American Express 2015 Annual Report Download - page 24

expand our presence into new geographic areas generally without assuming additional Card Member credit risk or
having to invest a large amount of resources, as our GNS partners already have established attractive customer bases
and are responsible for managing the credit risk associated with the cards they issue.
In assessing whether we should pursue a proprietary or GNS strategy in a given country, or some combination
thereof, we consider a wide range of country-specific factors, including the stability and attractiveness of financial
returns, the size of the potential Card Member base, the strength of available marketing and credit data, the size of
cobrand opportunities and how we can best create strong merchant value.
Although we customize our network arrangements to the particular country and each partner’s requirements, as
well as to our strategic plans in that marketplace, all GNS arrangements are designed to help issuers develop products
that are relevant and attractive to their customers and to support the value of American Express card acceptance to
merchants. We choose to partner with institutions that share a core set of attributes compatible with the American
Express brand, such as commitment to high quality standards and strong marketing expertise, and we require
adherence to our product, brand and service standards.
The GNS business has established 158 card-issuing and/or merchant-acquiring arrangements with banks and
other institutions in 141 countries. Since 1999, cards-in-force issued by GNS partners have grown at a compound
annual growth rate of approximately 20 percent, totaling over 47 million cards at the end of 2015. Outside the United
States, approximately 80 percent of new cards issued in 2015 were cards issued by GNS partners. Spending on GNS
cards has grown at a compound annual rate of 21 percent since 1999, with spending on these cards totaling $166
billion in 2015, up 3 percent from a year ago. With the total number of American Express-branded GNS partner
products standing at over 1,350, GNS strengthens our brand visibility around the world, drives more transaction
volume onto our merchant network and increases the number of merchants choosing to accept the American Express
card.
GNS Arrangements
Although the structures and details of each of the GNS arrangements vary, all of them generate revenues for us
from the card transaction volumes they drive on the American Express network. Gross revenues we receive per dollar
spent on a card issued by a GNS partner are generally lower than those from our proprietary card-issuing business.
However, because the GNS partner is responsible for most of the operating costs and risk of its card-issuing business,
our operating expenses and credit losses are generally lower than those in our proprietary card-issuing business. The
GNS business model generates an attractive earnings stream and risk profile that requires a lower level of capital
support. The return on equity in our GNS business can thus be significantly higher than that of our proprietary card-
issuing business. In addition, since the majority of GNS costs are fixed, the business is scalable. GNS partners benefit
from their association with the American Express brand and their ability to gain attractive revenue streams and
expand and differentiate their product offerings with innovative marketing programs.
Our GNS arrangements fall into the following three main categories: Independent Operator Arrangements,
Network Card License Arrangements and Joint Venture Arrangements.
Independent Operator Arrangements. The first type of GNS arrangement is known as an independent operator
(“IO”) arrangement. As of the end of 2015, we had 71 of these arrangements around the world. We pursue these
arrangements to expand the presence of the American Express network in countries in which we do not offer a
proprietary local currency card. The partner’s local presence and relationships help us enhance the impact of our
brand in the country, reach merchant coverage goals more quickly, and operate at economic scale and cost levels that
would be difficult for us to achieve on our own. Subject to meeting our standards, IO partners are licensed to issue
local currency cards in their countries, including the American Express®classic Green, Gold, Platinum and Centurion
cards. In addition, most of these partners serve as the merchant acquirer and processor for local merchants.
American Express retains the relationship with multinational merchants. Our IO partners make the decisions about
which customers will be issued cards, own the customer relationships and bear the credit and fraud risk for the
American Express cards they issue. GNS generates revenues in IO arrangements from card licensing fees,
commissions on Card Member billings, foreign exchange conversion revenue, commissions on charge volume at
merchants, share of discount revenue and, in some partnerships, commissions on net interest income or commissions
on cards-in-force. Our IO partners are responsible for transaction authorization, billing and pricing, Card Member and
merchant servicing, and funding card receivables for their cards and payables for their merchants.
We bear the credit risk arising from the IO partner’s potential failure to meet its settlement obligations to us. This
exposure arises when their Card Members make purchases at merchants on the American Express network or use the
card for cash advances at ATMs and we submit such transactions to the IO partner for settlement. We mitigate this
risk by partnering with institutions we believe are financially sound and will meet their obligations, and by monitoring
their financial health, their compliance with the terms of their relationship with us and the political, economic and
regulatory environment in which they operate. In addition, depending on an IO partner’s credit rating and other
indicators of financial health, we may require an IO partner to post a letter of credit, bank guarantee or other collateral
to reduce this risk.
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