AmEx Says It Can Maintain Merchant Fees As It Signs More Banks

In the wake of its groundbreaking announcement last week that it had signed up MBNA Corp. as the first U.S. bank issuer on its network, American Express Co. yesterday said the MBNA deal is non-exclusive and that it is actively pursuing such arrangements with “plans to form additional partnerships” in the U.S. The card company, however, refused to project how many bank alliances it plans to have in place over any particular period of time. “Our first key priority is it get MBNA up and running,” said David House, the AmEx group president responsible for the company's alliances with bank issuers worldwide. “We expect to do that later this year.” At the same time, House emphasized that AmEx will continue to control merchant acquiring in the United States under the alliance programs and will set discount rates “in accordance with the superior value delivered to merchants.” In 35 of the 79 issuing partnerships AmEx has formed outside the U.S., partner institutions manage the acquiring operation in whole or in part, adding 2.5 million locations to the AmEx merchant network since the alliance program started in 1997. House rebutted speculation that merchants might balk at the higher transaction costs the AmEx-branded cards issued by banks will carry as those banks add cardholders, many of whom may not fit the company's traditional high-spend profile. “We are working with banks to ensure that the products they develop have compelling rewards, incentives, or other features,” he said, in an effort to maintain higher-value transactions at the point of sale. He pointed to AmEx's single-acquirer, or so-called closed-loop acquiring, model as a signal advantage in this effort, as it allows the company to coordinate rewards and other other marketing programs across networks of merchants more swiftly than the bank card networks, which are dependent on multiple acquirers, can. “This allows banks to customize marketing efforts and drive business to merchants who accept the (AmEx-branded) card,” he said. House cited statistics that indicate the company's alliances outside the U.S. have so far generated 6.4 million AmEx cards. This represents nearly one-third of all non-U.S. AmEx-branded cards. Charge volume on these cards totaled $12 billion last year, or $1,875 per card, and has grown at an annual rate of 16% since 1999. The traffic generated on these cards also generates more profit for AmEx than does volume on its own proprietary cards, since AmEx already has the processing infrastructure in place and the partner bank assumes major costs, including marketing and receivables financing. “The (return on equity) on new cards acquired is several times higher than cards acquired by our own proprietary issuing business,” said House. And the U.S. partnerships should be even more lucrative for AmEx. In the international alliance program, a 10% rise in transaction volume pushes AmEx's transaction costs up 1.5%, House said, whereas he expects the same increase in volume in the U.S. will generate only a 1% jump in cost. He attributed the greater efficiency in the U.S. to improved economies of scale from higher expected volumes. “Our network today already has the capacity to bring on considerable additional volume without the need for significant infrastructure investments,” he added. House's remarks came during a presentation to securities analysts that mainly dealt with AmEx's program involving bank issuing partners, a business AmEx calls global network services. In pursuing issuing alliances with banks in the U.S., AmEx is taking advantage of a federal appeals court decision last fall upholding a federal judge's ruling that struck down a rule Visa USA and MasterCard International have in place banning their U.S. members from issuing cards from AmEx or Discover Financial Services Inc. The bank card networks have announced they plan to appeal that decision to the U.S. Supreme Court.