American Express 2014 Annual Report Download - page 58

AMERICAN EXPRESS COMPANY
2014 FINANCIAL REVIEW
Deferred Tax Asset Realization
Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and
liabilities using the enacted tax rates expected to be in effect for the years in which the differences are expected to reverse.
Since deferred taxes measure the future tax effects of items recognized in the Consolidated Financial Statements, certain estimates and
assumptions are required to determine whether it is more likely than not that all or some portion of the benefit of a deferred tax asset will not
be realized. In making this assessment, management analyzes and estimates the impact of future taxable income, reversing temporary
differences and available tax planning strategies. These assessments are performed quarterly, taking into account any new information.
Changes in facts or circumstances can lead to changes in the ultimate realization of deferred tax assets due to uncertainties.
OTHER MATTERS
CERTAIN LEGISLATIVE, REGULATORY AND OTHER DEVELOPMENTS
As a participant in the financial services industry, and as a bank holding company, we are subject to comprehensive examination and
supervision by the Federal Reserve and to a range of laws and regulations that impact our business and operations. In light of legislative
initiatives over the last several years and continuing regulatory reform implementation, compliance requirements and expenditures have
risen for financial services firms, including us, and we expect compliance requirements and expenditures will continue to rise in the future.
In addition, legislators and regulators in various countries in which we operate have focused on the operation of card networks, including
through antitrust actions, legislation and rules that would or do impose changes on certain practices or pricing of card issuers, merchant
acquirers and payment networks and the establishment of broad and ongoing regulatory oversight regimes for payment systems. Regulators
and legislators have focused on the fees merchants pay to accept cards, including the way bankcard network members collectively set the
“interchange” (that is, the fee paid by the bankcard merchant acquirer to the card issuer in payment networks like Visa and MasterCard) and
the fees merchants are charged for card acceptance, as well as the rules, contracts and monitoring and other controls governing merchant
card acceptance. Although, unlike the Visa and MasterCard networks, the American Express payment network does not have interchange
fees or collectively set any fees or rules, antitrust actions and government regulation relating to merchant pricing or terms of merchant rules
and contracts could affect all networks directly or indirectly. For example, the European Commission’s (the Commission) decision to make
binding Visa Europe’s commitments to cap its cross-border credit card multilateral interchange fees to 30 basis points and change its rules on
how cross-border interchange is applied could negatively impact the discount revenue we derive from our business in the EU as a result of
downward marketplace pressure on merchant fees, including our discount rates. Broad regulatory oversight over payment systems can also
include, 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.
European Union Payments Legislation
In July 2013, the Commission proposed legislation in two parts, covering a wide range of topics across the payments industry. The first part
was a proposed EU-wide regulation on interchange fees (the Interchange Fee Regulation); the second consisted of revisions to the Payment
Services Directive (the PSD2). As part of the EU legislative process, these proposals have been subject to review by the European Parliament
and the Council of the European Union, after which these institutions then meet with the Commission to finalize the legislation in a process
known as a trialogue.
The Interchange Fee Regulation is now in the final stages of the legislative process following political agreement on its substantive content
among the Council, the Parliament and the Commission in December 2014. Although the regulation is still subject to final review and formal
adoption, the substantive terms agreed among the institutions include the following:
폷Price caps — Interchange fees on consumer card transactions would be capped, generally at 20 basis points for debit and prepaid cards and
30 basis points for credit and charge cards, with opportunity for lower caps in some instances. Although we do not have interchange fees,
as “four party” networks such as Visa and MasterCard have, and “three party” networks such as American Express are exempt from the
application of the caps, the regulation provides that “three party” networks should be treated as “four party” networks when they license
third party providers to issue cards and/or acquire merchants or when they issue cards with a co-brand partner or through an agent. This
means, for example, the caps would apply to elements of the financial arrangements agreed to between us and each of our GNS partners in
the EU. The caps would take effect six months after the regulation would become effective; however, the effectiveness of these caps in
relation to our transactions with no cross-border component may be extended for a further three years. The discount rates we agree to
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