American Express Co. has learned some hard lessons about credit cards. but now it feels it is ready to graduate to the real world.
And this time. the financial services giant says it is in the revolving credit business for keeps.
The Optima card was American Express' first experience with revolving credit, and it turned out to be a disaster. Early Optima card borrowers defaulted at a high rate, costing American Express $192 million in chargeoffs at the nadir in the second quarter of 1992, and a total of $1.4 billion since the product's introduction in 1987.
Optima customers were supposed to be a safe bet because they had already proved their creditworthiness by owning an American Express charge card.
As American Express hunkered down to cut its losses, it virtually halted all marketing of the Optima card from October 1991 to June 1992.
Then, as the portfolio's health improved, and American Express look on a new corporate mind-set and instituted a predictive modeling system that weeds out bad customers, the company plotted its return to revolving credit cards.
The New York-based company plans to launch a series of credit card products this fall and next year under the Optima umbrella. The products will be marketed to the general public, and the original Optima card will continue to be marketed to the American Express card base.
Each new credit card will represent a different configuration of five basic variables: interest rate. grace period, annual fee, rewards. and services. Each product is expected to bring in 500.000 to one million customers.
$30B Balance Goal Set
American Express hopes to build $30 billion in revolving balances over six years. But it does not specify how many products it will develop, nor does it know how many cards it will issue to reach the target, a spokeswoman said.
Some analysts point out that American Express was slow to realize that the best way to generate card profits is to reach the people who revolve their credit balances.
"American Express was trying to serve an entire market with one product," said Thomas P. Facciola an analyst with Salomon Brothers. "That was like being a restaurant and serving one thing on your menu."
The seeming irony, however, of American Express' embrace of credit on a large scale is not lost on industry observers. "They criticized the industry for the evils of credit and now they are doing it themselves." said Robert B. McKinley, president of RAM Research Corp. in Frederick, Md.
In 1992, American Express. launched a campaign called "Credability," in which consumer advocates moderated panel discussions on how to use credit cards wisely. The forums "were supposed to expose the high cost of credit cards," said Mr. McKinley.
American Express executives say these new credit products do not represent a philosophical departure.
"I think we have understood, since the launch of the Optima card, the need that our members have for revolving credit," said Phillip J. Riese, president of cardmember financial services. "While the understanding of that need has not changed, how we are executing the strategy has."
One who contributed significantly to the hold marketing plans and who will be key to ensuring their viability is Vijay R. Parekh, senior vice president and chief credit officer in the consumer lending group.
He was part of a team that was brought in to evaluate American Express' missteps and ultimately to reverse earlier decisions.
When Mr. Parekh rose to his present position from a vice presidency in March 1992, American Express was studying what went wrong with the Optima card.
The company recognized its problem in the last quarter of 1991 and was out of the woods within 18 to 24 months. The rate of chargeoffs steadily declined from 10.44% at the beginning of 1992 to 5.44% in the second quarter of this year.
The earlier version of Optima failed. Mr. Parekh conceded, because American Express had been operating under the false assumption that the charge and revolving card businesses were the same.
Focusing on Risk Management
Another fallacy American Express had to overcome was the notion that debt collection, rather than risk management, is a normal cost of the business.
In examining some of the trends in the Optima portfolio. Mr. Parekh discovered that "a small group in the portfolio was performing rather poorly, and we were subsidizing their losses on the good guys."
One of the biggest differences between now and the earlier Optima version, he said, is that American Express developed sophisticated predictive modeling software, which not only singles out creditworthy customers but also calculates each customer's net present value.
The software, which Mr. Parekh niCknamed the "instrument panel," enables him to view the entire American Express portfolio in a variety of ways.
Wealth of Capabilities
In a recent interview at American Express headquarters in New York. Mr. Parekh demonstrated how the software earned its name: He can view profiles of different markets, including the United States and Europe, On actual maps that appear on his computer screen.
"The instrument panel is one element of the business, but it has helped us to create a tremendous competitive edge and innovation," said Mr. Parekh, "and it allows us to control any changes proactively and stay ahead of the curve."
Mr. Parekh, who joined American Express in 1987 as director of operations for the card business after two years at Citibank as an assistant vice president, is responsible for managing risk for all American Express products.
The first of the new credit products is to be unveiled next month.
Profile: Affluent, Creditworthy
Mr. Riese said the company would continue to target the "higher-income and highly creditworthy" customer.
Industry experts say the plan will be a formidable challenge to bank card competitors. The consensus appears to be that American Express has the marketing muscle. brand-name power, and expertise to reach its goals.
"Certainly none of the bank card programs have ever counted American Express as dead," said Mr. McKinley. Moreover, the researcher believes that the new products come at a time when the card industry is particularly vulnerable. Consumers are experiencing interest rate hikes for the first time in several years, and many of the major cobranded products are in the process of being repriced or already have been.
Aggressive pricing and strong customer service will serve American Express well, analysts say, but some point out that if American Express is reaching for the same consumer pool as MasterCard and Visa issuers, limited merchant acceptance could cause a problem.
Greater Acceptance Sought
According to American Express research, its cards are accepted at 80% of the places its cardholders want to shop. Now, the company target is 95%.
American Express faces another challenge: defining its products clearly.
Mr. Parekh believes that limiting each product to a potential consumer base of about one million creates a narrow focus. Once consumers enter the American Express product family, the idea is that they should never have to leave.
"As the customer's needs are changing, we have the products available to move them with us and grow with us," said Mr. Parekh, "They shouldn't have to look elsewhere."
Industry experts, however, caution that American Express risks cannibalizing its own base if it introduces such a wide array of products that people become confused.