American Express Co. is abandoning its bid to supply purchasing cards and travel and entertainment cards to U.S. government agencies.
American Express, whose five-year contract to provide travel cards for federal workers expires Nov. 30, said its program has been "modestly profitable," but it sees those margins narrowing.
The withdrawal leaves five other companies-all banks that apparently do not share Amex's pessimism-authorized to go after the business one agency at a time.
"The current pricing arena for these programs does not make good business sense for American Express," said Ed Gilligan, president of American Express Corporate Services. "We can better direct our resources to expanding our core corporate business, where the returns and growth opportunities are more attractive."
The announcement seems to leave a few loose ends, including whether Wright Express Corp. is still in the bidding for the fleet management portion of the government business. Wright Express came in as a partner with American Express.
An American Express spokeswoman said Wright Express, the incumbent fleet card contractor, was still free to participate. Russ Lamer, manager of strategic planning and research for Wright Express in South Portland, Maine, a subsidiary of Cendant Corp., said the company was "still working through what impact this will have on us."
A General Services Administration spokesman, Bill Bearden, said the announcement caught his agency by surprise. The GSA is "speaking with Amex for clarification" about "exactly what their concerns are," he said.
So far, three accounts have been awarded: NationsBank Corp. won the Department of Defense's travel card account, and Citicorp won the GSA's travel and purchase card business and the travel, purchase, and fleet card businesses of the Department of Veterans Affairs.
Also in the running for the eligible agency business are units of First Chicago NBD Corp., Mellon Bank Corp., and U.S. Bancorp.
One banker who spoke on the condition of anonymity said the departure of the incumbent travel card issuer "changes the whole competitive dynamic."
Ira Jekowsky, vice president of public-sector business development at MasterCard International, said, "We feel very strongly that, if properly managed and with the right product mix, this is a profitable business."
Moreover, Mr. Jekowsky said, government contracts can go hand-in-hand with private-sector card opportunities. He said Amex has "basically withdrawn from competing for a large portion of the corporate card market for the next 10 years."
"There is no question that the pioneering work the government will do in bill presentment, on-line dispute resolution, multi-application chip cards, and other areas will set the bar for corporate America," Mr. Jekowsky said. "How could one argue that this will not be a profitable business to pursue?"
American Express officials said they perceived the bank card issuers as bending over backward to provide ambitious services at unreasonably low prices.
"As one of the incumbent card issuers, we understand the investment that is needed to meet the unique service and technology requirements of individual agencies and operate at a profit," Mr. Gilligan said. "Based on the initial rounds of bidding, it is clear the returns will deteriorate significantly, and we are not willing to pursue this business at any cost."
Nancy Muller, an American Express spokeswoman, called some of the competitors' bids "irrational."
Ms. Muller said it took "several years" for Amex's government travel contract to turn profitable, and even then it was "extremely marginal." Technology and customization costs had run high, she said, and credit losses have been a nagging problem.
American Express has issued charge cards to everyone in the military, including young people who have little experience with credit, Ms. Muller said. Delinquencies were high-about three times the average delinquency rate for civilians-and the company had to impose controls and offer education programs in response.
David K. Hillman, a credit card consultant with Deloitte & Touche consulting group in Parsippany, N.J., said American Express' decision should give the bankers pause.
"If Amex is looking at those numbers and saying it doesn't want to play in that game, then you wonder what numbers the banks are looking at," he said.
Mr. Hillman said agency contracts are more prestigious than lucrative. The government "is an extremely demanding customer for whom one would have to make significant investments in technology and provide an attractive financial arrangement, which would mean from an economic perspective it might not be that attractive."
