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In a rare coordinated effort Monday, all three federal banking agencies, the CFPB and the state regulator in Utah announced more than $112 million in enforcement penalties against American Express for card practices that allegedly violated a range of consumer protection laws.
October 1 -
American Express is downplaying concerns over the impact of a proposed settlement in a longstanding retailers' lawsuit against Visa and MasterCard.
July 19 -
The rebound of credit card lending is having nasty side effects for Capital One Financial Corp. and American Express Co., which are increasingly spending more to compete for the most credit-worthy customers.
January 20
American Express is getting ready to spend even more to keep its best customers.
The New York credit card company warned Wednesday that it will likely take a charge in the fourth quarter for higher spending on its rewards programs. Chief Financial Officer Daniel Henry told analysts on a conference call that the company has begun a review of the formula it uses to calculate how fully customers redeem the credit card rewards points that they have earned. That redemption rate is already high at 93%, but Henry's comments suggested that it will tick even higher.
The expense is the latest toll in American Express'
Henry declined Wednesday to estimate the likely size of the fourth-quarter charge, saying "at this juncture, we haven't evolved the models to a sufficient degree to have a reliable estimate."
But he did add that if the redemption rate increased by 1 percentage point, it would result in a $330 million increase in the balance sheet reserve and corresponding provision.
Sanjay Sakhrani, an analyst with Keefe, Bruyette & Woods, said Wednesday's announcement was a bit of a surprise, because American Express had previously given indications that it would be able to stop increasing its redemption expenses. But he said he would wait to see the size of the redemption rate change before passing judgment: "If it's one or even two percentage points, it's not the end of the world," he said.
American Express is not planning on otherwise defraying costs by reducing the amount of rewards it offers, Henry said.
"So membership rewards, we view as being a competitive advantage to us. As I said, they are an important part of driving billings. It also is a way for us to have a very close relationship to our customers," he said in response to an analyst's question. "We actually think, to the extent we enhance the program, and we have higher redemptions, that will have a very positive impact on the long-term health of our business."
He made those comments during a call with analysts to discuss the company's third-quarter earnings. American Express reported earnings of $1.09 per share, which matched analysts' consensus estimate, but revenues fell short of expectations.
In the third quarter, American Express spent about $1.5 billion on membership rewards, up slightly from the same period a year earlier, though its overall member rewards expense fell by $69 million due to a decrease in liability for points earned in previous quarters.
Rewards issued by American Express traditionally have a comparatively high redemption rate, in large part because its customers have tended to keep their cards for a long period of time, and many of the unredeemed rewards involve customers who close their accounts. Since 2010, the company's redemption rate has already ticked up 2 percentage points.
Wednesday's announcement was not the first time that American Express has made a change to how it calculates its redemption rate. In the first quarter of 2011, it also revised the formula.
The company also said Wednesday that it plans to stop offering two credit-card add-on products by Dec. 31, after such products have come under fire from regulators.
The products are Account Protector, which offers something akin to insurance in cases where customers experience hardships, and ID Protect, an identity theft prevention program. American Express said that it has already stopped marketing the two products.
The marketing of credit card add-on products has come under scrutiny from the Consumer Financial Protection Bureau, with Capital One and Discover Financial Services (DFS) paying stiff penalties in connection with their marketing tactics.
Earlier this month, the CFPB and other state and federal agencies hit American Express with
Henry said Wednesday that those two products do not provide a significant source of revenue for American Express.
