary basic small business and corporate cards-in-force include
basic and supplemental cards issued to employee Card Members.
Non-proprietary basic cards-in-force includes cards that are issued
and outstanding under network partnership agreements, except for
supplemental cards and retail co-brand Card Member accounts which
have had no out-of-store spend activity during the prior 12-month
period.
Billed business — Includes activities (including cash advances)
related to proprietary cards, cards issued under network partnership
agreements (non-proprietary billed business), corporate payments and
certain insurance fees charged on proprietary cards. In-store spend
activity within retail co-brand portfolios in GNS, from which the
Company earns no revenue, is not included in non-proprietary billed
business. Card billed business is reflected in the U.S. or outside the
U.S. based on where the Card Member is domiciled.
Capital asset pricing model — Generates an appropriate discount
rate using internal and external inputs to value future cash flows based
on the time value of money and the price for bearing uncertainty
inherent in an investment.
Capital ratios — Represents the minimum standards established by
the regulatory agencies as a measure to determine whether the
regulated entity has sufficient capital to absorb on- and off-balance
sheet losses beyond current loss accrual estimates.
Card acquisition — Primarily represents the issuance of new cards
to either new or existing Card Members through marketing and
promotion efforts.
Card Member — The individual holder of an issued American
Express branded charge or credit card.
Card Member loans — Represents the outstanding amount due
from Card Members for charges made on their American Express
credit cards, as well as any interest charges and card-related fees. Card
Member loans also include revolving balances on certain American
Express charge card products and are net of deferred card fees.
Card Member receivables — Represents the outstanding amount
due from Card Members for charges made on their American Express
charge cards as well as any card-related fees.
Charge cards — Represents cards that generally carry no pre-set
spending limits and are primarily designed as a method of payment
and not as a means of financing purchases. Charge Card Members
generally must pay the full amount billed each month. No finance
charges are assessed on charge cards. Each charge card transaction is
authorized based on its likely economics reflecting a customer’s most
recent credit information and spend patterns. Some charge card
accounts have an additional lending-on-charge feature that allows
revolving certain balances.
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