Jerry Seinfeld and Superman aren't the only powerful players forging new relationships at American Express.
Kenneth Chenault, chairman and chief executive officer of American Express (New York, $175 billion in assets), is poised to reshape longstanding industry dynamics by partnering with leading financial institutions, such as MBNA (Wilmington, Del.; $59 billion in assets) and Deutsche Bank (Frankfurt, $1.01 trillion in assets). The resulting landscape promises to have a profound impact on consumers and corporations alike.
American Express has a "tremendous window of opportunity" over the next 12 to 24 months in the current climate of radical industry change in the payments network, said Chenault, speaking at a presentation to investors at a Sanford C. Bernstein & Co. conference last month.
The recent antitrust ruling against Visa and MasterCard has cleared the way for American Express to issue cards through banks that previously had been prevented from doing so by their exclusivity agreements with the bank-owned associations. MBNA will be American Express' first U.S. bank issuer. "Pending the Supreme Court's ruling of Visa and MasterCard's appeal, we expect MBNA to begin issuing American Express-branded cards in the fourth quarter," Chenault said.
Other bank issuers are ready to follow, Chenault indicated. In fact, observers say that American Express could have a strong cudgel at the bargaining table when it comes to forging new partnerships with the larger banks, as it has already floated the threat of legal action against the bank-owned associations. "A private legal action is a very viable option," Chenault told the audience.
Whether enticed by carrot or stick, its partners on the issuing side will insulate American Express from many of the risks. "Now, since it's our operating partner who owns the customer receivable and bears the credit and funding risk, our capital commitment is minimal," Chenault said. "If, as we expect, Global Network Services delivers a healthy stream of earnings, the ROE [return on equity] impact is fairly simple - we gain good 'R' with minimal 'E.'"
"This higher level of ROE should give us more flexibility and more choice when it comes to building shareholder value," Chenault continued.
But there's a key criterion - and a critical challenge - for American Express in forging any such partnerships. "Our model in financial services is directed toward mass-affluent clients who want a long-term advice relationship," Chenault said. "We don't want customers who are going to come in and out with balance transfer offers based on the lowest APR."
Hey, Big Spender
Corporate big spenders certainly fit the profile of those that American Express hopes to garner through its bank partnerships. Along those lines, American Express and Deutsche Bank will offer a co-branded American Express corporate card to Deutsche Bank's corporate customers that have a presence in Germany. Through the distribution partnership, Deutsche Bank will also offer its customers American Express' travel and expense management solutions.
The deal resembles a January 2003 partnership with TD Bank Financial Group (Toronto, $215 billion in assets). "It really fits into our overall strategy of developing partnerships with like-minded organizations to distribute our corporate card products, or issue jointly branded products, as part of our overall growth strategy in corporate," says Jean-Luc Durant, VP and head of network development for commercial cards in Europe for American Express.
The partnership did not require a substantial technology investment in the underlying systems behind the expense management solutions. "They will be identical to the American Express proprietary products," Durant says.
But in preparing the company's operational footprint for its expected growth, American Express has undergone significant reengineering over the past few years. "In each of the last three years, we've realized annual benefits over $1 billion from reengineering, and we've targeted another $1 billion for 2004," Chenault said.