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Section 1: 10-K (FORM 10-K)

Form 10-K
Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File No. 1-7657

 

 

American Express Company

(Exact name of registrant as specified in its charter)

 

New York   13-4922250
(State or other jurisdiction of
incorporation or organization)
 

(I.R.S. Employer

Identification No.)

 

World Financial Center

200 Vesey Street

New York, New York

  10285
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (212) 640-2000

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

 

Name of each exchange

on which registered

Common Shares (par value $0.20 per Share)

  New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x

  Accelerated filer  ¨

Non-accelerated filer  ¨ (Do not check if a smaller reporting company)

  Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

As of June 30, 2009, the aggregate market value of the registrant’s voting shares held by non-affiliates of the registrant was approximately $27.6 billion based on the closing sale price as reported on the New York Stock Exchange.

As of February 22, 2010, there were 1,196,727,420 common shares of the registrant outstanding.

Documents Incorporated By Reference

Parts I, II and IV: Portions of Registrant’s 2009 Annual Report to Shareholders.

Part III: Portions of Registrant’s Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Shareholders to be held on April 26, 2010.

 

 

 


Table of Contents

TABLE OF CONTENTS

Form 10-K

Item Number

 

          Page

PART I

  
1.   

Business

   1
  

Introduction

   1
  

Global Network & Merchant Services

   4
  

U.S. Card Services

   16
  

International Card Services

   26
  

Global Commercial Services

   27
  

Corporate & Other

   31
  

Foreign Operations

   45
  

Sale of American Express Bank Ltd./Discontinued Operations

   46
  

Segment Information and Classes of Similar Services

   46
  

Executive Officers of the Company

   46
  

Employees

   48
  

Guide 3 – Statistical Disclosure by Bank Holding Companies

   49
1A.   

Risk Factors

   67
1B.   

Unresolved Staff Comments

   81
2.   

Properties

   81
3.   

Legal Proceedings

   82
4.   

Submission of Matters to a Vote of Security Holders

   88
PART II    89
5.   

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   89
6.   

Selected Financial Data

   90
7.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   90
7A.   

Quantitative and Qualitative Disclosures about Market Risk

   90
8.   

Financial Statements and Supplementary Data

   90
9.   

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   90
9A.   

Controls and Procedures

   90
9B.   

Other Information

   91
PART III   
10.   

Directors, Executive Officers and Corporate Governance

   92
11.   

Executive Compensation

   92
12.   

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   92
13.   

Certain Relationships and Related Transactions, and Director Independence

   92
14.   

Principal Accounting Fees and Services

   92
PART IV   
15.   

Exhibits, Financial Statement Schedules

   93
  

Signatures

   94
  

Index to Financial Statements

   F-1
  

Exhibit Index

   E-1

 


Table of Contents

PART I*

 

ITEM 1. BUSINESS

INTRODUCTION

Overview

American Express Company, together with its consolidated subsidiaries (“American Express,” the “Company,” “we,” “us” or “our”), is a global service company that provides customers with access to products, insights and experiences that enrich lives and build business success. Our principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. We were founded in 1850 as a joint stock association. We were incorporated in 1965 as a New York corporation. American Express Company and its principal operating subsidiary, American Express Travel Related Services Company, Inc. (“TRS”), are bank holding companies under the Bank Holding Company Act of 1956 (the “BHC Act”), subject to the supervision and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).

Our headquarters are located in New York, New York in lower Manhattan. We also have offices in other locations in North America, as well as throughout the world.

We are principally engaged in businesses comprising four reportable operating segments: U.S. Card Services, International Card Services, Global Commercial Services, and Global Network & Merchant Services, all of which we describe below.

Securities Exchange Act Reports and Additional Information

We maintain an Investor Relations Web site on the Internet at http://ir.americanexpress.com. We make available free of charge, on or through this Web site, our annual, quarterly and current reports and any amendments to those reports as soon as reasonably practicable following the time they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). To access these, just click on the “SEC Filings” link under the caption “Financial Information/Filings” on our Investor Relations homepage.

You can also access our Investor Relations Web site through our main Web site at www.americanexpress.com by clicking on the “About American Express” link, which is located at the bottom of our homepage. Information contained on our Investor Relations Web site and our main Web site is not incorporated by reference into this report or any other report filed with or furnished to the SEC.

2009 Highlights

Compared with 2008, we delivered:

 

   

total revenues net of interest expense of $24.5 billion, down 14% from $28.4 billion

 

   

income from continuing operations of $2.1 billion, down 26% from $2.9 billion

 

   

net income of $2.1 billion, down 21% from $2.7 billion

 

 

* Some of the statements in this report constitute forward-looking statements. You can identify forward-looking statements by words such as “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” “estimate,” “predict,” “potential,” “continue” or other similar expressions. We discuss certain factors that affect our business and operations and that may cause our actual results to differ materially from these forward-looking statements under “Item 1A. Risk Factors” below. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements.

 

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diluted earnings per share based on income from continuing operations of $1.54, down 38% from $2.47

 

   

diluted earnings per share based on net income of $1.54, down 34% from $2.32

 

   

return on average equity of 14.6%, compared with 22.3%.

2009 was a challenging year characterized by a weak economy, frozen credit markets in the first half of the year and high credit losses industrywide. In the first two quarters, the Company’s spending and cardmember loan balances declined by double digits as compared to the corresponding periods in 2008 and credit metrics (e.g. past due and write-off rates) peaked at historically high levels. In the third quarter, the Company’s credit actions began to positively impact past due and write-off rates and spending declines began to become less severe. The fourth quarter showed greater improvement.

In the fourth quarter of 2009 the year-over-year growth rate in cardmember spending volumes was positive for the first time since the third quarter of 2008, benefiting from both easier comparisons to year-ago billings as well as higher levels of spending. Improvements in billed business trends were experienced in all business lines in the fourth quarter. In addition, for the first time during the year, the growth rate in both the number of card transactions and average transaction size were positive in the fourth quarter as compared to the corresponding period in 2008. Despite these favorable trends, the Company expects the global economy to continue to recover gradually and the resulting environment to be characterized by billings growth that is more modest than it experienced before the recession, as consumers and businesses remain cautious about their spending.

For a complete discussion of our 2009 financial results, including financial information regarding each of our reportable operating segments, see pages 18-128 of our 2009 Annual Report to Shareholders, which are incorporated herein by reference. For a summary of the Company and our reportable operating segments, and a discussion of our principal sources of revenue, see pages 18-21 and pages 73-74, respectively, of the 2009 Annual Report to Shareholders.

Products and Services

The Company’s range of products and services include:

 

   

charge and credit card products

 

   

expense management products and services

 

   

consumer and business travel services

 

   

stored value products such as Travelers Cheques and other prepaid products

 

   

network services for the Company’s network partners

 

   

merchant acquisition and processing, point-of-sale, servicing and settlement and marketing and information products and services for merchants

 

   

fee services, including market and trend analyses along with related consulting services and customer loyalty and rewards programs.

The Company’s products and services are sold globally to diverse customer groups, including consumers, small businesses, middle-market companies, and large corporations. These products and services are sold through various channels including direct mail, on-line, targeted sales forces, and direct response advertising.

Our general-purpose card network, card-issuing and merchant-acquiring and processing businesses are global in scope. We are a world leader in providing charge and credit cards to consumers, small businesses and corporations. These cards include cards issued by American Express as well as cards issued by third-party banks

 

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and other institutions that are accepted on the American Express network (collectively, “Cards”). Our Cards permit our cardmembers (“Cardmembers”) to charge purchases of goods and services in most countries around the world at the millions of merchants that accept Cards bearing our logo. We have total worldwide Cards-in-force of 87.9 million (including Cards issued by third parties). In 2009, our worldwide billed business (spending on American Express® Cards, including Cards issued by third parties) was $620 billion.

Our business as a whole has not experienced significant seasonal fluctuations, although travel sales generally tend to be highest in the second and fourth quarters. Travelers Cheque sales and Travelers Cheques outstanding tend to be greatest each year in the summer months, peaking in the third quarter. American Express® Gift Card sales are highest in the months of November and December; and Card billed business tends to be moderately higher in the fourth quarter than in other quarters.

Organizational Changes

To put us in a better position to grow within our traditional businesses, new revenue categories and emerging payments, we implemented a number of organizational changes in October 2009. To realize the full potential of our traditional card and network businesses, we grouped our global consumer and small business card-issuing, merchant and network businesses under the senior leadership of our Vice Chairman. This move will enable us to sharpen our focus on our strongest growth opportunities, while maintaining the appropriate confidentiality protections. We are also creating an Enterprise Growth Group that will focus exclusively on generating new sources of fee revenue from our existing assets and advancing our efforts in emerging payments. This includes developing new opportunities for growth that transcend individual businesses and take advantage of technological trends. In addition, under the leadership of our Group President and Chief Information Officer, we created a new Global Services Group that unites our U.S. and international cardmember servicing organizations, as well as most processing and support functions across the Company, including among others, technology support and certain key processing functions in areas such as finance and human resources. With this change to Global Services, the Company is organizing support functions by process rather than business unit, which the Company expects will streamline costs, reduce duplication of work, better integrate skills and expertise, and improve customer service. This organization has been tasked with generating an annualized level of gross expense savings of approximately $500 million by 2012. It is expected that a portion of any such savings would be reinvested in growth initiatives. Also, as part of the organizational changes, our Chief Executive Officer is now working directly with the leaders of our Global Commercial Card and Global Travel Services groups on overall strategies to capitalize on Business-to-Business growth opportunities.

Spend-Centric Model is Competitive Advantage

Despite the challenges of the current economic environment, we believe our “spend-centric” business model (which focuses on generating revenues primarily by driving spending on our Cards and secondarily by finance charges and fees) continues to give us significant competitive advantages, even when the overall spending level is down. Average spending on our Cards, which is substantially higher on a per-card basis for us versus our competitors, represents greater value to merchants in the form of loyal customers and higher sales. This enables us to earn a premium discount rate and thereby invest in greater value-added services for merchants and Cardmembers. As a result of the higher revenues generated from higher spending, we have the flexibility to offer more attractive rewards, other incentives to Cardmembers and targeted marketing programs for merchants, which in turn creates an incentive for Cardmembers to spend more on their Cards. The significant investments we make in rewards and other compelling value propositions for Cardmembers drives Card usage at merchants. This business model, along with our closed-loop network, in which we are both the Card issuer and, in most instances, the merchant acquirer, gives us a competitive advantage that we seek to leverage to provide more value to Cardmembers, merchants and our Card-issuing partners.

The American Express Brand

Our brand and its attributes—trust, security, integrity, quality and customer service—are key assets of the Company. We continue to focus on our brand by educating employees about these attributes and by incorporating them into our programs, products and services. Our brand has consistently been rated one of the most valuable brands in the world in published studies, and we believe it provides us with a significant competitive advantage.

 

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We believe our brand and its attributes are critical to our success, and we invest heavily in managing, marketing and promoting it. In addition, we place significant importance on trademarks, service marks and patents, and diligently protect our intellectual property rights around the world.

GLOBAL NETWORK & MERCHANT SERVICES

The Global Network & Merchant Services (“GNMS”) segment operates a global general-purpose charge and credit card network for both proprietary Cards and Cards issued under the global network services business. It also manages merchant services globally, which includes signing merchants to accept Cards as well as processing and settling Card transactions for those merchants. This segment also offers merchants point-of-sale, servicing and settlement and marketing and information products and services.

Cards bearing our logo are issued by our principal operating subsidiary, TRS, the Company’s U.S. bank subsidiaries, American Express Centurion Bank (“Centurion Bank”) and American Express Bank, FSB (“AEBFSB”), and by other operating and bank subsidiaries outside the United States. They are accepted at all merchant locations worldwide that accept American Express-branded Cards. In addition, depending on the product, Cards bearing our logo are generally accepted at ATM locations worldwide that accept Cards. TRS and its subsidiaries, including Centurion Bank and AEBFSB, issue the majority of Cards on our network.

Our Global Network Services (“GNS”) business establishes and maintains relationships with banks and other institutions around the world that issue Cards and, in certain countries, acquire local merchants on the American Express network. GNS is key to our strategy of broadening the Cardmember and merchant base for our network worldwide.

Our Global Merchant Services (“GMS”) business provides us with access to rich transaction data through our closed-loop network, which encompasses relationships with both the Cardmember and the merchant. This capability helps us acquire new merchants, deepen relationships with existing merchants, process transactions, and provide targeted marketing, analytical and other value-added services to merchants in our network. In addition, it allows us to analyze trends and spending patterns among various segments of our customer base.

A key asset of our network is the American Express brand, which is one of the world’s most highly recognized and respected brands.

Global Network Services

We continue to pursue a strategy, through our GNS business, of inviting U.S. and foreign banks and other institutions to issue Cards and acquire merchants on the American Express network. By leveraging our global infrastructure and the appeal of the American Express brand, we broaden our Cardmember and merchant base for our network worldwide. The GNS business has established more than 130 card-issuing and/or merchant-acquiring arrangements with banks and other institutions in 129 countries.

Historically, we had successfully implemented our GNS business strategy in a number of countries outside the United States. In contrast to the situation outside the United States, until 2004, no major U.S. banks had issued Cards in the United States on the American Express global network. This situation was the result of rules and policies of Visa Inc., Visa USA, and Visa International (collectively “Visa”) and MasterCard International, Inc. (“MasterCard”) in the United States at the time, which mandated expulsion of members that issued American Express-branded Cards. These rules were struck down in 2004 in a lawsuit brought by the U.S. Department of Justice. As a result of this decision, beginning in 2004, we have been able to extend our network to other card issuers in the United States, just as we have done internationally.

 

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In 2009, GNS signed 7 new partners to issue Cards and/or acquire merchants on the American Express network. Additionally, GNS partners launched approximately 100 new products during 2009, bringing the total number of American Express-branded GNS partner products launched to date to approximately 1,030.

GNS focuses on partnering with qualified third-party banks and other financial institutions that choose to issue Cards accepted on our global network and/or acquire merchants on our network. Although we customize our network arrangements to the particular country and each partner’s requirements, as well as to our strategic plans in that marketplace, all GNS arrangements are designed to help issuers develop products for their highest-spending and most affluent customers and to support the value of American Express Card acceptance to merchants. We choose to partner with institutions that share a core set of attributes compatible with the American Express brand, such as commitment to high quality standards and strong marketing expertise, and we require adherence to our product, brand and service standards.**

With approximately 1,030 different Card products launched on our network so far by our partners, GNS is an increasingly important business that is strengthening our brand visibility around the world, driving more transaction volume onto our merchant network and increasing the number of merchants accepting the American Express Card. GNS enables us to expand our network’s global presence generally without assuming additional Cardmember credit risk or having to invest a large amount of resources, as our GNS partners already have established attractive customer bases they can target with American Express-branded products, and are responsible for managing the credit risk associated with the Cards they issue. Since 1999, Cards-in-force issued by GNS partners have grown at a compound annual growth rate of 25%, and totaled over 26 million Cards at the end of 2009. Outside the United States, 74% of new Cards issued in 2009 were Cards issued by GNS partners. Spending on GNS Cards has grown at a compound annual rate of 25% since 1999. Year over year spending growth on these Cards in 2009 was 7%, with total spending equal to $72 billion.

GNS Arrangements

Although the structures and details of each of the GNS arrangements vary, all of them generate revenues for us from the Card transaction volumes they drive on the American Express network. Gross revenues we receive per dollar spent on a Card issued by a GNS partner are lower than those from our proprietary Card-issuing business. However, because the GNS partner is responsible for most of the operating costs and risk of its Card-issuing business, our operating expenses and credit losses are lower than those in our proprietary Card-issuing business. The GNS business model generates an attractive earnings stream and risk profile that requires a lower level of capital support. The return on equity in our GNS business can thus be significantly higher than that of our proprietary Card-issuing business. In addition, since the majority of GNS costs are fixed, the GNS business is highly scalable. GNS partners benefit from their association with the American Express brand and their ability to gain attractive revenue streams and expand and differentiate their product offerings with innovative marketing programs.

Our GNS arrangements fall into the following three main categories: Independent Operator Arrangements, Network Card License Arrangements and Joint Venture Arrangements.

Independent Operator Arrangements

The first type of GNS arrangement is known as an independent operator (“IO”) arrangement. As of the end of 2009, we had 65 of these arrangements around the world. We pursue these arrangements to expand the presence of the American Express network in markets in which we do not offer a proprietary local currency Card. The partner’s local presence and relationships help us enhance the impact of our brand in the market, reach

 

 

** The use of the term “partner” or “partnering” does not mean or imply a formal legal partnership, and is not meant in any way to alter the terms of American Express’s relationship with third-party issuers and merchant acquirers.

 

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merchant coverage goals more quickly, and operate at economic scale and cost levels that would be difficult for us to achieve on our own. Subject to meeting our standards, IO bank partners are licensed to issue local currency Cards in their markets, including the classic Green, Gold and Platinum American Express Cards. In addition, the majority of these partners serve as the merchant acquirer and processor for local merchants. American Express retains the relationship with multinational merchants. Our IO partners own the customer relationships and credit risk for the Cards they issue, and make the decisions about which customers will be issued Cards. GNS generates revenues in IO arrangements from Card licensing fees, royalties on Cardmember billings, foreign exchange conversion revenue, royalties on charge volume at merchants, share of discount revenue and, in some partnerships, royalties on net spread revenue or royalties on cards-in-force. Our IO partners are responsible for transaction authorization, billing and pricing, Cardmember and merchant servicing, and funding Card receivables for their Cards and payables for their merchants.

We bear the credit risk arising from the IO partner’s potential failure to meet its settlement obligations to us. We mitigate this risk by partnering with institutions that we believe are financially sound and will meet their obligations, and by monitoring their financial health, their compliance with the terms of their relationship with us and the political, economic and regulatory environment in which they operate. In addition, depending on an IO partner’s credit rating and other indicators of financial health, we may require an IO partner to post a letter of credit, bank guarantee or other collateral to reduce this risk.

Examples of countries where we have entered into IO arrangements include Brazil, Russia, China, Ecuador, Greece, South Korea, Pakistan, Croatia, Peru, Portugal, Vietnam, Georgia and Bangladesh. Through our IO partnerships, we believe we can accelerate growth in Cardmember spending, Cards-in-force and merchant acceptance in these countries.

Network Card License Arrangements

The second type of GNS arrangement is known as a network card license (“NCL”). At the end of 2009, we had 61 of these arrangements in place worldwide. We pursue these arrangements to increase our brand presence and gain market share in markets in which we have a proprietary Card-issuing and/or merchant acquiring business and, in a few cases, those in which we have IO partners. In an NCL arrangement, we grant the third-party financial institution a license to issue American Express-branded Cards. The NCL issuer owns the customer relationships for all Cards it issues, provides customer service to its Cardmembers, authorizes transactions, manages billing and credit, is responsible for marketing the Cards, and designs Card product features (including rewards and other incentives for Cardmembers), subject to meeting certain standards. We operate the merchant network, route and process Card transactions from the merchant’s point-of-sale through submission to the issuer, and settle with issuers. The NCL is the type of arrangement we have implemented with banks in the United States, United Kingdom, Australia and Japan.

GNS’ revenues in NCL arrangements are driven by a variety of factors, including the level of Cardmember spending, royalties, currency conversions and licensing fees paid by the partner and fees charged to the Card issuer based on charge volume, and our provision of value-added services such as Cardmember insurance products and other Card features and benefits for the issuer’s Cards. As indicated above, the NCL issuer bears the credit risk for the issued Cards, as well as the Card marketing and acquisition costs, Cardmember fraud risks and costs of rewards and other loyalty initiatives. We bear the risk arising from the NCL partner’s potential failure to meet its settlement obligations to us. We mitigate this risk by partnering with institutions that we believe are financially sound and will meet their obligations, and by monitoring their financial health, their compliance with the terms of their relationship with us and the political, economic and regulatory environment in which they operate. In addition, depending on an NCL issuer’s credit rating and other indicators of financial health, we may require an NCL issuer to post a letter of credit, bank guarantee or other collateral to reduce this risk.

Examples of NCL arrangements include our relationships with Bank of America in the United States, Lloyds TSB Bank in the United Kingdom and Westpac Banking Corporation in Australia.

 

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Joint Venture Arrangements

The third type of GNS arrangement is a joint venture (“JV”) arrangement. We have utilized this type of arrangement in Switzerland and Belgium, as well as in other countries. In these markets, we join with a third-party to establish a separate business in which we have a significant ownership stake. The JV typically signs new merchants to the American Express network and issues local currency Cards that carry our logo. In a JV arrangement, the JV is responsible for the Cardmember credit risk and bears the operating and marketing costs. Unlike the other two types of GNS arrangements, we share management, risk, and profit and loss responsibility with our JV partners. Income is generated by discount revenues, card fees and net spread revenues. The economics of the JV are similar to those of our proprietary Card-issuing business, which we discuss under “U.S. Card Services,” and we receive a portion of the JV’s income depending on, among other things, the level of our ownership interest. Our subsidiary, AEOCC Ltd., purchases card receivables from certain of the GNS JVs from time to time.

GNS Business Highlights

Outside the United States we signed a number of agreements in 2009 to enhance our presence in existing markets and further expanded our global presence into new markets.

Some of the highlights of our GNS business outside the United States in 2009 include:

 

   

Announcement of new card partnerships in the Asia-Pacific region with ANZ, one of the largest banks in Australia and a leading bank in New Zealand and the South Pacific, Commonwealth Bank, which operates the largest financial services distribution network in Australia, and United Overseas Bank Limited (UOB), one of the leading credit card issuers in Singapore

 

   

Announcement of our new partnership in Brazil with Banco do Brasil and the issuance of the Ourocard Estilo Platinum American Express and Ourocard Platinum American Express® products

 

   

Issuance of the City Bank American Express® Gold Credit Card and the City Bank American Express® Credit Card in Bangladesh, with our new partner, City Bank

 

   

Launch of the American Express® Card and the American Express® Gold Card in Georgia, with our new partner, Bank of Georgia.

GNS continues to expand its airline co-brand portfolio, launching 12 new airline co-brands in 2009 bringing the total to 49 airline co-brand products. Some of the key airline co-brand launches outside the United States in 2009 include:

 

   

Launch of Quantas Airlines co-brand cards with National Australia Bank and ANZ in Australia

 

   

Launch of the Turkish Airlines co-brand card with Garanti Bank.

Some of the highlights of our GNS business in the United States in 2009 include:

 

   

Launch of The PenFed Premium Travel Rewards American Express® Card with our new partner Pentagon Federal Credit Union (PenFed)

 

   

Expansion of our wealth management portfolio in the United States with Bank of America’s launch of the Merrill Accolades™ American Express® Card, developed for Bank of America Merrill Lynch’s wealth management clients

 

   

Launch of The Fidelity® Private Client American Express® Card, the fourth Card in Fidelity’s American Express portfolio.

 

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Global Merchant Services

We operate a GMS business, which includes signing merchants to accept Cards, accepting and processing Card transactions, and settling with merchants that accept Cards for purchases made by Cardmembers with Cards (“Charges”). We also provide marketing, information and programs to merchants, leveraging the capabilities provided by our closed-loop structure, as well as point-of-sale products and servicing.

Our objective is for Cardmembers to be able to use the Card wherever and however they desire, and to increase merchant coverage in key geographic areas and in selected new industries that have not traditionally accepted general-purpose credit and charge cards as a means of payment. We add new merchants to our network through a number of sales channels: a proprietary sales force, third-party sales and service agents, strategic alliances with banks and processors, the Internet, telemarketing and inbound “Want to Honor” calls (i.e., where merchants desiring to accept the Card contact us directly). As discussed in the “Global Network Services” section, our IO partners and JVs also add new local merchants to the American Express network.

During 2009, we continued expanding our integrated American Express OnePoint® solution for small- and medium-sized merchants. Under this program, third-party service agents provide payment processing services to merchants on our behalf for Card transactions, while we retain the acceptance contract with participating merchants, establish merchant pricing and receive the same transactional information we always have received through our closed-loop network. This program simplifies card processing for small- and medium-sized merchants by providing them with a single source for statements, settlement and customer service.

GMS continues to significantly expand the number of merchants that accept our Card products as well as the kinds of businesses that accept the Card. Over the last several years, we have focused our efforts on increasing the use of our Cards for everyday spending. In 1990, 64% of our U.S. billings came from the travel and entertainment sectors and 36% came from retail and other sectors. That proportion has now been more than reversed. In 2009, U.S. non-travel and entertainment billings represented approximately 71% of the U.S. billed business on American Express Cards. This shift resulted from the growth, over time, in the types of merchants that began to accept charge and credit cards in response to consumers’ increased desire to use these cards for more of their purchases, and our focus on expanding Card acceptance to meet Cardmembers’ needs.

During 2009, we continued our efforts to encourage consumers to use the Card for everyday spending and to increase the number and types of merchants in retail and everyday spending categories that accept the Card, such as quick-serve restaurants, mass transit and recurring billing merchants. For example, during 2009, we announced Card acceptance agreements in the United States with:

 

   

Big Lots

 

   

Hennes & Mauritz (“H&M”)

 

   

Weis Markets Inc.

Outside the United States, we signed card acceptance agreements with:

 

   

McDonald’s Restaurants of Canada Limited, now accepting the Card at 1,200 locations across Canada

 

   

Air Asia, Asia’s leading lowfare carrier

 

   

Yahoo! Auction, now accepting the Card in Japan

 

   

PTT Public Company Limited, the largest petrol retail distributor in Thailand, now accepting the Card at its more than 900 petroleum service stations.

In addition, we continued our drive to bring Card acceptance to industries where cash or checks are the predominant form of payment. For example, we have made headway in promoting Card acceptance payments in

 

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industries such as pharmaceuticals, construction, industrial supply and advertising. Acceptance agreements signed in 2009 in the United States include:

 

   

Lehigh Hanson, one of North America’s largest suppliers of heavy building materials to the construction industry

 

   

Professional Veterinary Products, one of the nation’s largest animal health products distributors.

Internationally, among others, a Card acceptance agreement was reached with Travis Perkins, a leading builders’ merchant and home improvement retailer headquartered in the United Kingdom, with more than 1,000 locations.

Globally, acceptance of general-purpose charge and credit cards continues to increase. As in prior years, during 2009, we continued to grow merchant acceptance of Cards around the world and to refine our approach to calculating merchant coverage in accordance with changes in the marketplace. Management estimates that, as of the end of 2009, our merchant network in the United States accommodated more than 90% of our Cardmembers’ general-purpose charge and credit card spending, and our international merchant network as a whole accommodated approximately 80% of our Cardmembers’ general-purpose charge and credit card spending. These percentages are based on comparing our Cardmembers’ spending on our network currently with our estimate of what our Cardmembers would spend on our network if all merchants that accept general-purpose credit and charge cards accepted American Express Cards.

We earn “discount” revenue from fees charged to merchants for accepting Cards as payment for goods or services sold. The merchant discount is the fee charged to the merchant for accepting Cards and is generally expressed as a percentage of the amount charged on a Card. In some instances, an additional flat transaction fee is assessed. The merchant discount is generally deducted from the amount of the payment that the “merchant acquirer” (in most cases, TRS or one of its subsidiaries) pays to a merchant for Charges submitted. A merchant acquirer is the entity that contracts for Card acceptance with the merchant, accepts transactions from the merchant, pays the merchant for these transactions and submits the transactions to the American Express network, which submits the transactions to the appropriate Card issuer. When a Cardmember presents the Card for payment, the merchant creates a record of charge for the transaction and submits it to the merchant acquirer for payment. To the extent that TRS or one of its subsidiaries is the merchant acquirer, the merchant discount is recorded by us as discount revenue at the time the transaction is received by us from the merchant.

Where we act as the merchant acquirer and the Card presented at a merchant is issued by a third-party bank or financial institution, such as in the case of our GNS partners, we will make financial settlement to the merchant and receive the discount revenue. In our role as the operator of the Card network, we will also receive financial settlement from the Card issuer, who receives an issuer rate (i.e., the individually negotiated amount that Card issuers receive for transactions charged on our network with Cards they issue, which is usually expressed as a percentage of the charged amount). The difference between the discount revenue (received by us in the form of the merchant discount) and the issuer rate received by the Card issuer generates a return to us. In cases where American Express is the Card issuer and the merchant acquirer is a third-party bank or financial institution (which can be the case in a country in which the IO is the local merchant acquirer), we receive an individually negotiated issuer rate in our settlement with the merchant acquirer, which is recorded by us as discount revenue. By contrast with networks such as Visa and MasterCard, there is no collectively set interchange rate on the American Express network.

 

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The following diagrams depict the relationships among the parties in a point-of-sale transaction effected on the American Express network where we act as both the Card issuer and merchant acquirer (the “3-Party Model”) and under an NCL arrangement where third-party financial institutions act as Card issuers (the “NCL Model”):

LOGO

LOGO

The merchant discount we charge is principally determined by the value we deliver to the merchant and generally represents a premium over other networks. We deliver greater value to merchants through higher spending Cardmembers relative to users of cards issued on competing card networks, our marketing expertise, information and fraud services, and Cardmembers’ insistence on using their Cards when enrolled in rewards or other Card loyalty programs, including Cardmembers who are part of our Corporate Card program.

The merchant discount varies, among other factors, with the industry in which the merchant does business, the merchant’s Charge volume, the timing and method of payment to the merchant, the method of submission of Charges and, in certain instances, the geographic scope of the Card acceptance agreement signed with us (local or global) and the Charge amount.

In 2009, as in prior years, we experienced some reduction in our global weighted average merchant discount rate. Over time, selective re-pricing initiatives, changes in the mix of business and volume-related pricing discounts likely will continue to result in some erosion in the average discount rate.

While most merchants that accept our Cards understand our merchant discount pricing in relation to the value provided, we do encounter a relatively small number of merchants that accept our Cards, but tell their customers that they prefer to accept another type of payment and, consequently, suppress use of the Card. Subject to local legal requirements, we respond to this issue vigorously to ensure that our Cardmembers are able to use their Card where and when they want to and to protect the American Express brand. We have made progress limiting Card suppression by concentrating on acquiring merchants where Cardmembers want to use the Card; continuing to enhance the value we provide to merchants through programs such as DailyWish and American

 

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Express Selects®, which enable merchants of any size to gain valuable exposure and additional sales by providing exclusive offers and experiences to American Express Cardmembers; developing and providing new and innovative business insights and fraud tools using information available through our closed-loop network; providing better and earlier communication of our value proposition; and, when appropriate, cancelling merchants who suppress the use of our Card products. We recognize that it is the merchant’s choice whether or not to accept American Express cards, and therefore we dedicate substantial resources to delivering value to attract and retain our merchant customers.

The laws of certain countries and most states in the United States do not prohibit merchants from surcharging credit card purchases. American Express’ policy generally does not prohibit surcharging so long as it is permitted by law and a merchant does not discriminate against the Card by surcharging higher amounts on purchases with the Card than is imposed for purchases with other cards, or by imposing a surcharge only on Card purchases, but not on purchases made with other cards. American Express also does not prohibit merchants from offering discounts to customers who pay with cash or check. For information concerning the Department of Justice’s information and document request regarding our policies relating to merchant surcharging and “anti-steering,” please see “Other Matters” within “Legal Proceedings” below beginning on page 87.

Merchant satisfaction is a key goal of our GMS business. We focus on understanding and addressing factors that influence merchant satisfaction, including developing and executing innovative programs that increase Card usage at merchants, using technology resources, enhancing operational efficiencies and merchants’ ease of doing business with us, making our United States operating procedures easily available to merchants on our Web site, applying our closed-loop capabilities and deep marketing expertise, and strengthening our relationships with merchants through an expanding roster of services that helps them meet their business goals.

We also offer our merchant customers a full range of point-of-sale solutions, including integrated point-of-sale terminals, software, online solutions, and direct links that allow merchants to accept American Express Cards (as well as credit and debit cards issued on other networks and checks). Virtually all proprietary point-of-sale solutions support direct processing (i.e., direct connectivity) to American Express, which can lower a merchant’s cost of Card acceptance and enhance payment efficiency.

We continue to focus our commitment to driving global interoperability in payment card specifications, making it easier for merchants to accept our Cards, for Cardmembers to have a more seamless experience at the point of sale, and for issuers who have more than one network relationship to have a standard across their card products. In January 2009, we became the fourth owner-member of EMVCo, the standards body that manages, maintains, and enhances specifications for chip-based payment cards and acceptance devices, including point-of-sale terminals. Our participation in this company will help drive secure and interoperable payments globally for transactions made with chip cards by aligning and progressing the EMV™ specifications. Further, as EMVCo’s scope expands to include emerging payment technologies such as contactless cards and mobile phones, our participation will allow for our products and specifications to be universally compatible and ready for merchant acceptance.

We continue to focus our efforts in areas that make use and acceptance of the Card more convenient for merchants and Cardmembers. For instance, ExpressPay from American Express®, a contactless payment feature embedded in certain cards, continues to provide a fast, easy-to-use alternative for making everyday purchases at merchants where speed and convenience is important. In the U.S., top quick-service restaurants, movie theaters, drug and convenience stores and major retail chains readily accept payments through ExpressPay, which is powered by radio-frequency technology that is currently embedded within several Card products. Similarly, Automatic Bill Payment focuses on providing convenience by allowing merchants to bill Cardmembers on a regular basis for recurring charges approved by the Cardmember such as insurance premiums, newspaper subscriptions, health club memberships, commutation costs and telecommunication services. We have also made modifications to our host authorization system to approve more transactions and reduce Cardmember inconvenience at the point-of-sale including eliminating the signature requirement for transactions of $25 or less.

 

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Wherever we manage both the acquiring relationship with merchants and the Card-issuing side of the business, there is a “closed-loop,” which distinguishes our network from the bankcard networks, in that we have access to information at both ends of the Card transaction. We maintain direct relationships with both our Cardmembers and our merchants, and we handle all key aspects of those relationships. Our relationships allow us to analyze information on Cardmember spend. This enables us to provide targeted marketing for merchants and special offers to Cardmembers through a variety of channels. At the same time, we protect the confidentiality of this data, and comply with our privacy and firewall policies and applicable legal requirements.

We work closely with our Card-issuing and merchant-acquiring bank partners to maintain key elements of this closed-loop, which permits them to customize marketing efforts, deliver greater value to their Cardmembers and help us to direct increased business to merchants who accept the Card.

As the merchant acquirer, we have certain exposures that arise if a billing dispute between a Cardmember and a merchant is settled in favor of the Cardmember. Drivers of this liability are returns in the normal course of business, disputes over fraudulent charges, the quality or non-delivery of goods and services and billing errors. Typically, we offset the amount due to the Cardmember against payments for the merchant’s current or future Charge submissions. We can realize losses when a merchant’s offsetting Charge submissions cease, such as when the merchant decides to no longer accept the Card, commences a bankruptcy proceeding or goes out of business. We actively monitor our merchant base to assess the risk of this exposure. When appropriate, we will take action to reduce the net exposure to a given merchant by holding cash reserves funded through Charge payable holdbacks from a merchant, lengthening the time between when the merchant submits a Charge for payment and when we pay the merchant by requiring the merchant to secure a letter of credit or a parent company guarantee, or implementing other appropriate risk management tools. We also establish reserves on our balance sheet for these contingencies in accordance with relevant accounting rules.

With the increase in electronic transmission of payment card transaction data over merchants’ point-of-sale systems, American Express and the other major card networks recognized the necessity for merchants and merchant processors to secure this data against accidental or intentional compromise using a standard protocol that applies to all card types. In 2006, in order to strengthen the security practices of merchants and payment processing firms and to secure payment account data in a globally consistent manner, we and Discover Financial Services, JCB, MasterCard Worldwide and Visa formed PCI Security Standards Council, LLC (“PCI SSC”), an independent standards-setting organization. PCI SSC’s role is to manage the Payment Card Industry (PCI) Data Security Standard, and more recently the PCI PIN Entry Device (PED) Security Requirements and the Payment Application Data Security Standard, which focus on improving payment card account security throughout the transaction process. By establishing PCI SSC, we and the other founders have developed common standards that are more accessible and efficient for participants in the payment card industry. All our merchants and service providers that store, process and transmit payment card data are required to comply with the PCI Data Security Standard. PCI SSC is dedicated to driving greater education, awareness and adoption of these security standards to ensure that all stakeholders involved in the payment process conduct their business responsibly.

In some markets outside the United States, particularly in Asia, third-party processors and some bankcard acquirers have begun to offer merchants the capability of converting credit card transactions from the local currency to the currency of the cardholder’s residence (i.e., the cardholder’s billing currency) at the point-of-sale, and submitting the transaction in the cardholder’s billing currency, thus bypassing the traditional foreign currency conversion process of the card network. This practice is known as “dynamic currency conversion.” If a merchant utilizes a dynamic currency conversion process, the merchant and processor share any fee assessed or spread earned for converting the transaction at the point-of-sale, thus reducing or eliminating revenue for card issuers and card networks relating to the conversion of foreign charges to the cardholder’s billing currency. This practice is not widespread, and it is uncertain to what extent consumers will prefer to have foreign currency transactions converted by merchants in this way. Our policy generally requires merchants to submit Charges and be paid in the currency of the country in which the transaction occurs, and we convert the transaction to the Cardmember’s billing currency.

 

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GLOBAL NETWORK & MERCHANT SERVICES—Competition

Our global card network, including our Global Merchant Services and Global Network Services businesses, competes with other charge and credit card networks, including, among others, Visa, MasterCard, Diners Club International (which was acquired by Discover Financial Services), Discover (primarily in the United States), and JCB Co., Ltd. (primarily in Asia). We are the third largest general-purpose charge and credit card network based on charge volume, behind Visa and MasterCard, which are larger than we are in most markets. In addition, apart from such network services, a range of companies globally, including merchant acquirers and processors, carry out some activities similar to those performed by our GMS and GNS businesses. No single entity participates on a global basis in the full range of activities that are encompassed by our closed-loop business model.

The principal competitive factors that affect the network and merchant service businesses include:

 

   

the number of Cards-in-force and amount of spending on these Cards

 

   

the quantity and quality of the establishments where the Cards can be used

 

   

the economic attractiveness to card issuers and merchant acquirers of participating in the network

 

   

the success of marketing and promotional campaigns

 

   

reputation and brand recognition

 

   

innovation in systems, technology and product offerings, particularly in on-line commerce

 

   

the quality of customer service

 

   

the security of Cardmember and merchant information

 

   

the impact of existing litigation, legislation and government regulation

 

   

the cost of Card acceptance relative to the value provided.

Another aspect of network competition is the recent emergence and rapid growth of alternative payment mechanisms and systems, which include aggregators (such as PayPal), wireless payment technologies (including using mobile telephone networks to carry out transactions), prepaid systems and systems linked to credit cards, and bank transfer models. To the extent alternative payment mechanisms and systems, such as aggregators, continue to successfully expand in the online payments space, our merchant revenues and our ability to access transaction data through our closed-loop network could be negatively impacted. In the United States, alternative payment vehicles continue to emerge that seek to redirect online customers to payment systems based on ACH (automated clearing house, i.e., inter-bank transfer), and existing debit networks are making efforts to develop online PIN functionality, which could potentially reduce the relative use of charge and credit cards online. For a discussion concerning our recent acquisition of Revolution Money Inc. in the emerging payments area, please see “Enterprise Growth” beginning on page 34 below.

Some of our competitors have attempted to replicate our closed-loop structure, such as Visa, with its Visa Incentive Network. Although it remains to be seen how effective Visa will be, efforts by Visa and other card networks and payment providers to replicate the closed-loop speak to its continued value and to the intense competitive environment in which we operate.

GLOBAL NETWORK & MERCHANT SERVICES—Regulation

Local regulations governing the issuance of charge and credit cards have not been a significant factor impacting GNS’ arrangements with banks and qualifying financial institutions, because such banks and institutions generally are already authorized to issue general-purpose cards and, in the case of our IO arrangements, to operate merchant-acquiring businesses. Accordingly, our GNS partners have generally not had difficulty obtaining appropriate government authorization in the markets in which we have chosen to enter into GNS arrangements. As a network service provider to regulated U.S. banks, our GNS business is subject to review

 

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by certain federal bank regulators, including the Federal Reserve, the Federal Deposit Insurance Corporation (“FDIC”), the Office of the Comptroller of the Currency and the Office of Thrift Supervision. As the operator of a general-purpose card network, we are also subject to certain provisions of the Currency and Foreign Transactions Reporting Act and the accompanying regulations issued by the U.S. Department of the Treasury (collectively referred to as the “Bank Secrecy Act”), as amended by the USA PATRIOT Act of 2001 (the “Patriot Act”). We conduct due diligence on our GNS partners to ensure that they have implemented and maintain sufficient anti-money laundering (“AML”) controls to prevent our network from being used for money laundering or terrorist financing purposes. As a result of American Express Company and TRS each becoming bank holding companies, our business is also subject to further regulation and regulatory oversight by the Federal Reserve. For additional information about this change in regulatory status, please see “Supervision and Regulation—General” beginning on page 35 below.

In recent years, regulators in several countries outside the United States have focused on the fees involved in the operation of card networks, including interchange fees paid to card issuers and the fees merchants are charged to accept cards. Regulators in the United Kingdom, Canada, New Zealand, Poland, Italy, Switzerland, Germany, Hungary, the European Union (EU), Australia, Brazil, Mexico, Venezuela, among others, have conducted investigations that are either ongoing or on appeal.

The interchange fee, which is the collectively set fee paid by the bankcard merchant acquirer to the card issuing bank in “four party” payment networks, like Visa and MasterCard, is generally the largest component of the merchant service charge payable by merchants for bankcard debit and credit card acceptance in these systems. By contrast, the American Express network does not have collectively set interchange fees. Although the regulators’ focus has primarily been on Visa and MasterCard as the dominant card networks and their operations on a multilateral basis, antitrust actions and government regulation of the bankcard associations’ pricing could ultimately affect all networks. Lower interchange and/or merchant discount revenue may lead card issuers to look for other sources of revenue from consumers such as higher annual card fees or interest charges, as well as to reduce costs by scaling back or eliminating rewards programs.

In certain countries where antitrust actions or regulations have led our competitors to lower their fees, we have made adjustments to our pricing to merchants to reflect local competitive trends. For example, reductions in bankcard interchange mandated by the Reserve Bank of Australia reforms in 2003 have resulted in lower merchant discount rates for Visa and MasterCard acceptance. As a result of changes in the marketplace, we have reduced our own merchant discount rates in Australia, although we have been able to increase billed business and the number of merchants accepting our Cards. In addition, under legislation enacted in Argentina, a merchant acquirer is required to charge the same merchant discount rate to all merchants in the same industry category, and merchant discount rates for credit cards cannot exceed 3%. The Central Bank of Venezuela has issued regulations regarding the maximum level of merchant discount rates by industry category. In Hungary, recently enacted legislation will require point-of-sale service charges not to exceed 2%.

In Europe, investigations of interchange are usually handled by the domestic competition law authorities, as well as the European Commission. In its Final Report on the retail banking sector issued in January 2007, which included a review of the payment cards industry, including interchange fees, the European Commission appeared to favor competition law enforcement tools, rather than regulation of price levels, to address perceived competition issues. The conclusions of the European Commission in its Final Report do not have the force of law, but may be used as the basis for future regulation or antitrust enforcement action in the EU Member States.

In December 2007, the European Commission ruled that MasterCard’s multilateral interchange fees (“MIF”) for cross-border payment card transactions violate EC Treaty rules on restrictive business practices. The Commission’s decision applies to cross-border consumer credit, charge and debit card transactions within the EU and to domestic transactions to which MasterCard has chosen to apply the cross-border MIF. The ruling does not prevent MasterCard and its member banks from adopting an alternative MIF arrangement that can be proven to comply with EU Competition rules. Although the Commission’s investigation included commercial cards, it has

 

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reserved judgment for the time being on the legality of MasterCard’s cross-border MIF for commercial card transactions. MasterCard lodged an appeal against the Commission’s findings, which is pending. An interim settlement has been agreed to between the Commission and MasterCard, capping MIF at 30 basis points for consumer card transactions and 20 basis points for debit card transactions.

In 2002, the Commission granted an exemption to Visa regarding its MIFs. This exemption expired on December 31, 2007 and in March 2008 the Commission opened formal antitrust proceedings against Visa Europe Limited in relation to Visa’s MIFs for cross-border consumer card transactions. The Commission has indicated that the MasterCard decision should “provide Visa with guidance for the way ahead,” although it stated that “every MIF must be examined on its own merits.”

These developments may affect how the competition authorities in the Member States of the EU view domestic interchange. In 2007, for example, the competition regulator in Poland found insufficient basis for Visa and MasterCard interchange fees and ordered the associations and their members to stop their current interchange setting practices immediately. The banks appealed that decision, and in November 2008 the decision was overturned. The Polish Competition Authority has appealed that ruling.

In August 2009, Visa and MasterCard settled an anti-trust case with the New Zealand regulatory authorities regarding whether the setting of interchange rates constituted price fixing and whether other scheme rules lessened competition. The settlement results in changes to the Visa and MasterCard scheme rules, which will set maximum interchange rates and also allow bilateral setting of lower interchange rates between issuers and acquirers, as well as remove the schemes’ no surcharging rules. The full extent of the impact of the changes to interchange on our discount rate in New Zealand is not likely to be known until the schemes publish their maximum interchange rates on April 17, 2010.

Regulators have also considered the industry practice of prohibiting merchants from passing the cost of merchant discount fees along to consumers through surcharges on card purchases. In Australia, we have seen selective, but increasing, merchant surcharging on our Cards in certain industries and, in some cases, on a basis that is greater than that applied to cards issued on the bankcard networks. The European Union has adopted a new legislative framework for electronic payment services, including cards, referred to as the Payment Services Directive. The Payment Services Directive prescribes common rules for licensing and supervision of payment services providers, including card issuers and merchant acquirers, and for their conduct of business. The objective of the Payment Services Directive is to facilitate the creation of a single, internal payments market in the EU through harmonization of EU Member State laws governing payment services. One provision of the Payment Services Directive permits merchants to surcharge, subject to disclosure requirements, but also allows individual Member States to override this rule by prohibiting or limiting surcharging. To date, the United Kingdom has decided to permit surcharging (and the United Kingdom has for a number of years permitted merchants to levy a surcharge on credit card purchases). There are varied approaches in most of the other countries where some prohibit surcharging, others allow surcharging, and still others allow surcharging but limit it in some way, such as by capping the surcharge allowed or limiting the types of transactions where surcharging is permitted. All member states permit or propose to permit discounts. The Payment Services Directive complements another European initiative, the Single Euro Payments Area (“SEPA”), which is an industry-led initiative with support from EU institutions. Among other changes, SEPA will involve the adoption of new, pan-European technical standards for cards and card transactions. All of the foregoing requires significant costs to implement and maintain.

In the United States, Congress continues to debate the interchange issue. There have been several hearings on Visa/MasterCard interchange over the last several years, and in 2009 at the request of Congress, the Government Accountability Office (GAO) completed a study on the structure of interchange fees and their impact on consumers and merchants. The report provides a balanced view of the interchange issue and explains how large merchants would benefit and how consumers could be harmed by the pending legislative proposals. In 2009, legislation was reintroduced in Congress that would give all U.S. merchants antitrust immunity to negotiate

 

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collectively the price and terms of card acceptance on networks. The House Judiciary Committee bill covers networks with at least a 20% share of U.S. credit and debit card payments combined, which would not apply to the American Express network but, if enacted, would have an effect on American Express in the marketplace. The Senate version of the bill covers networks with at least 10% of U.S. credit or debit payments, which would apply to American Express. Both bills have a default process for having prices and terms set through government action rather than competitive forces. A similar version of the House bill (the “Credit Card Fair Fee Act”) was passed in the House Judiciary Committee in 2008. No action was taken on either of these bills in 2009. The House Financial Services Committee held a hearing on a third piece of interchange-related legislation that was reintroduced in 2009 (the “Credit Card Interchange Fees Act”), a bill that would regulate payment network rules, including the American Express network. No further action was taken on this bill. It is expected that Congressional hearings will continue in 2010 on the interchange issue. The Federal Reserve and various Federal Reserve Banks have been following developments on interchange and have held several conferences focused on interchange rates. While the Federal Reserve has expressed interest in monitoring this issue, it has not indicated the need to regulate interchange rates in the United States.

During the last three years, there were also a number of bills proposed in individual state legislatures seeking to impose caps on credit card interchange or to prohibit card companies from charging merchant discount on the sales tax portion of credit card purchases. Other proposals were aimed at increasing the transparency of card network rules for merchants. In addition, a number of bills were proposed to establish merchant liability for the costs of a data security breach of a merchant’s system or require merchants to adopt technical safeguards to protect sensitive card holder payment information. Proposed state legislation aimed at regulating pricing or other aspects of merchants’ card acceptance will continue during 2010. In the event that governmental or regulatory activity to limit interchange or merchant fees continues or increases, or state data security legislation is adopted, our revenues and profitability could be adversely affected. During the last few years as regulatory interest in credit card network pricing to merchants and related issues has increased, the Company has responded to many inquiries from banking and competition authorities throughout the world. For information about our ongoing response to a Civil Investigative Demand from the Antitrust Division of the United States Department of Justice, please see “Other Matters” within “Legal Proceedings” below.

U.S. CARD SERVICES

As a significant part of our proprietary Card-issuing business, our U.S. banking subsidiaries, Centurion Bank and AEBFSB, issue a wide range of Card products and services to consumers and small businesses in the United States. Our consumer travel business, which provides travel services to Cardmembers and other consumers, complements our core Card business, as does our Global Prepaid business. The proprietary Card business offers a broad set of card products to attract our target customer base. Core elements of our strategy are:

 

   

focusing on acquiring and retaining high-spending, creditworthy Cardmembers

 

   

designing Card products with features that appeal to specific customer segments

 

   

the use of strong incentives to drive spending on our various Card products, including our Membership Rewards® program and other rewards features

 

   

the use of loyalty programs such as Delta SkyMiles, sponsored by our co-brand and other partners to drive spending

 

   

the development and nurturing of wide-ranging relationships with co-brand and other partners

 

   

promoting and using incentives for Cardmembers to use their Cards in new and expanded merchant categories, including everyday spend and traditional cash and check categories

 

   

providing exceptional customer service.

In September, 2009, J.D. Power and Associates released its annual nationwide credit card satisfaction study and ranked American Express highest in overall satisfaction among 21 of the largest card issuers in the United States, for the third consecutive year.

 

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Consumer and Small Business Services

We offer individual consumer charge Cards such as the American Express® Card, the American Express® Gold Card, the Platinum Card®, and the ultra-premium Centurion® Card; revolving credit Cards such as Blue from American Express®, Blue Cash® Card from American Express and Blue Sky from American Express; and a variety of Cards sponsored by and co-branded with other corporations and institutions, such as the Delta SkyMiles Credit Card from American Express, True Earnings® Card exclusively for Costco members, Starwood Preferred Guest Credit Card and JetBlue Card from American Express.

Centurion Bank and AEBFSB as Issuers of Certain Cards

We have two U.S. bank subsidiaries, Centurion Bank and AEBFSB, which are wholly owned subsidiaries of TRS. Each bank is a Federal Deposit Insurance Corporation (“FDIC”) insured depository institution. The activities of Centurion Bank and AEBFSB are subject to examination by their respective regulators. Both banks take steps to maintain compliance programs to address the various safety and soundness, internal control and compliance requirements, including anti-money laundering requirements that apply to them. You can find a further discussion of the anti-money laundering initiatives affecting us under “Corporate & Other” below.

Certain additional information regarding each bank is set forth in the table below:

 

     Centurion Bank    AEBFSB

Type of Bank

   Utah-chartered industrial bank    Federal savings bank

Regulatory Supervision

   Regulated, supervised and regularly examined by the Utah Department of Financial Institutions and the FDIC    Regulated, supervised and regularly examined by the Office of Thrift Supervision (“OTS”), a bureau of the U.S. Department of the Treasury

Types of cards issued

  

•    Revolving credit cards

•    Consumer charge cards

  

•    Revolving credit cards

•    Consumer charge cards

•    All OPEN® credit cards and charge cards

Marketing methods

   Primarily direct mail and other remote marketing channels   

•    Direct mail and other remote marketing channels

•    In-person selling and third-party co-brand partners

Risk-based capital adequacy requirements*, based on Tier One risk-based capital, total risk-based capital and Tier One core capital ratios at December 31, 2009    Well-capitalized    Well-capitalized**

 

* The risk-based capital standards for both the FDIC and OTS are substantively identical. A bank generally is deemed to be well capitalized if it maintains a Tier One risk-based capital ratio of at least 6%, a total risk-based capital ratio of at least 10% and a leverage ratio of at least 5%.
** Since January 2009, AEBFSB has committed to maintain a Total capital ratio of no less than 15%.

Charge Cards

Our charge Cards, which generally carry no preset spending limits, are primarily designed as a method of payment and not as a means of financing purchases of goods or services. Charges are approved based on a variety of factors including a Cardmember’s current spending patterns, payment history, credit record, and financial resources. Cardmembers generally must pay the full amount billed each month, and no finance charges are assessed on the balance. Charge Card accounts that are past due are subject, in most cases, to a delinquency

 

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assessment and, if not brought to current status, may be cancelled. The no preset spending limit and pay-in-full nature of these products attract high-spending Cardmembers who want to use a charge Card to facilitate larger payments.

The charge Cards also offer flexible payment features to Cardmembers. The Sign & Travel® program gives qualified U.S. Cardmembers the option of extended payments for airline, cruise and certain travel charges that are purchased with our charge Cards. The Extended Payment Option offers qualified U.S. Cardmembers the option of extending payment for certain charges on the charge Card in excess of a specified amount.

In 2009, we launched two new Card products to the charge Card portfolio. Premier Rewards Gold launched in October, targeting high-spending, frequent travelers who want to maximize rewards. This Card offers triple Membership Rewards® points on airfare purchases, double points on gas and grocery and single points on all other spend. In addition, cardmembers receive 15,000 bonus points when they spend $30,000 in a year. In November, we piloted ZYNCSM Card from American Express, a new charge Card for a younger demographic with a low annual fee of $25. Cardmembers get core charge Card features and protections on the base card, and have the option of purchasing “packs” with specialized lifestyle-based features and benefits.

During 2009, we launched the “Don’t Take Chances, Take ChargeSM” marketing campaign, which highlights the benefits of the American Express Charge Card. The campaign is part of an ongoing effort to inform consumers about the charge Card and illustrates how it can help customers, particularly during difficult economic times. Our charge Card products have global breadth, high average spend, lower losses and annual card fees. In addition, at a time when people are looking for financial discipline and value, charge Cards, being a pay-in-full product, allow consumers and companies to control their debt.

In another effort to help Cardmembers achieve financial empowerment, we launched the online Money Manager, where Cardmembers can track spend across all of their financial accounts—not just American Express. Cardmembers can set budgets by category and receive alerts to keep them apprised of their spending versus their budget. We also announced a unique, new service that helps American Express® Charge Cardmembers to set, manage, and track spending limits on additional Cards on their account, which is available for anyone who is 15 years of age or older.

Revolving Credit Cards

We offer a variety of revolving credit Cards. These Cards have a range of different payment terms, interest rate and fee structures, rewards programs and Cardmember benefits. Revolving credit Card products, such as Blue from American Express, Blue Cash from American Express and Blue Sky from American Express, provide Card members with the flexibility to pay their bill in full each month or carry a monthly balance on their Cards to finance the purchase of goods or services. Along with charge Cards and co-brand Cards, these revolving credit Cards attract affluent Cardmembers and promote increased relevance for our expanding merchant network. Our non-co-Brand proprietary lending products represent approximately 13% of our US Card Services billings. As we continue to scale back on these Cards and target premium charge Card and co-brand Card products, the Company’s priority will be to drive billed business and average spend per card rather than achieve broad growth in cards-in-force.

Co-brand Cards

We issue Cards under co-brand agreements with selected commercial firms in the United States. The competition among card issuers and networks for attractive co-brand card partnerships is quite intense because these partnerships can generate high-spending loyal cardholders. The duration of our co-brand arrangements generally ranges from five to ten years. Cardmembers earn rewards provided by the partners’ respective loyalty programs based upon their spending on the co-brand Cards, such as frequent flyer miles, hotel loyalty points and cash back. We make payments to our co-brand partners, which can be significant, based primarily on the amount of Cardmember spending and corresponding rewards earned on such spending and, under certain arrangements, on the number of accounts acquired and retained. We expense amounts due under co-brand arrangements in the month earned. Payment terms vary by arrangement, but are monthly or quarterly. Generally, once we make

 

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payment to the co-brand partner, the partner is solely liable for providing rewards to the Cardmember under the co-brand partner’s own loyalty program. As the issuer of the co-brand Card, we retain all the credit risk with the Cardmember and bear the receivables funding and operating expenses for such Cards. The co-brand partner retains the risk associated with the miles, points or other currency earned by the Cardmember under the partner’s loyalty program.

During 2009, we extended our exclusive U.S. co-brand partnership with Starwood Hotel and Resorts Worldwide, Inc. and JetBlue for a multi-year period, allowing for the continued expansion of the programs and providing attractive economic and business benefits for both companies. We also unveiled a number of new benefits available on our Delta SkyMiles Credit Cards that allows Cardmembers to earn and redeem miles in more ways and places, on both Delta and Northwest-operated flights. In addition, we also launched a new premium co-branded credit Card called the Hilton HHonors Surpass® Card from American Express, with several enhancements to the existing Hilton HHonors® Card from American Express.

Co-brand Partnerships with Financial Services Institutions

We also issue Cards that are marketed under co-brand partnership arrangements with financial services partners. Such partnerships involve the offering of a standard product (issued by TRS or one of its subsidiaries) to customers of the financial services partner, generally co-branded with the partner’s name on the Card. Under these arrangements, we make payments to the financial services partners that are primarily based on the number of accounts acquired and retained through the arrangement and the amount of Cardmember spending on such Cards. The duration of such arrangements generally ranges from three to seven years.

Card Pricing and Account Management

Certain Cards, particularly charge Cards, charge an annual fee that varies based on the type of Card and the number of Cards for each account. We also offer many revolving credit Cards with no annual fee but on which we assess finance charges for revolving balances. Depending on the product, we also charge Cardmembers an annual program fee to participate in the Membership Rewards programs and fees for account performance (e.g., late fees) or for certain services (e.g., additional copies of account statements). We apply standards and criteria for creditworthiness to each Cardmember through a variety of means both at the time of initial solicitation or application and on an ongoing basis during the Card relationship. We use sophisticated credit models and techniques in our risk management operations. For a further description of our risk management policies, please see “Risk Management” appearing on page 47 of our 2009 Annual Report to Shareholders, which information is incorporated herein by reference.

Membership Rewards® Program

The Membership Rewards program from American Express has over 1,600 redemption partners worldwide. The program allows Cardmembers to earn one point for virtually every dollar charged on eligible, enrolled American Express Cards, and then redeem points for a wide array of rewards, including travel, retail merchandise, dining and entertainment, financial services and even donations to benefit tens of thousands of charities. Points generally have no expiration date and there is no limit on the number of points one can earn. A large majority of spending by eligible Cardmembers earns points under this program.

The U.S. Membership Rewards program has over 150 redemption partners and features over 500 merchandise brands. Membership Rewards program tiers are aligned with specific Card products to better meet Cardmember lifestyle and reward program usage needs. American Express Cardmembers participate in one of three Membership Rewards program tiers based on the Credit or Charge Card they have in their wallet. For those Cardmembers with American Express Cards, such as Blue from American Express and ZYNC from American Express, we have the Membership Rewards Express® program. American Express Charge Cardmembers with American Express Green and Gold Cards have the Membership Rewards program. Platinum Card® members and Centurion® Card members are enrolled in the Membership Rewards First® program.

 

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During the year we also expanded our list of redemption partners and announced a number of innovations to meet customer demand.

We enhanced our Membership Rewards® program with the introduction of new reward options designed to provide cardmembers with greater breadth and variety as well as utility. Specifically, these included: providing Cardmembers the ability to designate their points as payment for “everyday charges” within their online statement; the launch of the Membership Rewards Specials program featuring specials for popular reward options, including electronics and travel products and services; and the addition of a number of new partners, such as Zappos.Com and British Airways, which give Cardmembers a broader range of opportunities to redeem points with casual dining restaurants, retailers and airlines.

When a Cardmember enrolled in the Membership Rewards program uses the Card, we establish reserves to cover the cost of estimated future reward redemptions for points earned to date. When a Membership Rewards program enrollee redeems a reward using Membership Rewards points, we make a payment to the Membership Rewards program partner providing the reward pursuant to contractual arrangements. Membership Rewards expense is driven by Cardmember charge volume, customer participation in the program, and contractual arrangements with redemption partners. At year end, we estimated that current Cardmembers will redeem approximately 90% of their points. For more information on our Membership Rewards Program, see “Critical Accounting Policies—Reserves for Membership Rewards Costs” appearing on page 24 of our 2009 Annual Report to Shareholders, which information is incorporated herein by reference.

Membership Rewards continues to be an important driver of Cardmember spending and loyalty. We believe, based on historical experience, that Cardmembers enrolled in rewards programs yield higher spend, stronger credit performance and greater profit for us. By offering a broader range of redemption choices, we have given our Cardmembers more flexibility in the use of their rewards points and favorably affected our average cost per point. We continually seek to optimize the overall economics of the program and make changes to enhance its value to Cardmembers. Our program is also valuable to merchants that become redemption partners as we bring them high-spending Cardmembers and new marketing channels to reach these Cardmembers.

Cardmember Special Services and Programs

Throughout the world, our Cardmembers have access to a variety of fee-free and fee-based special services and programs, depending on the type of Cards they have. Examples of these special services and programs include:

 

•   the Membership Rewards® program

 

•   Global Assist® Hotline

 

•   Extended Warranty

 

•   Car Rental Loss and Damage Insurance Plan

 

•   Purchase Protection Plan

 

•   Emergency Card Replacement

 

•   Return Protection

 

•   Manage Your Card Account Online

 

•   Online Year-End Summary

 

•   American Express Roadside Assistance Services

 

•   American Express Bill Pay®

 

•   Advanced Ticket Sales

  

•   Automatic Flight Insurance

 

•   Premium Baggage Protection

 

•   CreditSecure®

 

•   Account Protector

 

•   Online Fraud Protection Guarantee

 

•   Credit Card Registry

 

•   My Free Credit Score and Report

 

•   Identity Theft Assistance

 

•   Event Ticket Protection Plan

 

•   Platinum Office Program

 

•   Online Money Manager

 

•   Exclusive Access to Cardmember Events

 

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OPEN

In addition to our U.S. Consumer Card business, through AEBFSB we are also a leading provider of financial services to small businesses (generally, firms with less than 100 employees and/or annual sales up to $10 million). American Express OPEN (“OPEN”) offers small business owners a wide range of tools, services and savings designed to meet their evolving needs, including:

 

   

charge and credit cards

 

   

rewards on eligible spend and business relevant redemptions

 

   

retail and travel protections such as purchase protection and baggage insurance

 

   

travel services

 

   

3% - 10% or more discounts at select suppliers of travel, business services, and products through OPEN Savings®

 

   

expense management reporting

 

   

enhanced online account management capabilities

 

   

resources to help grow and manage a business through the community-driven website, OPEN Forum®.

All American Express OPEN® Cardmembers are automatically enrolled in OPEN Savings®, a program that offers discounts for all OPEN customers on travel and other major business expenses simply by using their American Express OPEN Card at participating companies. These savings may be combined with any existing discounts or offers. During 2009, American Express OPEN also launched several new initiatives including:

 

   

a business co-brand with Lowe’s

 

   

Accept PaySM—an integrated online invoicing and electronic payment solution for small businesses

 

   

OPEN Forum 2.0, with enhancements to our online resource and networking website for small business owners

 

   

OPEN for Government Contracts: Victory in ProcurementSM (VIP) for Small Business, a national program to help small business owners capitalize on the enormous growth opportunity provided through government contracts.

Card-Issuing Business—Competition

Our proprietary Card business encounters substantial and intense competition in the United States and internationally. As a card issuer, we compete in the United States with financial institutions (such as Citibank, Bank of America, JPMorgan Chase, and Capital One Financial) that issue general-purpose charge and revolving credit cards, and Discover Financial Services, which issues the Discover Card on the Discover Business Services network. We also encounter limited competition from businesses that issue their own cards or otherwise extend credit to their customers, such as retailers and airline associations, although these cards are generally accepted only at limited locations. Because of continuing consolidations among banking and financial services companies and credit card portfolio acquisitions by major card issuers, there are now a smaller number of significant issuers. The largest competing issuers have continued to grow, in several cases by acquiring card portfolios, and also by cross-selling through their retail branch networks, and competition among all issuers remains intense.

Competing card issuers offer a variety of products and services to attract cardholders, including premium cards with enhanced services or lines of credit, airline frequent flyer program mileage credits, cash rebates and

 

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other reward or rebate programs, services for small business owners, “teaser” promotional interest rates for both credit card acquisition and balance transfers, and co-branded arrangements with partners that offer benefits to cardholders. In recent years we have encountered increasingly intense competition in the small business sector, as competitors have targeted OPEN’s customer base and our leadership position in providing financial services to small businesses.

Most financial institutions that offer demand deposit accounts also issue debit cards to permit depositors to access their funds. Use of debit cards for point-of-sale purchases has grown as most financial institutions have replaced ATM cards with general-purpose debit cards bearing either the Visa or MasterCard logo. As a result, the purchase volume and number of transactions made with debit cards in the United States has grown more rapidly than credit and charge card transactions. Debit cards are marketed as replacements for cash and checks, and transactions made with debit cards are typically for small dollar amounts. The ability to substitute debit cards for credit and charge cards is limited because there is no credit extended and the consumer must have sufficient funds in his or her demand deposit account to pay for the purchase at the time of the transaction as opposed to charge cards where payment is due at the end of the month or credit cards where payment can be extended over a period of time. We do not currently issue point-of-sale debit cards for use on the American Express network.

The principal competitive factors that affect the card-issuing business include:

 

   

features and the quality of the services, including rewards programs, provided to Cardmembers

 

   

the number, spending characteristics and credit performance of Cardmembers

 

   

the quantity and quality of the establishments that accept Cards

 

   

the cost of Cards to Cardmembers

 

   

pricing, payment and other Card account terms and conditions

 

   

the number and quality of other charge and credit cards available to Cardmembers

 

   

the nature and quality of expense management data capture and reporting capability

 

   

the success of targeted marketing and promotional campaigns

 

   

reputation and brand recognition

 

   

the ability of issuers to manage credit and interest rate risk throughout the economic cycle

 

   

the ability of issuers to implement operational and cost efficiencies

 

   

the quality of customer service.

As the payment industry continues to evolve, we are also beginning to face competition from non-traditional players, such as online networks and telecom providers, that leverage new technologies and customers’ existing charge and credit card account and bank relationships to create payment solutions. In addition, the evolution of payment products in emerging markets may be different than it has been in developed markets. Instead of migrating from cash to checks to plastic, technology and consumer behaviors in these markets may result in the skipping of one or more steps to alternative payment mechanisms such as mobile payments. For a discussion concerning our recent acquisition of Revolution Money Inc. in the emerging payments area, please see “Enterprise Growth” beginning on page 34 below.

Financing Activities

The Company meets its funding needs through a variety of sources, including cash or assets that are readily convertible into cash, deposits placed with the Company’s U.S. banks, unsecured medium- and long-term notes, asset securitizations, and long-term committed bank borrowing facilities in certain non-U.S. markets.

American Express Credit Corporation, a wholly owned subsidiary of TRS, along with its subsidiaries (“Credco”), acquires the majority of charge Card receivables arising from the use of corporate Cards issued in the

 

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United States and consumer and corporate Cards issued in certain currencies outside the United States. Credco finances the acquisition of receivables principally through the sale of medium- and long-term notes. Centurion Bank and AEBFSB finance their revolving credit receivables and consumer and small business charge card receivables, in part, through the sale of medium-term notes and by offering consumer deposits in the United States. TRS, Centurion Bank and AEBFSB also typically have funded receivables through asset securitization programs. The cost of funding Cardmember receivables and loans is a major expense of Card operations.

(You can find a discussion of our securitization and other financing activities on pages 40-43 under the caption “Financial Review,” and Note 7 on pages 87-90 of our 2009 Annual Report to Shareholders, which portions we incorporate herein by reference.) In addition, please see “Difficult conditions in the global capital markets and economy generally, as well as political conditions in the United States and elsewhere, may materially adversely affect our business and results of operations” and “Adverse capital and credit market conditions may significantly affect the Company’s ability to meet liquidity needs, access to capital and cost of capital” in “Item 1A—Risk Factors” below.

Deposit Programs

As an additional source of funding, our banking subsidiaries offer deposits to individuals through brokerage networks as well as directly to consumers. As of December 31, 2009, we had approximately $26.3 billion in total consumer deposits, a large portion of which was raised through brokerage networks. Our deposit-taking activities compete with other deposit-taking organizations that source deposits through telephone, internet and other electronic delivery channels, brokerage networks, and/or through branch locations. We compete primarily in the deposit markets on the basis of price and our brand reputation for safety and service. We seek to obtain the deposits of new customers as well as existing card customers by offering attractive rates and marketing our name brand.

Our ability to obtain deposit funding and offer competitive interest rates on deposits is also dependent on capital levels of our bank subsidiaries. The Federal Deposit Insurance Act (“FDIA”) generally prohibits a bank, including our banking subsidiaries, from accepting brokered deposits or offering interest rates on any deposits significantly higher than the prevailing rate in its normal market area or nationally (depending upon where the deposits are solicited), unless (1) it is well-capitalized or (2) it is adequately capitalized and receives a waiver from the FDIC. A bank that is adequately capitalized generally may not pay an interest rate on any deposit, including direct-to-consumer deposits, in excess of 75 basis points over the national rate published by the FDIC. There are no such restrictions on a bank that is well-capitalized (provided such bank is not subject to a capital maintenance provision within a written agreement, consent order, order to cease and desist, capital directive, or prompt corrective action directive issued by its federal regulator).

Card-Issuing Business—Regulation

The charge card and consumer lending businesses are subject to extensive regulation. In the United States, we are subject to a number of federal laws and regulations, including:

 

   

the Equal Credit Opportunity Act (which generally prohibits discrimination in the granting and handling of credit)

 

   

the Fair Credit Reporting Act (“FCRA”), as amended by the Fair and Accurate Credit Transactions Act (“FACT Act”) (which, among other things, regulates use by creditors of consumer credit reports and credit prescreening practices and requires certain disclosures when an application for credit is rejected)

 

   

the Truth in Lending Act (“TILA”) (which, among other things, requires extensive disclosure of the terms upon which credit is granted), including the amendments to TILA that were adopted through the enactment of the Fair Credit and Charge Card Disclosure Act (which mandates certain disclosures on credit and charge card applications)

 

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the Fair Credit Billing Act (which, among other things, regulates the manner in which billing inquiries are handled and specifies certain billing requirements)

 

   

the Electronic Funds Transfer Act (which regulates disclosures and settlement of transactions for electronic funds transfers including those at ATMs)

 

   

the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act”) (which prohibits certain acts and practices in connection with consumer credit card accounts)

 

   

Regulation Z (which was recently amended by the Federal Reserve to extensively revise the open end consumer credit disclosure requirements and to implement the requirements of the CARD Act)

 

   

federal and state laws and regulations that generally prohibit engaging in unfair and deceptive business practices.

Certain federal privacy-related laws and regulations govern the collection and use of customer information by financial institutions (see “Corporate & Other” below). Federal legislation also regulates abusive debt collection practices. In addition, a number of states, the European Union, and many foreign countries in which we operate have significant consumer credit protection and disclosure and privacy-related laws (in certain cases more stringent than the laws of the United States). Bankruptcy and debtor relief laws affect us to the extent that such laws result in amounts owed being classified as delinquent and/or charged off as uncollectible. As stated above, card issuers and card networks are subject to certain provisions of the Bank Secrecy Act as amended by the Patriot Act, with regard to maintaining effective anti-money laundering programs. For a discussion of these and other regulations and legislation that impact our business, please see “Supervision & Regulation—General” within “Corporate & Other” below.

Centurion Bank, AEBFSB and our other bank entities are subject to a variety of laws and regulations applicable to financial institutions. Changes in such laws and regulations or in the regulatory application or judicial interpretation thereof could impact the manner in which we conduct our business and the costs of compliance. The regulatory environment in which our Card and lending businesses operate has become increasingly complex and robust. The U.S. Congress and regulators, as well as various consumer advocacy groups, have continued their focus and attention on certain practices of credit card issuers, such as unfair and deceptive business practices, increases in APRs, changes in the terms of the account, and the types and levels of fees and financial charges charged by card issuers for, among other things, late payments, returned checks, payments by telephone, copies of statements and the like. We regularly review and, as appropriate, refine our business practices in light of existing and anticipated developments in laws, regulations and industry trends so we can continue to manage our business prudently and consistent with regulatory requirements and expectations. For information about the recently enacted CARD Act, please see “Privacy and Fair Credit Reporting” within “Supervision and Regulatory- General” below beginning on page 42.

In June 2009, we announced that Centurion Bank and AEBFSB entered into separate settlement agreements with the FDIC and the OTS, respectively. The settlement agreements related to convenience checks used by certain Cardmembers, which were declined as a result of a change in the Cardmember’s risk profile. Among other terms of the settlement agreements, the banks agreed to modify certain practices of their convenience check programs and disclosures and to assist qualifying Cardmembers in the removal of their respective names from any “bad check” registry or similar database and to refund certain amounts to affected Cardmembers.

In January 2003, the Federal Financial Institutions Examination Council (the “FFIEC”), an interagency body composed of the principal U.S. federal entities that regulate banks and other financial institutions, issued new guidance to the industry on credit card account management and loss allowance practices (the “Guidance”). The Guidance covers five areas: (i) credit line management; (ii) over-limit practices; (iii) minimum payment and negative amortization practices; (iv) workout and forbearance practices; and (v) certain income (fee) recognition and loss allowance practices. The Guidance is generally applicable to all institutions under the supervision of the federal bank regulatory agencies that comprise the FFIEC, although it is primarily the result of the identification by bank regulators in their examinations of other credit card lenders’ practices deemed by them to be inappropriate, particularly, but not exclusively, with regard to subprime lending programs. At present, we do not

 

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have any lending programs that target the subprime market. Centurion Bank and AEBFSB evaluate and discuss the Guidance with their respective regulators on an ongoing basis as part of their regulatory examination processes, and, as a result, may refine their practices from time to time based on regulatory input. The Guidance has not had, nor do we expect it to have, any material impact on our businesses or practices.

American Express Consumer Travel Network—USA

The American Express Consumer Travel Network—USA provides travel, financial and Cardmember services to consumers through American Express-owned travel service offices, call centers, participating American Express Representatives (independently owned travel agency locations that operate under the American Express brand) and the Consumer Travel Web site. U.S. Consumer Travel has distinguished itself in the luxury marketplace through its Platinum Travel Services and Centurion Travel Services. These services provide programs such as the International Airline Program, which offers special discount fares on certain international first- and business-class tickets, and the Fine Hotels & Resorts program, a luxury hotel program offering room upgrades and value-added amenities. Other premium programs developed by Consumer Travel for Centurion Card and Platinum Card members include the Cruise Privileges Program, Destinations Vacations Program and the Private Jet Services Program. Consumer Travel also provides other value-added programs such as Gold Card Destinations, a collection of travel benefits exclusively for Gold Card members, and Destination Family®, a set of valuable benefits and offers across cruise, tour, hotel, and car rental designed for American Express Card members traveling with families.

In addition, the Consumer Travel business operates a wholesale travel business in the United States through our Travel Impressions subsidiary. (A wholesaler purchases inventory, such as hotel rooms, from suppliers and then resells the services to the customer at retail prices that the wholesaler determines.) Our wholesale travel business manages and operates American Express Vacations, which is sold exclusively through the American Express Consumer Travel Network, and distributes travel packages through other retail travel agents and private label brands for third parties in the United States.

Our Consumer Travel Web site, americanexpress.com/travel, offers a full range of travel rates and discounts on airfares, hotels, car rentals, last-minute deals, cruises and full vacation packages. The Web site offers unique American Express Cardmember benefits such as an American Express Travel Office locator, Travel Specialist finder tools, double Membership Rewards points, and travel planning resources and destination content through the “Local Color” portion of the Web site. In addition, Cardmembers are able to Pay With Points by redeeming Membership Rewards points for some categories of travel through our Web site, as well as through our call centers and Travel Offices. The ability to Pay With Points for travel is unique among our competitors and has been well received by our customers.

Consumer Travel continues to attract agencies to our Representative Network to increase our network footprint in areas where American Express Cardmembers are concentrated. In 2009, 18 new member agencies joined the Representative Network. Key signings included Altour International, one of the largest travel companies in the United States, and National Travel Center in Charleston, West Virginia, a leading travel management company in the region. Furthermore, in 2009, the Representative Network launched a series of new services allowing Representatives to better service Cardmembers and customers. These services include Pay with Points, AgentPort—a Tour and Cruise on-line search engine, and the Hotel Luxury Collection—a value-added hotel program with over 700 properties worldwide. TRS’ travel network of retail travel locations is important in supporting the American Express brand and providing Cardmember servicing throughout the world.

In 2009, we opened a flagship travel service office in Cambridge, Massachusetts, which, in addition to providing service from American Express’ travel agents, offers visitors new services including a Cardmember lounge, concierge services, unique virtual technology and special travel offers and events.

 

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Consumer Travel Network—USA—Competition

American Express Consumer Travel competes with a variety of different competitors including traditional “brick and mortar” travel agents, credit card issuers offering products with significant travel benefits, online travel agents and travel suppliers that distribute their products to consumers directly via the Internet or telephone-based customer service centers. In recent years we have experienced an increasing presence of “niche” players that are seeking to capitalize on the growth in the luxury travel segment by combining luxury travel offers with concierge-type services.

INTERNATIONAL CARD SERVICES

We issue our charge and credit Cards in numerous countries around the globe. Our geographic scope is widespread and we focus primarily on those markets that we believe offer us the greatest financial opportunity. For a discussion of Cards issued internationally through our GNS partner relationships, please see the section “Global Network Services” above.

The Company continued to bolster its international proprietary Card business through the launch of numerous new or enhanced Card products during 2009. These are Cards that we issue, either on our own or, as further described below, as co-brands with partnering institutions. This past year, among other new proprietary products, we announced or launched Cards with SAS Scandinavian Airlines in Sweden, All Nippon Airways Co., Ltd. in Japan and The Express Rewards Credit CardSM in the United Kingdom. We offer many of the same programs and services in our international proprietary Card-issuing business as we do in our U.S. proprietary issuing business. For example, as in the United States, we offer various flexible payment options similar to our Sign & Travel® program and our Extended Payment Option to Cardmembers in several international markets.

Also, as in the United States, we issue Cards internationally under distribution agreements with banks. Another example of our distribution partnerships is affinity cards with fraternal, professional, educational and other organizations. For instance, we have been successful in penetrating the affinity card segment in Australia, where we issue Cards with the majority of the largest professional associations in that country. In Australia, affinity cards are a substantial part of our total revolving portfolio and contribute to our proprietary consumer lending activities.

As in the United States, rewards programs are a strong driver of Cardmember spending in the international consumer business. We have more than 1,500 redemption partners across our international business, with an average of approximately 84 partners in each country; approximately 30% of these partners are in the travel industry. Cardmembers can redeem their points with more than 40 airlines and over 175 hotels. Our redemption options include travel, retail merchandise, entertainment, shopping and recreation gift certificates, experiences, financial services and charity rewards. In 2009, we continued to enhance our rewards programs in several markets, offering more flexible choices that enable Cardmembers to redeem Membership Rewards points more quickly.

Membership Travel Services International provides premium travel and concierge services to our Platinum and Centurion Customers, through 24 exclusively dedicated call centers in 23 international countries. Additionally, Membership Travel Services operates 16 proprietary Travel Service Offices in Mexico, Italy and Argentina to provide all Cardmembers with travel and general card service assistance. We also provide foreign exchange services in Mexico and Italy. We have taken steps to enhance our capabilities to sell exclusively negotiated benefits and luxury travel packages with preferred suppliers through the Fine Hotels and Resorts Program, American Express Vacations and American Express’s International Airline Program. Our International Airline Program (IAP), which is exclusively available to Platinum Card and Centurion Card members, allows these Card members to receive complimentary companion tickets or a class upgrade when flying on qualifying international flights in business or first class.

We expanded the flexibility of payment for travel and concierge services by allowing International Consumer Cardmembers to use their Membership Rewards points to pay for their travel purchases in 14 international markets.

 

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International Proprietary Consumer Card—Competition

Compared to the United States, consumers outside the United States use general-purpose charge and credit cards for a smaller percentage of their total payments, with some large emerging market countries just beginning to transition to card usage in any meaningful way. Although our geographic scope is widespread, we generally do not have significant share in the markets in which we operate outside the United States. Internationally, our proprietary Card-issuing business is subject to competition from multinational banks, such as Citibank, HSBC and Banco Santander, as well as many local banks and financial institutions. Globally, we view Citibank and HSBC as our strongest competitors, as they currently offer card products in a large number of markets.

International Proprietary Consumer Card—Regulation

As discussed elsewhere in this Report, regulators in 2009 continued to introduce a variety of proposed reforms to the payments landscape in a number of our key international markets, some of which have already been adopted. We expect this activity to continue in 2010. Regulators continue to consider developments in the United States and other jurisdictions to help inform and guide their policy. While the nature of the proposals vary, a number of markets have been focused on pricing, disclosure and other card practices and we expect this to continue in 2010.

As a consequence, international markets may consider and implement additional card practice regulation in 2010. As we move forward we continue to evaluate our business planning in light of changing market circumstances and the evolving political, economic, regulatory and media environment.

GLOBAL COMMERCIAL SERVICES

In our Global Commercial Services (“GCS”) segment, we provide expense management services to companies and organizations worldwide through Global Commercial Card and Global Travel Services. American Express is a leading global issuer of commercial cards and is also a leading global travel management company for corporations and businesses. During 2009, we added or retained several major Commercial Card clients in the United States and internationally including Affiliated Computer Services, Inc., International Business Machines Corporation, PepsiCo, Inc., Emerson Electric Co., Stryker, Tri-Pen Management Corporation and UPS. Additionally, in 2009, we added or retained several American Express Business Travel clients in the United States and internationally, including International Business Machines Corporation, Rio Tinto Limited, CBS Corporation, Zurich Insurance Company Ltd, and The Nielsen Company.

GCS offers a number of products and services, which include:

 

   

A comprehensive offering of Corporate Card Programs, such as:

 

   

Corporate Cards, issued to individuals through a corporate account established by their employer and designed primarily for travel and entertainment (“T&E”) spending

 

   

Corporate Meeting Cards, which are provided primarily to corporate meeting planners as a tool to help companies control their meeting and event expenses

 

   

Business Travel Accounts, centrally billed accounts that companies can use to charge their employees’ travel expenses.

 

   

A suite of Business-to-Business Payment Solutions, including:

 

   

Corporate Purchasing Card, an account established by corporations to pay for everyday business expenses such as office and computer supplies

 

   

Payment, which provides fast and efficient payment for large-ticket purchases and permits the processing of large transactions with effective fraud controls

 

   

Buyer Initiated Payment, an electronic solution for companies looking to automate their payment processes.

 

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American Express Business Travel, which helps businesses manage and optimize their travel expenses through a variety of travel-related products, services and solutions.

Global Commercial Card

Global Commercial Card (“GCC”) offers a range of expense management solutions to companies worldwide through our Corporate Card Programs and our Business-to-Business Payment Solutions. The American Express® Corporate Card is a charge card that individuals may obtain through a corporate account established by their employer for business purposes. Through our Corporate Card Program, companies can manage their travel, entertainment and purchasing expenses and improve negotiating leverage with suppliers, among other benefits. We use our direct relationships with merchants to offer Corporate Card clients superior data about company spending, as well as streamlined dispute resolution. We issue local currency Corporate Cards in 41 countries and international dollar/euro Corporate Cards in 84 countries. In addition, we provide Corporate Cards issued through our GNS partner relationships for presence in 31 additional countries.

With the heightened focus on cost containment, many companies increasingly are interested in our Corporate Meeting Card program, which helps businesses control meeting-related expenses. It allows clients to capture meeting spending, to simplify the payment process, and to gain access to data to support negotiations with suppliers.

We also offer a series of Business-to-Business Payment Solutions to help companies manage non-T&E (or B2B) spending. This type of spending by corporations helps to diversify our spend mix beyond travel and entertainment. These solutions provide a variety of benefits to companies including cost savings, process efficiency, improved cash flow and increased visibility, control and security. The Corporate Purchasing Card helps large corporations and mid-sized companies manage their everyday spending. The Corporate Purchasing Card is used to pay for everyday goods and business expenses, such as office supplies, industrial supplies and business equipment in 22 markets around the world.

vPayment allows corporate customers to make payments with enhanced controls, data capture and reconciliation capabilities. vPayment offers companies single-use virtual account numbers. Charges are authorized for a specified amount during a specified amount of time. The solution automates reconciliation; eliminates manual check requests; interfaces easily with enterprise resource planning (ERP), procurement and accounts payable systems; and can be used at one or more stages of the procurement-to-payables process.

Buyer Initiated Payment allows American Express to pay B2B suppliers electronically on behalf of our clients, permitting them to manage payments, extend their own days payable outstanding or float, and increase their cash on hand. Buyer Initiated Payment has been offered first to clients in the United States and will be offered in other markets around the world in 2011. This solution is best suited for mid- to large-sized companies that want to transition rapidly to electronic payments, reduce supplier inquiries, convert paper to electronic payments, and optimize cash flow.

In addition to providing expense management services to large and global corporations, GCC markets Commercial Card programs to middle-market companies (defined in the United States as firms with annual revenues of $10 million to $1 billion worldwide). GCC is focused on continuing to expand its business with mid-sized companies, which represent significant growth opportunities. Businesses of this size often do not have a Commercial Card program. However, once enrolled in a Commercial Card program, mid-sized companies, which usually do not have well-defined purchasing programs, typically put a significant portion of their business spending (both T&E and non-T&E, such as office supplies) on the Commercial Card because they can gain control, savings and employee benefits.

American Express also partners with many other companies around the world to offer a number of co-brand corporate Cards in various markets. These products, typically suited for mid-sized companies, provide savings on everyday business spending and /or air travel. To date, American Express has 15 co-brand partnerships

 

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worldwide. These include the two new co-brand corporate cards we added in 2009: the SAS American Express Corporate Card in Denmark, Norway and Sweden and the American Express BP Corporate Card in Australia, a unique card program that allows eligible clients to achieve savings and benefits on fuel expenses and on Qantas air travel. GCC offers the Savings at Work® Program to mid-sized companies in the United States, as well as similar programs globally, which provides companies with cash back and/or discounted pricing on everyday business products and services, such as car rentals, hotels, restaurants and courier services. Corporate Cardmembers can also take advantage of our Membership Rewards program to redeem points for air travel and hotel stays, as well as shopping, home, and recreation items. Membership Rewards is a powerful tool for encouraging Card usage and corporate policy compliance—leading to greater control and savings.

GCC offers American Express @ Work®, a secure, web-based suite of online tools that enables clients to manage their Corporate Card, Corporate Purchasing Card, BTA and Corporate Meeting Card programs on a 24/7 basis through a single user interface. American Express @ Work provides authorized client representatives online access to global management information to help them gain visibility into their spending patterns, as well as the ability to make changes to their program or Commercial Card accounts. American Express @ Work also feeds data to automated expense reporting solutions and includes reconciliation tools that together allow clients to enforce program compliance and effectively integrate spending information with their internal accounting systems. This suite of online tools assists companies in managing expenses more efficiently than offline alternatives, thereby decreasing both the direct and indirect costs associated with maintaining accounts and ensuring program compliance.

Global Commercial Card—Competition

In the current economic environment, the interest in expense management tools is particularly strong, as clients aim to capture data, analyze trends and make decisions that enhance their cash flow and profitability. Both Visa and MasterCard continue to support card issuers such as U.S. Bank, JPMorgan Chase, and Citibank to build and support data collection and reporting necessary to satisfy customer requirements. Commercial card issuers have increasingly acquired niche technology offerings to enhance data capture capabilities and reporting functionality. Global servicing, data quality, technological functionality and simplicity, and customer experience are among the key competitive factors in the commercial card business.

Global Commercial Card—Regulation

The Global Commercial Card business, which engages in the extension of commercial credit, is subject to more limited regulation than our consumer lending business. In the United States, we are subject to certain of the federal and state laws applicable to our consumer lending business, including the Equal Credit Opportunity Act, the FCRA (as amended by the FACT Act), as well laws that generally prohibit engaging in unfair and deceptive business practices. (For a discussion of this legislation, see “Card-Issuing Business—Regulation”.) We are also subject to certain state laws that regulate fees and charges on our products. Additionally, as a global business, we are subject to U.S. state data security and breach notification laws and regulations, as well as significant data protection laws in the European Union and many foreign countries in which we operate. We are also subject to bankruptcy and debtor relief laws that can affect our ability to collect amounts owed to us. As discussed above, along with the rest of our business, we are subject to certain provisions of the Bank Secrecy Act as amended by the Patriot Act, with regard to maintaining effective anti-money laundering programs. (For a discussion of this legislation and its effect on our business, see “Supervision & Regulation—General” within “Corporate & Other” below.)

Global Travel Services

Global Travel Services (“GTS”) consists of American Express Business Travel and Global Foreign Exchange Services. American Express Business Travel (“Business Travel”) provides globally integrated solutions, both online and offline, to help organizations manage and optimize their travel investments and service

 

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their traveling employees. These solutions include travel reservation advice and transaction processing through a global network that is available 24 hours per day; travel expense management policy consultation; meeting management, supplier negotiation and consultation; advisory services; management information reporting, data analysis and benchmarking; and group and incentive travel services.

In 2009, we announced, with Maritz Travel, the launch of MaXvantageSM, an alliance to provide end-to-end strategic meetings management services to support a business’ entire meeting, event and incentive travel portfolio. We have also launched the CXO Planning Dashboard, which is designed to help senior-level executives make informed, targeted decisions that support revenue generating activities within cost reduction parameters. We also introduced new online initiatives from Business Travel designed to provide companies with enhanced services and increased efficiencies. We continue to update our economic model and invest in new products, services and technologies to enhance the value that we deliver to our customers and address ongoing travel industry challenges and opportunities. For example, we have substantially reduced our reliance on commission revenues from suppliers (such as airlines or hotels), and now generate revenues primarily from customers who pay for the services that we provide.

These services include solutions designed to provide our clients with savings, control, services and traveler care. For example, we offer customers savings and benefits through the Preferred ExtraSM supplier value programs and advisory services, which provide preferred supplier rates and consulting solutions in all areas of travel and entertainment expense management.

In 2009, we further developed our comprehensive cost-saving travel management offerings, including products such as Recession-Proof Your Travel Investment, a proprietary methodology that allows us to make travel program recommendations to maximize returns. We also established virtual meetings eXpert, an online / offline solution that aggregates both public and private telepresence inventory, makes it accessible to companies so they have a broader pool of virtual meeting options, and delivers the methodology and intelligence necessary to guide travelers to make informed decisions about traveling and potential alternatives. Additionally, we established eXpert insights, a new line that enables clients to benefit from the collective knowledge of numerous consultants and years of travel management experience, as well as gain access to our data repository, through a series of in-depth research reports. We also launched small meetings eXpert, a new online meetings marketplace that reinvents the way users plan and book meetings with fewer than 50 attendees and delivers real-time connection to browse content, compare rates and book guest rooms, meeting space, catering and audio visual equipment. Finally, we grew www.businesstravelconneXion.com, our online community for business travel, to nearly 8,000 members.

Business Travel has moved many of its business processes and customer servicing online. In the United States, more than 50% of all Business Travel transactions continue to be processed online. In addition, the volume of online transactions is growing in other markets around the world.

Global Foreign Exchange Services (“GFES”) consists of retail and wholesale foreign exchange services and FX International Payments. Other than in Australia and Singapore, where we operate foreign exchange offices in city locations, we concentrate our retail foreign exchange business in key international airports, for example at London Heathrow in the United Kingdom, Barajas Madrid in Spain and Changi Airport in Singapore. For corporate clients, our FX International Payments online product allows companies and financial institutions to make cross-border payments in major foreign currencies at competitive exchange rates.

In 2009, we secured agreements to operate on an exclusive basis at Edinburgh airport in the United Kingdom. We also launched in 2009 our FX International Payments business in New Zealand and increased the global portfolio of active customers to over 10,000 by signing in excess of 2,500 new corporate clients, including 37 financial institutions in the United States.

 

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Global Travel Services—Competition

Business Travel continues to face intense competition in the United States and internationally from numerous traditional and online travel management companies, as well as from direct sales by airlines and other travel suppliers. Competition among travel management companies is mainly based on price, service, value creation, convenience, global capabilities and proximity to the customer. Competition also comes from corporate customers themselves, as some companies have become accredited as in-house corporate travel agents.

For many years, travel management companies have faced pressure on revenues from airlines, as most carriers have stopped paying “base” commissions to travel agents for tickets sold and significantly reduced other forms of travel agent compensation. Carriers have also increased the number of transactions they book directly through their Web sites and other means. These trends have reduced the revenue opportunities for travel management companies because they do not receive distribution revenue from directly booked transactions. In recent years, the airline industry has undergone bankruptcies, restructurings, consolidations and other similar events including expanded grants of antitrust immunity to airline alliances. This immunity enables airlines to closely coordinate their international operations and to launch highly integrated joint ventures in transatlantic and other markets. These types of structural changes may result in additional challenges to travel management companies. For additional information concerning these issues, please see “Risk Factors—We have agreements with business partners in a variety of industries, including the airline industry, that represent a significant portion of our business” on page 78 below.

Overall, intense competition among travel management companies, the ongoing trends of increasing direct sales by airlines, the rise of low-cost carriers and ongoing reductions in or elimination of airline commissions and fees, continue to put pressure on revenue for travel agents.

Over the last few years we have evolved our business model allowing us to charge customers for the services we provide and the value we create, and restructured our expense base through the rationalization of our call center locations and the transitioning of many of our services online. This restructuring, as well as our global presence, has helped us to balance these revenue pressures. We continue to look for new ways to enhance the value we deliver for our customers both online and offline. Additionally, we are focusing on developing new and innovative products, services and technologies, which enhance the value we deliver to our customers and suppliers and address ongoing travel industry challenges and opportunities.

CORPORATE & OTHER

Corporate & Other consists of corporate functions and auxiliary businesses, including the Company’s publishing business, Travelers Cheques and other prepaid products, as well as other company operations. We also discuss information relevant to the Company as a whole in this section.

Global Prepaid

We have been in the business of issuing and selling travelers checks since 1891. We sell the American Express® Travelers Cheque (“Travelers Cheque” or “Cheque”) as a safe and convenient alternative to cash. Travelers Cheques are currently available in U.S. dollars and four foreign currencies, including Euros. We also issue and sell other forms of paper travelers checks, including American Express® Gift Cheques, which are available in U.S. and Canadian dollars. Sales of Travelers Cheques continued to decline in 2009.

In addition to travelers checks, Global Prepaid also offers prepaid gift cards in the United States and Canada, including the American Express® Gift Card, which can be used in the United States and Canada at merchants that accept American Express Cards. On September 30, 2009, American Express announced that it had eliminated all monthly fees on its gift cards, becoming the first “open system” gift card (i.e., a gift card that can be used at multiple unaffiliated sellers of goods or services) to do so. Sales of gift cards continued to rise in

 

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2009, reflecting the growing popularity of these products and our efforts to increase buying convenience for customers. Global Prepaid also offers a variety of incentive prepaid cards, such as prepaid rebate and reward card products.

We sell American Express prepaid products through a variety of channels, including sales directly to customers via phone and the Internet. Travelers Cheques and Gift Cheques are sold primarily through a broad network of selling outlets worldwide, including American Express travel offices, independent travel agents and third-party financial institutions. Gift cards are primarily sold through travel offices and retail establishments, including supermarkets and drug stores.

During 2009, we solidified our position as the largest gift card issuer in the United States by signing or renewing distribution deals with a number of large partners, including Simon Malls and General Growth Properties, and we continue to expand the network of retail locations at which our gift card products are sold.

Global Prepaid—Competition

Travelers Cheques compete with a wide variety of financial payment products including cash, foreign currency, checks, other brands of travelers checks, debit, prepaid and ATM cards and, in some circumstances, other payment cards. Our prepaid cards compete with the same payment methods, and in particular, with cash, checks and other open-system and store-specific gift cards.

The principal competitive factors affecting the travelers check and prepaid card industry are:

 

   

the number and location of merchants willing to accept the form of payment

 

   

the availability to the consumer of other forms of payment

 

   

the amount of fees charged to the consumer

 

   

the compensation paid to, and frequency of settlement by, selling outlets

 

   

the accessibility of sales and refunds for the products

 

   

the success of marketing and promotional campaigns

 

   

the ability to service the customer satisfactorily, including for lost or stolen instruments.

Global Prepaid—Regulation

As an issuer of travelers checks, we are regulated in the United States under the “money transmitter” or “sale of check” laws in effect in most states. These laws require travelers check (and, where applicable, prepaid card) issuers to obtain licenses, to meet certain safety and soundness criteria, to hold outstanding proceeds of sale in highly rated and secure investments, and to provide detailed reports. We invest the proceeds from sales of our Travelers Cheques and prepaid cards in accordance with applicable law, predominantly in highly rated debt securities consisting primarily of intermediate- and long-term federal, state and municipal obligations. Many states examine licensees annually. In addition, federal anti-money laundering regulations require, among other things, the registration of traveler check issuers as “Money Service Businesses” and compliance with anti-money laundering recordkeeping and reporting requirements by issuers and selling outlets. At this time, stored value issuers and redeemers, while considered to be “Money Service Businesses,” are not required to register under these regulations. Outside the United States, there are varying licensing and anti-money laundering requirements, including some that are similar to those in the United States.

Travelers check issuers are required by the laws of many states to comply with state unclaimed and abandoned property laws under which such issuers must pay to states the face amount of any travelers check that is uncashed or unredeemed after 15 years. The abandoned property laws of numerous states also apply to prepaid cards in a variety of ways.

 

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In May 2009, the CARD Act amended provisions of the Electronic Funds Transfer Act to impose new restrictions on the terms of gift cards and certain other prepaid cards, including restrictions on the fees that may be charged, expiration dates, and consumer disclosures. Under the CARD Act, the Federal Reserve must promulgate regulations to implements its gift card provisions, which regulations will become effective in August 2010. In addition, a number of states have also enacted laws pertaining to the issuance and the sale of gift cards. We continue to monitor state legislative activity restricting the terms of gift cards. In certain states where regulation continues to restrict fees and has made it unprofitable for us to offer gift cards, we have limited or withdrawn from selling these cards.

American Express Publishing

Through American Express Publishing, we publish luxury lifestyle magazines such as Travel + Leisure®, Food & Wine® and Departures®; travel resources such as SkyGuide®; business resources such as the American Express Appointment Book and SkyGuide Executive Travel, a business traveler supplement; a variety of general interest, cooking, travel, wine, financial and time management books; branded membership services; a growing roster of international magazine editions; as well as directly sold and licensed products. American Express Publishing also has a custom publishing group and is expanding its service-driven Web sites such as: travelandleisure.com, foodandwine.com, departures.com, tlgolf.com, tlfamily.com and eskyguide.com. We have an agreement with Time Inc. under which it manages our publishing business, and we share profits relating to this business.

Global Services Group

As part of the organizational changes announced in October 2009, management created a new Global Services organization to heighten the company’s focus on customer service and to ensure all business operations are managed as effectively and efficiently as possible. We are organizing support functions by process rather than business unit, which the Company expects will streamline costs, reduce duplication of work, better integrate skills and expertise, and improve customer service.

Global Services is comprised principally of the following divisions:

World Service

We have consolidated our U.S. and International service organizations for the first time. Our customer service units have worked over a number of years to ensure outstanding service to customers, while at the same time improving operating margins. As mentioned earlier in this Report, J.D. Power and Associates released its annual nationwide credit card satisfaction study and ranked American Express highest in overall satisfaction among 21 of the largest card issuers in the United States for the third consecutive year.

Global Business Services

The Global Business Services division is principally comprised of procurement, real estate, human resources processing and financial processing. By consolidating these internal process-driven activities, we will seek to simplify and standardize processes for increased quality, efficiency and cost savings.

Corporate Development

The Corporate Development Group is responsible for supporting AXP growth and profitability by working with our business units to identify and execute on acquisitions, investments, joint ventures, partnerships and divestitures.

 

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Service and Technology Infrastructure

We continue to make significant investments, both in the United States and internationally, in our Card systems and infrastructure to allow faster introduction and greater customization of products. We also are using technology to develop and improve our service capabilities to continue to deliver a high quality customer experience. For example, we maintain a service delivery platform that our employees use in the Card business to support a variety of customer servicing and account management activities such as account maintenance, updating of Cardmember information, the addition of new Cards to an account and resolving customer satisfaction issues. In international markets, we are enhancing our global platforms and capabilities, such as in revolving credit.

We continue to leverage the Internet to lower costs, improve service quality and enhance our business model. During 2009, we continued to broaden our focus to use the Internet to drive revenue and build our brand, while continuing to migrate transaction volumes at lower costs. We also continue to have more online customer service interactions in the United States than we do by telephone or in person.

As of year-end, customers had enrolled approximately 26 million Cards globally in our “Manage Your Card Account” service. This service enables Cardmembers to review and pay their American Express bills electronically, view and service their Membership Rewards program accounts and conduct various other functions quickly and securely online. We now have an online presence in 23 markets around the world, including the United Kingdom, Australia, Italy, France, Mexico and Japan.

We continue to devote substantial resources to our technology platform to ensure the highest level of data integrity, security and privacy. In 2006, we and several other payment card networks formed PCI SSC, an independent standards-setting organization to manage the evolution of technical data security standards. In 2009, we became an owner-member of EMVCo, the standards body that manages, maintains, and enhances specifications for chip-based payment cards and acceptance devices, including point-of-sale terminals. (For a discussion of these organizations, see the “Global Merchant Services” section above.)

In 2002, we outsourced most of our technology infrastructure management and support to IBM. The various arrangements covered under our agreement with IBM range in term from 8 to 12 years, with certain rights to extend. This arrangement currently enables us to benefit from IBM’s expertise while lowering our information technology costs. IBM is currently responsible for managing most of our day-to-day technology infrastructure functions, including most of our mainframe and midrange computing systems; Web hosting; database administration; and a portion of our help desk services function. We also outsource other technology infrastructure functions to other third-party service providers. Our internal IT organization continues to retain the Company’s key technology competencies, including information technology strategy, information security, managing strategic relationships with technologies’ partners, data center operations, developing and maintaining applications and databases and managing the technology portfolios of our businesses.

Enterprise Growth

As part of the organizational changes, we also are creating a new Enterprise Growth group to leverage existing assets, generate incremental fee revenue and drive our entry into new payment areas and related businesses. The objective for the Enterprise Growth organization is to develop opportunities for growth that transcend individual businesses that take advantage of some of the new technological trends that are emerging across the payments industry.

Consistent with our focus on new payments areas, on January 15, 2010, we purchased Revolution Money Inc., a provider of secure person-to-person payment services through an internet based platform, for approximately $300 million. Revolution Money’s online person-to-person payment accounts are FDIC insured and suited for social and instant messaging networks. Additionally, Revolution Money offers the RevolutionCard, a general-use PIN-based card with enhanced security; no name or account number appears on

 

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the card and transactions are processed using PIN numbers. We believe Revolution Money’s assets and expertise complement not only our existing payments and processing capabilities, but also provide us with innovative technology and expertise that can help extend our leadership beyond the traditional payments arena.

Fee Services

Our existing businesses, as well as our Enterprise Growth Group, are tasked with developing new fee-generating products and services by leveraging our Blue Box resources. Two recently introduced examples of these services from our existing businesses in other segments include:

 

   

Business Insights, a new business that incorporates analytics and consulting to assist merchants with identifying new trends, enabling product innovation, expanding geographically, and improving the effectiveness of their marketing

 

   

LoyaltyEdgeSM, a new business line that will assist partners with developing, operating, and improving their own loyalty programs, which includes Delta Airlines as the first customer.

Supervision and Regulation—General

Overview

American Express Company and TRS are bank holding companies under the BHC Act and have elected to be treated as financial holding companies under the BHC Act. As a bank holding company under the BHC Act, the Company is subject to supervision and examination by the Federal Reserve. Under the system of “functional regulation” established under the BHC Act, the Federal Reserve supervises the Company, including all of its nonbank subsidiaries, as an “umbrella regulator” of the consolidated organization and generally defers to the primary U.S. regulators of the Company’s U.S. depository institution subsidiaries, as applicable, and to the other U.S. regulators of the Company’s U.S. non-depository institution subsidiaries that regulate certain activities of those subsidiaries, such as insurance companies regulated by state insurance authorities.

Many aspects of our business are also subject to rigorous regulation by other U.S. federal and state regulatory agencies and securities exchanges and by non-U.S. government agencies or regulatory bodies and securities exchanges. Certain of our public disclosure, internal control environment and corporate governance principles are subject to the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and related regulations and rules of the SEC and the New York Stock Exchange, Inc. As a global financial institution, to the extent that different regulatory systems impose overlapping or inconsistent requirements on the conduct of our business, we face complexity and additional costs in our compliance efforts.

New laws or regulations or changes to existing laws and regulations (including changes in interpretation or enforcement) could materially adversely affect our financial condition or results of operations. More specifically, severe market disruptions in 2008 have led to numerous proposals in the United States and internationally for potentially significant changes in the regulation of the financial services industry. Please see “Risk Factors—Proposed legislative and regulatory reforms could, if enacted or adopted, result in our business becoming subject to significant and extensive additional regulations, which could adversely affect our results of operations and financial condition” on pages 70-71 for a further discussion of some of these proposals and their potential impact on our results of operations and financial condition.

Banking Regulation

Federal and state banking laws, regulations and policies extensively regulate the Company, TRS, Centurion Bank and AEBFSB, including prescribing standards relating to capital, earnings, liquidity, dividends, the repurchase or redemption of shares, loans or extension of credit to affiliates and insiders, internal controls, information systems, internal audit systems, loan documentation, credit underwriting, asset growth and impaired assets. Such laws and regulations are intended primarily for the protection of depositors, other customers and the federal deposit insurance funds, as well as to minimize systemic risk, and not for the protection of holders of our

 

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securities. Bank regulatory agencies have broad examination and enforcement power over bank holding companies and their subsidiaries, including the power to impose substantial fines, limit dividends, restrict operations and acquisitions and require divestitures. Bank holding companies and banks, as well as subsidiaries of both, are prohibited by law from engaging in practices that the relevant regulatory authority deems unsafe or unsound.

Financial Holding Company Status and Activities

The BHC Act limits the nonbanking activities of bank holding companies. Unless a bank holding company has qualified as a “financial holding company,” its nonbanking activities are restricted to those “so closely related to banking as to be a proper incident thereto.” An eligible bank holding company may elect to be a financial holding company, which is authorized to engage in a broader range of financial activities. A financial holding company may engage in any activity that has been determined by rule or order to be financial in nature, incidental to such financial activity, or (with prior Federal Reserve approval) complementary to a financial activity and that does not pose a substantial risk to the safety or soundness of a depository institution or to the financial system generally. American Express engages in various activities permissible only for a bank holding company that has elected to be treated as a financial holding company, including in particular providing travel agency services, acting as a finder and certain insurance underwriting and agency services.

For a bank holding company to be eligible for financial holding company status, all of its subsidiary U.S. depository institutions must be “well capitalized” and “well managed” and have received at least a satisfactory rating on its most recent Community Reinvestment Act of 1977 (the “CRA”) review. If, after becoming a financial holding company and undertaking activities in reliance on such qualification, the company fails to continue to meet applicable capital or managerial standards for financial holding company status, the company must enter into an agreement with the Federal Reserve to comply with applicable capital and managerial standards. Moreover, until all relevant conditions are satisfied, the Company, its subsidiaries and affiliates may not, without the Federal Reserve’s prior approval, commence any additional activities, or acquire control or shares of any company, in reliance on the Company’s status as a financial holding company, and the Company must comply with any additional limitations that the Federal Reserve imposes. If the company does not return to compliance within 180 days, the Federal Reserve may order the company to divest its subsidiary U.S. depository institutions or the company may discontinue or divest investments in companies engaged in activities permissible only for a bank holding company that has elected to be treated as a financial holding company. If any subsidiary U.S. depository institution fails to maintain a satisfactory rating under the CRA, American Express would be subject to substantially the same restrictions on activities and acquisitions as set forth above.

Activities and Acquisitions

The BHC Act requires a bank holding company to obtain the prior approval of the Federal Reserve before: (1) it may acquire direct or indirect ownership or control of any voting shares of any bank or savings and loan association, if after such acquisition, the bank holding company will directly or indirectly own or control more than 5% of any class of the voting securities of the institution; (2) it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank or savings and loan association; or (3) it may merge or consolidate with any other bank holding company.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended (the “Interstate Banking Act”), generally permits bank holding companies to acquire banks in any state, and preempts all state laws restricting the ownership by a bank holding company of banks in more than one state. The Interstate Banking Act also permits (1) a bank to merge with an out-of-state bank and convert any offices into branches of the resulting bank if both states have not opted out of interstate branching, (2) a bank to acquire branches from an out-of-state bank if the law of the state where the branches are located permits the interstate branch acquisition and (3) banks to establish and operate de novo interstate branches whenever the host state opts-in to de novo branching. Bank holding companies and banks seeking to engage in transactions authorized by the Interstate Banking Act must be adequately capitalized and managed.

 

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The Federal Reserve must approve certain additional capital contributions to an existing non-U.S. investment and certain direct and indirect acquisitions by the Company of an interest in a non-U.S. company, including in a foreign bank, as well as the establishment by Centurion Bank of foreign branches in certain circumstances.

The Change in Bank Control Act prohibits a person, entity, or group of persons or entities acting in concert, from acquiring “control” of a bank holding company such as the Company unless the Federal Reserve has been given prior notice and has not objected to the transaction. Under Federal Reserve regulations, the acquisition of 10% or more of a class of voting stock of the Company would create a rebuttable presumption of acquisition of control of the Company under certain circumstances.

In addition, any company is required to obtain the approval of the Federal Reserve under the BHC Act before acquiring control of the Company, which, among other things, includes the acquisition of ownership of or control over 25% or more of any class of voting securities of the Company or the power to exercise a “controlling influence” over the Company. In the case of an acquirer that is a bank or bank holding company, the BHC Act requires approval of the Federal Reserve for the acquisition of ownership or control of any voting securities of the Company, if the acquisition results in the bank or bank holding company controlling more than 5% of the outstanding shares of any class of voting securities of the Company.

Source of Strength

Under Federal Reserve policy, the Company is expected to act as a source of strength to Centurion Bank and to commit capital and financial resources to support it. Such support may be required by the Federal Reserve at times when, absent Federal Reserve policy, we otherwise might determine not to provide it. Capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulator to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Capital Adequacy

The Company, TRS, Centurion Bank and AEBFSB are required to comply with the applicable capital adequacy standards established by the federal banking regulators. There are two risk-based measures of capital adequacy for bank holding companies that have been promulgated by the Federal Reserve, as well as a leverage measure.

The Company currently calculates its risk-based capital ratios under guidelines adopted by the Federal Reserve, based on the 1998 Capital Accord (“Basel I”) of the Basel Committee on Banking Supervision (the “Basel Committee”). The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in credit and market risk profiles among banks and financial holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.

Under Basel I, as adopted by the applicable federal bank regulatory agencies, the minimum guideline for the ratio of total capital to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8%. At least half of the total capital must be composed of Tier 1 capital, which includes common equity, undivided profits, minority interests in the equity accounts of consolidated subsidiaries (including, for bank holding companies but not banks, trust preferred securities), non-cumulative perpetual preferred stock and for bank holding companies (but not banks) a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets. Tier 2 capital may consist of, among other things, qualifying subordinated debt, mandatorily convertible debt securities, other preferred stock and trust preferred securities and a limited amount of the allowance for loan losses. Non-cumulative perpetual preferred stock, trust preferred securities and other so-called “restricted core capital elements” are generally limited to 25% of Tier 1 capital. The minimum guideline for the ratio of Tier 1 capital to risk weighted assets is 4%.

 

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In June 2004, the Basel Committee published new international guidelines for determining regulatory capital (“Basel II”). In December 2007, the U.S. bank regulatory agencies jointly adopted a final rule based on Basel II. The Company, Centurion Bank and AEBFSB are required now to transition to the Basel II-based guidelines, absent a waiver. The final rule provides for a series of three transitional periods during which the Company must calculate its risk-based capital ratios under both the Basel I-based guidelines and the new Basel II-based guidelines, with the minimum capital requirements during the transitional periods being the greater of the required capital as calculated under the final rule and a designated percentage of required capital as calculated under Basel I. Prior to beginning the three transitional periods, we must complete a satisfactory parallel-run period of no less than four consecutive calendar quarters during which we will be required to confidentially report regulatory capital under both the Basel I and Basel II regulations. Under the final rule, we must adopt a board of directors-approved implementation plan for Basel II and begin the first transitional period for capital calculation under the final rule no later than January 1, 2013, unless this time is extended by the Federal Reserve.

In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 capital to average total assets, less goodwill and certain other intangible assets (the “Leverage Ratio”), of 3% for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies generally are required to maintain a Leverage Ratio of at least 4%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve has indicated that it will consider a “tangible Tier 1 capital leverage ratio” (deducting all intangibles) and other indicators of capital strength in evaluating proposals for expansion or new activities.

As a supervisory matter, federal bank regulatory agencies expect most bank holding companies, and in particular larger bank holding companies such as the Company, to maintain regulatory capital ratios that, at a minimum, qualify a bank holding company and its depository institution subsidiaries as “well capitalized.” The required ratios to qualify as well capitalized are a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% and a leverage ratio of at least 5%. Following the recent financial crisis, the federal bank regulatory agencies have encouraged larger bank holding companies to maintain capital ratios appreciably above even the well-capitalized standard. Moreover, the Federal Reserve is focusing more on the regulatory requirement that common equity be the “predominant” element of Tier 1 capital. In addition, the Federal Reserve has assessed the capital adequacy of the country’s 19 largest bank holding companies, including the Company, under a so-called “stress test” relating primarily to loan quality.

For information regarding our capital ratios, please see “Consolidated Capital Resources and Liquidity” on pages 39-40 of our 2009 Annual Report to Shareholders, which information is incorporated herein by reference.

Proposed Capital and Liquidity Requirements

In December 2009, the Basel Committee issued two consultative documents proposing reforms to bank capital and liquidity regulation. The Basel Committee’s capital proposals would significantly revise the definitions of Tier 1 capital and Tier 2 capital. Among other things, they would: (i) re-emphasize that common equity is the “predominant” component of Tier 1 capital by (a) adding a minimum common equity to risk-weighted assets ratio, with the ratio itself to be determined based on the outcome of an impact study that the Basel Committee is conducting, and (b) requiring that goodwill, general intangibles and certain other items that currently must be deducted from Tier 1 capital instead be deducted from common equity as a component of Tier 1 capital; (ii) disqualify innovative capital instruments – including U.S.-style trust preferred securities and other instruments that effectively pay cumulative dividends – from Tier 1 capital status; (iii) strengthen the risk coverage of the capital framework, particularly with respect to counterparty credit risk exposures arising from derivatives, repos and securities financing activities; (iv) introduce a leverage ratio requirement as an international standard; and (v) implement measures to promote the build-up of capital buffers in good times that

 

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can be drawn upon during periods of stress, introducing a countercyclical component designed to address the concern that existing capital requirements are procyclical – that is, they encourage reducing capital buffers in good times, when capital could more easily be raised, and increasing capital buffers in times of distress, when access to capital markets may be limited or they may effectively be closed. The capital proposals do not specify a percentage for the new ratio of common equity to risk-weighted assets or changes in the current minimum Tier 1 capital and total capital risk-based capital requirements, which currently are 4% and 8%, respectively. Instead, they state that the minimum percentage requirements for the new ratio of common equity to risk-weighted assets and the other capital ratios—including Tier 1 capital to risk-weighted assets, total capital to risk-weighted assets and the new leverage ratio—will be included in a “fully calibrated, comprehensive set” of capital and liquidity proposals to be released by December 31, 2010. Independently, in September 2009, the Department of the Treasury issued a policy statement titled “Principles for Reforming the U.S. and International Regulatory Capital Framework for Banking Firms” setting forth core principles intended to address many of the same substantive items as the Basel Committee capital proposals and specifically calling for increased capital requirements for financial institutions, and “substantially heightened” capital requirements for large financial institutions.

If implemented, the Basel Committee’s liquidity proposals, although apparently similar in many respects to tests historically applied by banking organizations and regulators for management and supervisory purposes, would for the first time be formulaic and required by regulation. They would impose two measures of liquidity risk exposure, one based on a 30-day time horizon and the other addressing longer-term structural liquidity mismatches over a one-year time period.

The Basel Committee indicated that it expects final provisions responsive to the proposals to be implemented by December 31, 2012. Ultimate implementation in individual countries, including the United States, is subject to the discretion of the bank regulators in those countries. The Basel Committee’s final proposals may differ from the proposals released in December 2009, and the regulations and guidelines adopted by regulatory authorities having jurisdiction over the Company and our subsidiaries may differ from the final accord of the Basel Committee. Moreover, although some aspects of the Basel Committee proposals were quite specific (e.g., the definition of the components of capital), others were merely conceptual (e.g., the description of the leverage test) and others not specifically addressed (e.g., the minimum percentages for required capital ratios). We are not able to predict at this time the content of guidelines or regulations that will ultimately be adopted by regulatory agencies having authority over the Company and our subsidiaries or the impact of changes in capital and liquidity regulation upon us. However, a requirement that the Company and our depository institution subsidiaries maintain more capital, with common equity as a more predominant component, or manage the configuration of their assets and liabilities in order to comply with formulaic liquidity requirements, could significantly impact our return on equity, financial condition, operations, capital position and ability to pursue business opportunities.

Prompt Corrective Action

The FDIA requires, among other things, that federal banking regulators take prompt corrective action in respect of FDIC-insured depository institutions that do not meet minimum capital requirements. The FDIA specifies five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation. A bank may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. Once an institution becomes “undercapitalized,” the FDIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the capital category in which an institution is classified. A depository institution that is not well capitalized is also subject to certain limitations on brokered deposits and Certificate of Deposit Account Registry Service deposits. The vast majority of the Company’s U.S. retail deposits have to date been raised through broker channels. For a description of our deposit programs, please see “Deposit Programs” beginning on page 23 above and “Deposit Programs” on page 42 of our 2009 Annual Report to Shareholders, which information is incorporated herein by reference.

 

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The FDIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve and to growth limitations, and are required to submit a capital restoration plan. For a capital restoration plan to be acceptable, any holding company must guarantee the capital plan up to an amount equal to the lesser of 5% of the depository institution’s assets at the time it became undercapitalized and the amount of the capital deficiency at the time it fails to comply with the plan. In the event of the holding company’s bankruptcy, such guarantee would take priority over claims of its general unsecured creditors. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.

Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator.

Dividends

The Company and TRS as well as Centurion Bank and AEBFSB are limited by banking statutes and regulations in their ability to pay dividends. In general, federal and applicable state bank laws prohibit, without first obtaining regulatory approval, insured depository institutions, such as Centurion Bank and AEBFSB, from making dividend distributions if such distributions are not paid out of available recent earnings or would cause the institution to fail to meet capital adequacy standards. In addition to specific limitations on the dividends that subsidiary banks can pay to their holding companies, federal regulators could prohibit a dividend that would constitute an unsafe or unsound banking practice in light of the financial condition of the banking organization.

It is Federal Reserve policy that bank holding companies should generally pay to common shareholders dividends on common stock only out of net income available to common shareholders over the past year and only if the prospective rate of earnings retention appears consistent with the organization’s current and expected future capital needs, asset quality, and overall financial condition. Moreover, bank holding companies should not maintain dividend levels that place undue pressure on the capital of depository institution subsidiaries or that may undermine the bank holding company’s ability to be a source of strength to its banking subsidiaries. The Federal Reserve could prohibit a dividend by the Company or TRS that would constitute an unsafe or unsound banking practice in light of the financial condition of the banking organization.

Transactions between Centurion Bank or AEBFSB and Their Respective Affiliates

Certain transactions (including loans and credit extensions from Centurion Bank and AEBFSB) between Centurion Bank and AEBFSB, on the one hand, and their affiliates (including the Company, TRS and their non-bank subsidiaries), on the other hand, are subject to quantitative and qualitative limitations, collateral requirements, and other restrictions imposed by statute and Federal Reserve regulation. Transactions subject to these restrictions are generally required to be made on an arms-length basis. These restrictions generally do not apply to transactions between a depository institution and its subsidiaries.

FDIC Insurance Assessments

Centurion Bank and AEBFSB accept deposits, and those deposits are insured by the FDIC up to the applicable limits. The FDIC’s deposit insurance fund is funded by assessments on insured depository institutions, which depend on the risk category of an institution and the amount of insured deposits that the institution holds. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis. Furthermore,

 

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assessment rates are subject to adjustments based upon the insured depository institution’s ratio of (1) long-term unsecured debt to domestic deposits, (2) secured liabilities to domestic deposits, and (3) brokered deposits to domestic deposits (if greater than 10%).

As part of its efforts to rebuild the deposit insurance fund, the FDIC adopted a rule imposing a special assessment of five basis points on each FDIC-insured depository institution’s assets, minus its Tier 1 capital, as of June 30, 2009. This special assessment was collected on September 30, 2009. Additionally, also as part of its efforts to rebuild the deposit insurance fund, the FDIC required insured depository institutions, including Centurion Bank and AEBFSB, to prepay their estimated assessments for all of 2010, 2011 and 2012 on December 30, 2009. The prepaid assessment amount for our insured depository institution subsidiaries totaled approximately $95.2 million, $6.7 million of which was recorded as an expense for income statement purposes in 2009 and $88.5 million of which was recorded as a prepaid expense for balance sheet purposes as of December 31, 2009. Also as part of its efforts to rebuild the deposit insurance fund, the FDIC recently adopted a rule implementing a uniform increase of three basis points for assessment rates, effective January 1, 2011.

Under the FDIA, the FDIC may terminate the insurance of an institution’s deposits upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not know of any practice, condition or violation that might lead to termination of our deposit insurance.

FDIC Powers upon Insolvency of Insured Depository Institutions

If the FDIC is appointed the conservator or receiver of an insured depository institution, such as Centurion Bank or AEBFSB, upon its insolvency or in certain other events, the FDIC has the power: (1) to transfer any of the depository institution’s assets and liabilities to a new obligor without the approval of the depository institution’s creditors; (2) to enforce the terms of the depository institution’s contracts pursuant to their terms; or (3) to repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome and the disaffirmation or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution.

In addition, under federal law, the claims of holders of U.S. deposit liabilities and certain claims for administrative expenses against an insured depository institution would be afforded a priority over other general unsecured claims against the institution, including claims of debt holders of the institution and depositors in non-U.S. offices, in the liquidation or other resolution of the institution by a receiver. As a result, whether or not the FDIC ever sought to repudiate any debt obligations of Centurion Bank or AEBFSB, the debt holders would be treated differently from, and could receive substantially less, if anything, than the depositors in U.S. offices of the depository institution.

Cross-Guarantee Provisions

Under the “cross-guarantee” provision of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), insured depository institutions, such as Centurion Bank and AEBFSB, may be liable to the FDIC with respect to any loss incurred or reasonably anticipated to be incurred by the FDIC in connection with the default of, or FDIC assistance to, any commonly controlled insured depository institution. Centurion Bank and AEBFSB are commonly controlled within the meaning of the FIRREA cross-guarantee provision.

Community Reinvestment Act

Centurion Bank and AEBFSB are subject to the provisions of the Community Reinvestment Act (“CRA”). Under the terms of the CRA, the primary federal regulator of a depository institution is required, in connection with its examination of the depository institution, to assess such depository institution’s record in meeting the credit needs of the communities served by that depository institution, including low- and moderate-income neighborhoods. Furthermore, such assessment is also required of any depository institution that has applied to,

 

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among other things, merge or consolidate with or acquire the assets or assume the liabilities of a federally regulated financial institution or to open or relocate a branch office. In the case of a bank holding company applying for approval to acquire a bank or bank holding company, the Federal Reserve will assess the record of each subsidiary depository institution of the applicant bank holding company in considering the application. In addition, as discussed previously, the failure of the Company’s subsidiary depository institutions to maintain satisfactory CRA ratings could result in restrictions on the Company’s and TRS’ ability to engage in activities in reliance on financial holding company authority.

Privacy and Fair Credit Reporting

We use information about our customers to develop and make available relevant, personalized products and services. Certain customers are given choices about how we use and disclose their information, and we give them notice regarding the measures we take to safeguard this information. Regulatory activity in the areas of privacy and data security continues to increase worldwide, spurred by advancements in technology and related concerns about the rapid and widespread dissemination and use of information. As noted above, as part of our efforts to enhance payment account data security, in 2006, we and several other payment card networks formed PCI SSC, an independent standards-setting organization to manage the evolution of the PCI Data Security Standard, which helps organizations that process card payments to prevent credit/charge card security breaches and fraud through increased controls around data and its exposure to compromise.

The Gramm-Leach-Bliley Act (“GLBA”) became effective on July 1, 2001. GLBA requires consumer notice of a financial institution’s privacy policies and practices and affords customers the right to “opt out” of the institution’s disclosure of their personal financial information to unaffiliated third parties (with limited exceptions). This legislation does not preempt state laws that afford greater privacy protections to consumers, and several states have adopted such legislation. For example, in 2003 California enacted that state’s Financial Information Privacy Act. As noted elsewhere in this Report, we are also subject to the FCRA, which, among other things, places restrictions (with limited exceptions) on the sharing and use of certain personal financial information of our customers with and by our affiliates.

In addition, various federal banking regulatory agencies, and as many as 45 states, the District of Columbia, Puerto Rico, and the Virgin Islands, have enacted security breach laws and regulations, requiring varying levels of consumer notification in the event of a security breach. Data breach laws are also becoming more prevalent in other parts of the world where we operate, including Japan, Mexico and Germany. In many countries that have yet to impose automatic data breach notification requirements, regulators have increasingly used the threat of significant sanctions and penalties by data protection authorities to encourage voluntary notification and discourage data breaches.

Beyond these data breach laws, a growing number of states, including Massachusetts and Nevada, have adopted broad-ranging data security regulations regarding the protection of customer and employee data that could result in higher compliance and technology costs for the Company. In 1995, the European Parliament and Council passed European Directive 95/46/EC on the protection of individuals with regard to the processing of personal data and on the free movement of such data (commonly referred to as the Data Protection Directive), which obligates the controller of an individual’s personal data to, among other things, take the necessary technical and organizational measures to protect personal data.

We continue our efforts to safeguard the data entrusted to us in accordance with applicable law and our internal data protection policies, including taking steps to reduce the potential for identity theft, while seeking to collect and use data properly to achieve our business objectives.

In May 2009, the CARD Act was enacted to prohibit certain practices for consumer credit card accounts. The CARD Act, among other requirements, prohibits issuers from treating a payment as late for any purpose, including increasing the annual percentage rate or imposing a fee, unless a consumer has been provided a “reasonable amount of time” to make the payment. It also requires issuers to apply payment amounts in excess of the minimum payment first to the balance with the highest APR and then to balances with lower APRs. In

 

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addition, the Act prohibits an issuer from increasing the APR on outstanding balances, except in limited circumstances such as when a promotional rate expires, a variable rate adjusts, or an account is seriously delinquent or completes a workout arrangement. These requirements became effective on February 22, 2010.

Also, beginning on February 22, 2010, issuers must maintain reasonable written policies to consider a consumer’s income or assets and current obligations prior to opening an account or increasing a credit line. This may require adjustments to our account opening decisioning and line increase decisioning processes. This is not expected to have any significant impact on these decisions – if anything it could result in fewer applications for new accounts being accepted or fewer requests for line increases being approved. In addition, applicants for new accounts who are under the age of 21 must demonstrate an independent ability to make the required minimum periodic payments. This may decrease the number of applications that are approved for applicants under the age of 21.

The Act also requires that penalty fees be reasonable and proportional, and that issuers review recent APR increases periodically to determine if a decrease is appropriate. These provisions become effective on August 22, 2010. Since the Federal Reserve has not yet published final rules implementing these provisions, it is difficult to assess the potential impact these requirements may have on our operations.

The Federal Reserve also amended its rules on the format and content of consumer credit card disclosures. The amendments require revisions to the format and content of all main types of open-end consumer credit disclosures, including applications and solicitations, account-opening disclosures, and periodic billing statements. These amendments become effective on July 1, 2010. While the Company is making certain changes to its product terms and practices that are designed to mitigate the impact of the changes required by the CARD Act, there is no assurance that it will be successful. The long-term impact of the CARD Act on the Company’s business practices and revenues will depend upon a number of factors, including its ability to successfully implement its business strategies, consumer behavior and the actions of the Company’s competitors, which are difficult to predict at this time. If the Company is not able to lessen the impact of the changes required by the CARD Act, it will have a material adverse effect on results of operations.

The Fair Credit Reporting Act of 1970 (“FCRA”) regulates the disclosure of consumer credit reports by consumer reporting agencies and the use of consumer credit report information by banks and other companies. FCRA was significantly amended by the enactment in December 2003 of the Fair and Accurate Credit Transactions Act (the “FACT Act”). The FACT Act requires any company that receives information concerning a consumer from an affiliate, subject to certain exceptions, to permit the consumer to opt out from having that information used to market the company’s products to the consumer. In November 2007, the federal banking agencies issued a final rule implementing the affiliate marketing provisions of the FACT Act. Companies subject to oversight by these agencies were required to comply with the rules by October 1, 2008. We qualify for an exception from the affiliate marketing provisions of the FACT Act, and as a result, we do not need to provide an affiliate marketing opt out. The FACT Act further amends the FCRA by adding several new provisions designed to prevent or decrease identity theft and to improve the accuracy of consumer credit information. The federal banking agencies and the FTC published a final rule in November 2007 requiring financial institutions to implement a program containing reasonable policies and procedures to address the risk of identity theft and to identify accounts where identity theft is more likely to occur. Companies subject to oversight by the federal banking agencies originally were required to comply with the rule by November 1, 2008, but the FTC has stated it will suspend enforcement of its rule until June 1, 2010. TRS continues to be regulated by the FTC with respect to this new rule and is currently evaluating what steps it will need to take to comply. The FACT Act also imposes new duties on both consumer reporting agencies and on businesses that furnish or use information contained in consumer credit reports. For example, a furnisher of information is required to implement procedures to prevent the reporting of any information that it learns is the result of identity theft. Also, if a consumer disputes the accuracy of information provided to a consumer reporting agency, the furnisher of that information must conduct an investigation and respond to the consumer in a timely fashion. The federal banking regulatory agencies and the FTC have issued rules that specify the circumstances under which furnishers of information would be

 

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required to investigate disputes regarding the accuracy of the information provided to a consumer reporting agency. The FACT Act also requires grantors of credit that use consumer credit report information in making a determination to offer a borrower credit on terms that are “materially less favorable” than the terms offered to most of the lender’s other customers to notify the borrower that the terms are based on a consumer credit report. In such a case the borrower is entitled to receive a free copy of the report from the consumer reporting agency. The federal bank regulatory agencies and the FTC have issued rules that specify the circumstances under which “risk-based pricing” notices must be provided to customers and the content, format and timing of such notices. Grantors of credit using prescreened consumer credit report information in credit solicitations are also required to include an enhanced notice to consumers that they have the right to opt out from receiving further prescreened offers of credit. The enactment of the FACT Act and the promulgation of rules implementing it are not expected to have a significant impact on our business or practices.

Anti-Money Laundering Compliance

In the United States, the USA Patriot Act was enacted in October 2001 in the wake of the September 11, 2001 terrorist attacks. The Patriot Act, in addition to substantially broadening existing anti-money laundering (“AML”) and terrorist financing legislation, amended the Bank Secrecy Act, the primary legislation governing AML requirements. The Patriot Act contains a wide variety of provisions aimed at fighting terrorism and money laundering, including provisions aimed at impeding terrorists’ ability to access and move funds used in support of terrorist activities. Among other things, the Bank Secrecy Act, as amended by the Patriot Act, requires financial institutions to establish AML programs that meet certain standards, including, in some instances, expanded reporting and enhanced information gathering and recordkeeping requirements. While American Express has long maintained AML programs in our businesses, certain of our business activities are subject to specific AML regulations that prescribe minimum standards for components of the AML programs. For example, our GNS business maintains a risk-based program to ensure that institutions that are licensed to issue cards or acquire merchants on their networks maintain adequate AML controls. We have also developed and implemented a Know Your Customer, or due diligence, program and an enhanced due diligence program, including a program for verifying the identity of our customers (“Customer Identification Program”) for applicable businesses. We will take steps to comply with any additional regulations or initiatives that are adopted, whether in the United States or in other jurisdictions in which we conduct business.

Over the last several years, the industry has seen increased regulatory scrutiny of the AML compliance programs of financial institutions, with emphasis on record keeping and reporting requirements such as the requirement to identify and report suspicious activity, leading to enforcement actions for non-compliance. To meet this increased scrutiny, we continue to enhance our enterprise-wide AML compliance program. Our AML compliance programs primarily consist of risk-based policies, procedures and controls that are reasonably designed to prevent, detect and report money laundering.

We have significant operations in the European Union, including a number of regulated businesses. We monitor developments in EU legislation, as well as in the other markets in which we operate, to ensure that we are in a position to comply with all applicable legal requirements, including European Union directives applicable to payment institutions, credit providers, insurance intermediaries and other financial institutions.

Compensation Practices

Our compensation practices are subject to oversight by the Federal Reserve. In October 2009, the Federal Reserve issued a comprehensive proposal on incentive compensation policies that applies to all banking organizations supervised by the Federal Reserve, including bank holding companies such as American Express. The proposal sets forth three key principles for incentive compensation arrangements that are designed to help ensure that incentive compensation plans do not encourage excessive risk-taking and are consistent with the safety and soundness of banking organizations. The three principles provide that a banking organization’s incentive compensation arrangements should provide incentives that do not encourage risk-taking beyond the

 

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organization’s ability to effectively identify and manage risks, be compatible with effective internal controls and risk management, and be supported by strong corporate governance. Any deficiencies in compensation practices of a banking institution that are identified by the Federal Reserve in connection with its review of such organization’s compensation practices may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The proposal provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies. Separately, the FDIC has solicited comments on whether to amend its risk-based deposit insurance assessment system to potentially increase assessment rates on financial institutions with compensation programs that put the FDIC deposit insurance fund at risk, and proposed legislation would subject compensation practices at financial institutions to heightened standards and increased scrutiny.

The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect the ability of American Express and its subsidiaries to hire, retain and motivate its and their key employees.

Foreign Corrupt Practices Act

Our international operations are subject to U.S. laws governing the activities of U.S. companies transacting business abroad, including the Foreign Corrupt Practices Act (the “FCPA”). The FCPA prohibits U.S. companies from making improper payments, or offers of payments, to foreign governments and their officials and political parties for the purpose of obtaining or retaining business. The FCPA also requires us to comply with certain accounting standards, which are enforced by the SEC. Violations of the FCPA may result in severe criminal and civil sanctions and other penalties. We have implemented safeguards to deter prohibited practices; however, if our employees or agents fail to comply with applicable laws governing our international operations, we may face investigations or prosecutions, which could have a material adverse effect on our financial condition or results of operations.

FOREIGN OPERATIONS

We derive a significant portion of our revenues from the use of our Card products, Travelers Cheques, travel and other financial products and services in countries outside the United States and continue to broaden the use of these products and services outside the United States. (For a discussion of our revenue by geographic region, see Note 25 to our Consolidated Financial Statements, which you can find on pages 122-124 of our 2009 Annual Report to Shareholders and which is incorporated herein by reference.) Our revenues can be affected by political and economic conditions in these countries (including the availability of foreign exchange for the payment by the local Card issuer of obligations arising out of local Cardmembers’ spending outside such country, for the payment of Card bills by Cardmembers who are billed in other than their local currency, and for the remittance of the proceeds of Travelers Cheque sales). Substantial and sudden devaluation of local Cardmembers’ currency can also affect their ability to make payments to the local issuer of the Card in connection with spending outside the local country.

As a result of our foreign operations, we are exposed to the possibility that, because of foreign exchange rate fluctuations, assets and liabilities denominated in currencies other than the U.S. dollar may be realized in amounts greater or less than the U.S. dollar amounts at which they are currently recorded in our Consolidated Financial Statements. Examples of transactions in which this may occur include the purchase by Cardmembers of goods and services in a currency other than the currency in which they are billed; the sale in one currency of a Travelers Cheque denominated in a second currency; and, in most instances, investments in foreign operations. These risks, unless properly monitored and managed, could have an adverse effect on our operations. For more information on how we manage risk relating to foreign exchange, see “Risk Management—Market Risk Management Process” on pages 47-49 of our 2009 Annual Report to Shareholders, which information is incorporated herein by reference.

 

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SALE OF AMERICAN EXPRESS BANK LTD. / DISCONTINUED OPERATIONS

On September 18, 2007, we entered into an agreement to sell our international banking subsidiary, American Express Bank Ltd. (“AEBL”), to Standard Chartered PLC (“Standard Chartered”), and to sell American Express International Deposit Company (“AEIDC”) through a put/call agreement to Standard Chartered 18 months after the close of the AEBL sale. The sale of AEBL was completed on February 29, 2008. In the third quarter of 2008, AEIDC qualified to be reported as a discontinued operation and the sale of AEIDC was completed on September 10, 2009.

For all periods presented, all of the operating results, assets and liabilities, and cash flows of AEBL (except for certain components of AEBL that were not sold) and AEIDC have been removed from the Corporate & Other segment and are presented separately in discontinued operations in the Company’s Consolidated Financial Statements. The Notes to the Consolidated Financial Statements have been adjusted to exclude discontinued operations unless otherwise noted.

You can find more information regarding this transaction on page 21 under caption “Financial Review” and in Note 2 to our Consolidated Financial Statements, appearing on page 76 of our 2009 Annual Report to Shareholders, which are incorporated herein by reference.

SEGMENT INFORMATION AND CLASSES OF SIMILAR SERVICES

You can find information regarding the Company’s reportable operating segments, geographic operations and classes of similar services in Note 25 to our Consolidated Financial Statements, which appears on pages 122-124 of our 2009 Annual Report to Shareholders, which Note is incorporated herein by reference.

EXECUTIVE OFFICERS OF THE COMPANY

Set forth below in alphabetical order is a list of all our executive officers as of February 25, 2010. None of our executive officers has any family relationship with any other executive officer, and none of our executive officers became an officer pursuant to any arrangement or understanding with any other person. Each executive officer has been elected to serve until the next annual election of officers or until his or her successor is elected and qualified. Each officer’s age is indicated by the number in parentheses next to his or her name.

 

DOUGLAS E. BUCKMINSTER -

   President, International Consumer and Small Business Services

Mr. Buckminster (49) has been President, International Consumer and Small Business Services of the Company since November 2009. Prior thereto he had been Executive Vice President, International Consumer Products and Marketing since July 2002.

KENNETH I. CHENAULT -

   Chairman and Chief Executive Officer

Mr. Chenault (58) has been Chairman since April 2001 and Chief Executive Officer since January 2001.

L. KEVIN COX -

   Executive Vice President, Human Resources

Mr. Cox (46) has been Executive Vice President, Human Resources of the Company since April 2005. Prior thereto, he had been Executive Vice President of The Pepsi Bottling Group since September 2004.

 

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EDWARD P. GILLIGAN -

   Vice Chairman

Mr. Gilligan (50) has been Vice Chairman of the Company and head of the Company’s Global Consumer and Small Business Card Issuing, Network and Merchant businesses since October 2009. Prior thereto, he had been Vice Chairman of the Company and head of the Company’s Global Business to Business Group since July 2007. Prior thereto, he had been Group President, American Express International & Global Corporate Services since July 2005. Prior thereto, he had been Group President, Global Corporate Services since June 2000 and Group President, Global Corporate Services & International Payments, since July 2003.

WILLIAM H. GLENN -

   Executive Vice President, Global Merchant Services

Mr. Glenn (52) has been Executive Vice President since September 2008 and President, Global Merchant Services since June 2007. Prior thereto, he had been President of Merchant Services North America and Global Merchant Network Group since September 2002.

ASH GUPTA -

   President of Risk, Information Management and Banking Group and Chief Risk Officer

Mr. Gupta (56) has been President of Risk, Information Management and Banking Group and Chief Risk Officer since July 2007. Prior thereto, he had been Executive Vice President and Chief Risk Officer of the Company since July 2003.

JOHN D. HAYES -

   Executive Vice President and Chief Marketing Officer

Mr. Hayes (55) has been Executive Vice President since May 1995 and Chief Marketing Officer of the Company since August 2003.

DANIEL T. HENRY -

   Executive Vice President and Chief Financial Officer

Mr. Henry (60) has been Executive Vice President and Chief Financial Officer of the Company since October 2007. Since February 2007, Mr. Henry had been serving as Executive Vice President and Acting Chief Financial Officer of the Company. Prior thereto, he had been Executive Vice President and Chief Financial Officer, U.S. Consumer, Small Business and Merchant Services since October 2005 and Executive Vice President and Chief Financial Officer, U.S. Consumer and Small Business Services since August 2000.

ALFRED F. KELLY, JR. -

   President

Mr. Kelly (51) has been President of the Company since July 2007. Prior thereto, he was Group President, Consumer, Small Business and Merchant Services since October 2005. Prior thereto, he had been President, U.S. Consumer and Small Business Services since June 2000.

JUDSON C. LINVILLE -

   President and Chief Executive Officer, Consumer Services

Mr. Linville (52) has been President and Chief Executive Officer of Consumer Services, since July 2007. Prior thereto, he had been President, U.S. Consumer Card Services Group from 2005 through 2007. Prior thereto, he was Executive Vice President, Service Delivery Network from 2001 through 2005.

LOUISE M. PARENT -

   Executive Vice President and General Counsel

Ms. Parent (59) has been Executive Vice President and General Counsel since May 1993.

THOMAS SCHICK -

   Executive Vice President, Corporate and External Affairs

Mr. Schick (63) has been Executive Vice President, Corporate and External Affairs since March 1993.

 

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Table of Contents

STEPHEN SQUERI -

   Group President, Global Services and Chief Information Officer

Mr. Squeri (50) has been Group President, Global Services, since October 2009. Since May 2005, he served as Executive Vice President, Chief Information Officer. In July 2008, he took on the additional responsibilities as head of Corporate Development. Prior thereto, he had been President, Global Commercial Card – Global Corporate Services since January 2002.

EMPLOYEES

We had approximately 58,300 employees on December 31, 2009.

 

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GUIDE 3 – STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES

The accompanying supplemental information should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements in the Company’s 2009 Annual Report to Shareholders, which information is incorporated herein by reference (“Annual Report”). This information excludes discontinued operations unless otherwise noted.

DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL

The following tables provide a summary of the Company’s consolidated average balances including major categories of interest-earning assets and interest-bearing liabilities along with an analysis of net interest earnings. Consolidated average balances, interest, and average yields are segregated between U.S. and non-U.S. offices. Assets, liabilities, interest income and interest expense are attributed to U.S. and non-U.S. based on location of the office recording such items.

 

Years Ended December 31,

(Millions, except percentages)

  2009     2008     2007  
  Average
Balance (a)
  Interest
Income
  Average
Yield
    Average
Balance (a)
  Interest
Income
  Average
Yield
    Average
Balance (a)
  Interest
Income
  Average
Yield
 

Interest-earning assets

                 

Interest-bearing deposits in other banks (b) (c) (d)

                 

U.S. (primarily U.S.
in 2007)

  $ 6,986   $ 13   0.2   $ 8,575   $ 136   1.6   $ 3,796   $ 297   n.m.

Non-U.S.

    1,395     28   2.0        662     19   2.9        n.m.     n.m.   n.m.   

Securities purchased under agreements to resell (d)

                 

Non-U.S.

    123     6   4.9        122     10   8.2        31     2   6.5   

Short-term investment securities

                 

U.S.

    10,523     28   0.3        4,926     73   1.5        624     34   5.4   

Non-U.S.

    195     1   0.5        31     2   6.5        24     1   4.2   

Cardmember loans (e) (f)

                 

U.S.

    26,114     2,984   11.4        36,962     4,464   12.1        37,298     4,881   13.1   

Non-U.S.

    8,696     1,446   16.6        10,670     1,649   15.5        9,774     1,371   14.0   

Other loans

                 

U.S.

    140     3   2.1        175     4   2.3        145     26   17.9   

Non-U.S.

    527     38   7.2        646     74   11.5        802     104   13.0   

Taxable investment securities (g)

                 

U.S.

    13,198     457   3.5        5,841     333   5.6        5,280     272   4.7   

Non-U.S.

    285     18   6.0        382     24   6.1        363     24   6.6   

Non-taxable investment securities (g)

                 

U.S.

    5,989     286   6.8        6,565     334   7.6        7,445     356   8.2   

Other assets (h)

                 

Primarily U.S.

    485     23   n.m.        336     79   n.m.        200     56   n.m.   
                                                     

Total interest-earning assets (i)

  $ 74,656   $ 5,331   7.3   $ 75,893   $ 7,201   9.7   $ 65,782   $ 7,424   11.6
                                                     

U.S.

    63,435     3,794       63,380     5,423       54,788     5,922  

Non-U.S.

    11,221     1,537       12,513     1,778       10,994     1,502  

 

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Years Ended December 31,

(Millions, except percentages)

   2009     2008     2007  
   Average
Balance (a)
    Average
Balance (a)
    Average
Balance (a)
 

Non-interest-earning assets

      

Cash and due from banks

      

U.S.

   $ 603      $ 902      $ 728   

Non-U.S.

     380        361        747   

Cardmember receivables, net

      

U.S.

     17,056        20,220        20,699   

Non-U.S.

     13,812        16,500        15,934   

Other receivables, net

      

U.S.

     2,149        2,349        991   

Non-U.S.

     1,249        1,279        984   

Reserves for cardmember and other loans losses

      

U.S.

     (2,556     (1,923     (1,104

Non-U.S.

     (564     (432     (370

Other assets (j)

      

U.S.

     12,288        9,699        6,741   

Non-U.S.

     2,131        2,205        2,003   
                        

Total non-interest-earning assets

     46,548        51,160        47,353   
                        

U.S.

     29,540        31,247        28,055   

Non-U.S.

     17,008        19,913        19,298   

Assets of discontinued operations

     75        5,745        21,509   
                        

Total assets

   $ 121,279      $ 132,798      $ 134,644   
                        

U.S.

     92,975        94,627        82,843   

Non-U.S.

     28,229        32,426        30,292   

Assets of discontinued operations

     75        5,745        21,509   

Percentage of total average assets attributable to non-U.S. activities

     23.3     24.4     22.5

 

(a) Averages based on monthly balances, except reserves for cardmember and other receivables/loans, which are based on quarterly averages.
(b) Amounts include (i) average interest-bearing restricted cash balances of $417 million, $214 million, and $293 million for 2009, 2008 and 2007, respectively, which are included in other assets on the Consolidated Balance Sheets, and (ii) the associated interest income.
(c) Average balances in 2007 include negative cash balances not reclassified to liabilities which also could not be segregated between U.S. and non-U.S. As a result, the average yield on interest-bearing deposits in other banks has not been shown for 2007 as it would not be meaningful (n.m.).
(d) Certain reclassifications of prior year amounts have been made to conform to the current presentation.
(e) Card fees related to cardmember loans included in interest income were $107 million, $95 million, and $90 million in U.S. and $79 million, $51 million and $40 million in non-U.S. for 2009, 2008 and 2007, respectively.
(f) Average non-accrual loans were included in the average loan balances used to determine the average yield on loans in amounts of $554 million, $8 million and $34 million in U.S. as well as $15 million, $6 million and $5 million in non-U.S. for 2009, 2008 and 2007, respectively.
(g) Average yields for available-for-sale investment securities have been calculated using total amortized cost balances and do not include changes in fair value recorded in other comprehensive (loss) income. Average yield on non-taxable investment securities is calculated on a tax-equivalent basis using the U.S. federal statutory tax rate of 35 percent.
(h) Amounts include (i) average equity securities balances, which are included in investment securities on the Consolidated Balance Sheets, and (ii) the associated dividend income. The average yield on other assets has not been shown as it would not be meaningful.
(i) The average yield on total interest-earning assets is adjusted for the impacts of items mentioned in (g) above.
(j) Includes premises and equipment, net of accumulated depreciation.

 

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Years Ended December 31,

(Millions, except percentages)

  2009     2008     2007  
  Average
Balance (a)
    Interest
Expense
  Average
Rate
    Average
Balance (a)
    Interest
Expense
  Average
Rate
    Average
Balance (a)
    Interest
Expense
  Average
Rate
 

Interest-bearing liabilities

                 

Customer deposits

                 

U.S.

  $ 19,638      $ 393   2.0   $ 12,130      $ 366   3.0   $ 8,390      $ 436   5.2

Non-U.S.

    798        32   4.0        1,432        88   6.1        2,021        130   6.4   

Federal funds purchased and securities sold under agreements to repurchase

                 

U.S.

    48        —     —          1,493        53   3.5        1,974        99   5.0   

Short-term borrowings (b)

                 

U.S.

    2,145        31   1.4        12,490        399   3.2        12,408        615   5.0   

Non-U.S.

    801        6   0.7        942        31   3.3        1,193        18   1.5   

Long-term debt (b)

                 

U.S.

    54,032        1,658   3.1        54,408        2,491   4.6        46,788        2,547   5.4   

Non-U.S.

    1,463        55   3.8        1,968        82   4.2        2,199        94   4.3   

Other liabilities (c)

                 

Primarily U.S.

    284        32   n.m.        277        45   n.m.        259        42   n.m.   
                                                           

Total interest-bearing liabilities

  $ 79,209      $ 2,207   2.8   $ 85,140      $ 3,555   4.2   $ 75,232      $ 3,981   5.3
                                                           

U.S.

    76,147        2,114       80,798        3,354       69,819        3,739  

Non-U.S.

    3,062        93       4,342        201       5,413        242  

Non-interest-bearing liabilities

                 

Travelers Cheques outstanding

                 

U.S.

    5,623            6,289            6,532       

Non-U.S.

    330            410            464       

Accounts payable

                 

U.S.

    5,726            6,933            6,679       

Non-U.S.

    3,075            2,666            2,390       

Other liabilities

                 

U.S.

    9,861            9,033            7,660       

Non-U.S.

    2,824            4,691            4,230       
                                   

Total non-interest-bearing liabilities

    27,439            30,022            27,955       
                                   

U.S.

    21,210            22,255            20,871       

Non-U.S.

    6,229            7,767            7,084       

Liabilities of discontinued operations

    61            5,561            20,706       
                                   

Total liabilities

    106,709            120,723            123,893       
                                   

U.S.

    97,357            103,053            90,690       

Non-U.S.

    9,291            12,109            12,497       

Liabilities of discontinued operations

    61            5,561            20,706       
                                   

Total shareholders’ equity

    14,570            12,075            10,751       
                                   

Total liabilities and shareholders’ equity

  $ 121,279          $ 132,798          $ 134,644       
                                   

Percentage of total average liabilities attributable to non-U.S. activities

    8.7         10.0         10.1    

Interest rate spread

      4.5       5.5       6.3
                             

Net interest income and net average yield on interest-earning assets (d)

    $ 3,124   4.4     $ 3,646   5.0     $ 3,443   5.6
                             

 

(a) Averages based on monthly balances.
(b) Interest expense incurred on derivative instruments in qualifying hedging relationships has been reported along with the related interest expense incurred on the hedged debt instrument.
(c) Amounts include (i) average deferred compensation liability balances which are included in other liabilities on the Consolidated Balance Sheets, and (ii) the associated interest expense. The average rate on other liabilities has not been shown as it would not be meaningful.
(d) Net average yield on interest-earning assets is defined as net interest income divided by average total interest-earning assets as adjusted for the items mentioned in note (g) on page 50.

 

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CHANGES IN NET INTEREST INCOME -VOLUME AND RATE ANALYSIS (a)

The following table presents the amount of changes in interest income and interest expense due to changes in both average volume and average rate. Major categories of interest-earning assets and interest-bearing liabilities have been segregated between U.S. and non-U.S. offices. Average volume/rate changes have been allocated between the average rate and average volume variances on a consistent basis based upon the respective percentage changes in average balances and average rates.

 

      2009 versus 2008     2008 versus 2007  
     Increase (Decrease)
due to change in:
          Increase (Decrease)
due to change in:
       

Years Ended December 31,

(Millions)

   Average
Volume
    Average
Rate
    Net
Change
    Average
Volume
    Average
Rate
    Net
Change
 

Interest-earning assets

            

Interest-bearing deposits in other banks (b)

            

U.S. (Primarily U.S. in 2007)

   $ (25   $ (98   $ (123   $ 513      $ (655   $ (142

Non-U.S.

     21        (12     9        —          —          —     

Securities purchased under agreements to resell (b)

            

Non-U.S.

     —          (4     (4     6        2        8   

Short-term investment securities

            

U.S.

     83        (128     (45     234        (195     39   

Non-U.S.

     11        (12     (1     —          1        1   

Cardmember loans

            

U.S.

     (1,310     (170     (1,480     (44     (373     (417

Non-U.S.

     (305     102        (203     126        152        278   

Other loans

            

U.S.

     (1     —          (1     5        (27     (22

Non-U.S.

     (14     (22     (36     (20     (10     (30

Taxable investment securities

            

U.S.

     404        (280     124        9        52        61   

Non-U.S.

     (5     (1     (6     2        (2     —     

Non-taxable investment securities

            

U.S.

     (17     (31     (48     5        (27     (22

Other assets

            

Primarily U.S.

     35        (91     (56     38        (15     23   
                                                

Change in interest income

     (1,123     (747     (1,870     874        (1,097     (223
                                                

Interest-bearing liabilities

            

Customer deposits

            

U.S.

     227        (200     27        194        (264     (70

Non-U.S.

     (39     (17     (56     (38     (4     (42

Federal funds purchased and securities sold under agreements to repurchase

            

U.S.

     (51     (2     (53     (24     (22     (46

Short-term borrowings

            

U.S.

     (330     (38     (368     4        (220     (216

Non-U.S.

     (5     (20     (25     (4     17        13   

Long-term debt

            

U.S.

     (17     (816     (833     415        (471     (56

Non-U.S.

     (21     (6     (27     (10     (2     (12

Other liabilities

            

Primarily U.S.

     1        (14     (13     3        —          3   
                                                

Change in interest expense

     (235     (1,113     (1,348     540        (966     (426
                                                

Change in net interest income

   $ (888   $ 366      $ (522   $ 334      $ (131   $ 203   
                                                

 

(a) Refer to the notes on pages 50 and 51 for additional information.
(b) Certain reclassifications of prior year amounts have been made to conform to the current presentation.

 

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INVESTMENT SECURITIES PORTFOLIO

The following table presents the fair value of the Company’s available-for-sale investment securities portfolio. Refer to Note 6, “Investment Securities” on page 84 in the Annual Report for additional information.

 

December 31, (Millions)    2009    2008    2007

State and municipal obligations (a)

   $ 6,250    $ 5,631    $ 7,131

U.S. Government treasury obligations

     5,566      1,981      1,971

U.S. Government agency obligations

     6,745      3,185      3,139

Mortgage-backed securities

     180      75      79

Retained subordinated securities

     3,599      744      78

Equity securities

     530      544      —  

Corporate debt securities

     1,335      218      282

Foreign government bonds and obligations

     92      81      53

Other (a) (b)

     40      67      481
                    

Total available-for-sale securities

   $ 24,337    $ 12,526    $ 13,214
                    

 

(a) Certain reclassifications of prior year amounts have been made to conform to the current presentation.
(b) Balances at December 31, 2009 and 2008, primarily include investments in various mutual funds. Balance at December 31, 2007, primarily includes short-term money market securities with original maturities of 91 days to one year, as well as investments in various mutual funds.

The following table presents an analysis of remaining contractual maturities and weighted average yields for available-for-sale investment securities. Yields on tax-exempt obligations have been computed on a tax-equivalent basis as discussed earlier.

 

      2009  
December 31, (Millions, except percentages)    Due in 1
year or less
    Due after 1
through
5 years
    Due after 5
through
10 years
    Due after
10 years
    Total  

State and municipal obligations (a)

   $ 303      $ 71      $ 361      $ 5,515      $ 6,250   

U.S. Government treasury obligations

     5,533        9        6        18        5,566   

U.S. Government agency obligations

     3,964        2,779        —          2        6,745   

Mortgage-backed securities (a)

     —          —          3        177        180   

Retained subordinated securities (b)

     295        2,925        379        —          3,599   

Corporate debt securities

     185        1,123        10        17        1,335   

Foreign government bonds and obligations

     53        12        —          27        92   
                                        

Total fair value (c)

   $ 10,333      $ 6,919      $ 759      $ 5,756      $ 23,767   
                                        

Weighted average yield (d)

     1.44     6.37     6.28     6.71     4.29

 

(a) The expected payments on state and municipal obligations and mortgage-backed securities may not coincide with their contractual maturities because borrowers have the right to call or prepay certain obligations.
(b) The Company’s individual investments in the unrated classes of its retained subordinated securities contain multiple maturity dates over periods ranging from 2010 through 2018. Accordingly, in the table above, the Company has classified such investments based on the weighted-average maturity.
(c) Excludes equity securities and other securities included in the prior table above as these are not debt securities with contractual maturities.
(d) Average yields for available-for-sale investment securities have been calculated using the effective yield on the date of purchase.

As of December 31, 2009, other than U.S. Government treasury and agency obligations, the Company’s holdings in the American Express Credit Account Master Trust (the “Lending Trust”) with a book value of $3.6 billion were the only investments that exceeded 10 percent of shareholders’ equity. The securities issued by the Lending Trust consist of investments in retained subordinated securities from the Company’s cardmember loan securitization program.

 

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LOANS AND CARDMEMBER RECEIVABLES PORTFOLIOS

The following table presents gross loans, net of unearned income, and gross cardmember receivables by customer type segregated between U.S. and non-U.S., based on the domicile of the borrowers. Allowance for losses is presented beginning on page 60. Refer to Note 4, “Accounts Receivable” on page 80 and Note 5, “Loans” on page 82 in the Annual Report for additional information.

 

December 31, (Millions)    2009    2008    2007    2006    2005

Loans

              

U.S. loans

              

Cardmember (a)

   $ 23,507    $ 32,684    $ 43,253    $ 33,543    $ 24,788

Other (b)

     46      144      91      132      985

Non-U.S. loans

              

Cardmember (a)

     9,265      9,527      11,155      9,685      8,234

Other (b)

     487      913      716      885      851
                                  

Total loans

   $ 33,305    $ 43,268    $ 55,215    $ 44,245    $ 34,858
                                  

Cardmember receivables

              

U.S. cardmember receivables

              

Consumer (c)

   $ 17,750    $ 17,822    $ 21,418    $ 20,586    $ 19,241

Commercial (d)

     5,587      5,269      6,261      5,897      5,370

Non-U.S. cardmember receivables

              

Consumer (c)

     6,149      5,769      7,243      6,484      5,926

Commercial (d)

     4,257      4,128      5,150      4,400      3,622
                                  

Total cardmember receivables

   $ 33,743    $ 32,988    $ 40,072    $ 37,367    $ 34,159
                                  

 

(a) Represents loans to individual and small business consumers.
(b) Other loans at December 31, 2009 and 2008 primarily represent small business installment loans, a store card portfolio whose billed business is not processed on the Company’s network, and small business loans associated with the acquisition of Corporate Payment Services. Other loans at December 31, 2008, also included a loan to an affiliate in discontinued operations. 2007 and prior periods primarily represent small business installment loans.
(c) Represents receivables from individual and small business charge card consumers.
(d) Represents receivables from corporate charge card clients.

 

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MATURITIES AND SENSITIVITIES TO CHANGES IN INTEREST RATES

The following table presents contractual maturities of loans and cardmember receivables by customer type and segregated between U.S. and non-U.S. borrowers, and distribution between fixed and floating interest rates for loans due after one year based upon the stated terms of the loan agreements.

 

      2009
December 31, (Millions)    Within
1 year (a) (b)
   1-5
years (b) (c)
   After
5 years (c)
   Total

Loans

           

U.S. loans

           

Cardmember

   $ 23,459    $ 48    $ —      $ 23,507

Other

     13      25      8      46

Non-U.S. loans

           

Cardmember

     9,250      3      12      9,265

Other

     449      30      8      487
                           

Total loans

   $ 33,171    $ 106    $ 28    $ 33,305
                           

Loans due after one year at fixed interest rates

      $ 105    $ 22    $ 127

Loans due after one year at variable interest rates

        1      6      7
                       

Total loans

      $ 106    $ 28    $ 134
                       

Cardmember receivables

           

U.S. cardmember receivables

           

Consumer

   $ 17,723    $ 27    $ —      $ 17,750

Commercial

     5,587      —        —        5,587

Non-U.S. cardmember receivables

           

Consumer

     6,149      —        —        6,149

Commercial

     4,257      —        —        4,257
                           

Total cardmember receivables

   $ 33,716    $ 27    $ —      $ 33,743
                           

 

(a) Cardmember loans have no stated maturity and are therefore included in the due within one year category. However, many of the Company’s cardmembers will revolve their balances, which may extend their repayment period beyond one year for balances due at December 31, 2009.
(b) Cardmember receivables are immediately due upon receipt of cardmember statements and have no stated interest rate and are included within the due within one year category. Receivables due after one year represent long-term modification programs or Troubled Debt Restructurings (TDR), wherein the terms of a receivable have been modified for cardmembers that are experiencing financial difficulties and a long-term concession (more than 12 months) has been granted to the borrower.
(c) Cardmember and other loans due after one year primarily represent installment loans and approximately $51 million of TDRs.

 

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CARDMEMBER LOAN AND CARDMEMBER RECEIVABLE CONCENTRATIONS

The following table presents the Company’s exposure to any concentration of gross cardmember loans and cardmember receivables which exceeds 10 percent of total cardmember loans and cardmember receivables. Cardmember loan and cardmember receivable concentrations are defined as cardmember loans and cardmember receivables due from multiple borrowers engaged in similar activities that would cause these borrowers to be impacted similarly to certain economic or other related conditions.

 

December 31, (Millions)    2009 (a)

Individuals

   $ 56,671

Commercial (b)

   $ 9,844
      

Total on-balance sheet

   $ 66,515
      

Unused lines of credit-individuals (c)

   $ 222,415
      

 

(a) Refer to Note 22, “Significant Credit Concentrations” on page 118 in the Annual Report for additional information on concentrations, including those from airlines and for a discussion of how the Company manages concentration exposures. Certain distinctions between categories require management judgment.
(b) Includes corporate charge card receivables of $513 million from financial institutions, $12 million from U.S. Government agencies and $9.3 billion from other corporate institutions.
(c) Because charge card products have no preset spending limit, the associated credit limit on cardmember receivables is not quantifiable. Therefore, the quantified unused line-of-credit amounts only include the approximate credit line available on cardmember loans (including both for on-balance sheet loans and loans previously securitized).

 

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RISK ELEMENTS

The following table presents the amounts of non-performing loans and cardmember receivables that are either non-accrual, past due, or restructured, segregated between U.S. and non-U.S. borrowers. Past due loans are loans that are contractually past due 90 days or more as to principal or interest payments. Restructured loans and cardmember receivables are those that meet the definition of “Troubled Debt Restructurings”.

 

December 31, (Millions)    2009    2008    2007    2006    2005

Loans

              

Non-accrual loans (a)

              

U.S. (b)

   $ 480    $ 8    $ 8    $ 112    $ 274

Non-U.S.

     14      6      5      5      1
                                  

Total non-accrual loans

     494      14      13      117      275
                                  

Loans contractually 90 days past-due and still accruing interest

              

U.S. (c)

     148      761      558      277      138

Non-U.S.

     151      166      149      133      110
                                  

Total loans contractually 90 days past-due and still accruing interest

     299      927      707      410      248
                                  

Restructured loans (c) (d)

              

U.S.

     64      41      47      73      85

Non-U.S.

     15      24      41      66      —  
                                  

Total restructured loans

     79      65      88      139      85
                                  

Total non-performing loans

   $ 872    $ 1,006    $ 808    $ 666    $ 608
                                  

Cardmember receivables

              

Restructured cardmember receivables (c) (d)

              

U.S.

     35      6      4      —        —  
                                  

Total restructured cardmember receivables

   $ 35    $ 6    $ 4    $ —      $ —  
                                  

 

(a) The Company’s policy is generally to cease accruing interest income once a related cardmember loan is 180 days past due at which time the cardmember loan is written off. The Company establishes loan loss reserves for estimated uncollectible interest receivable balances prior to write-off. Beginning with 2009, certain cardmember loans placed with outside collection agencies are put on non-accrual status.
(b) As of December 31, 2009, these amounts primarily include certain cardmember loans placed with outside collection agencies. Non-accrual loans at December 31, 2006 and 2005 included a single loan to a U.S. commercial airline of approximately $104 million and $266 million, respectively, which was paid off in full during the second quarter of 2007. The loan was put on non-accrual status in the third quarter of 2005.
(c) Represents long-term modification programs or TDR, wherein the terms of a loan or receivable have been modified for cardmembers that are experiencing financial difficulties and a long-term concession (more than 12 months) has been granted to the borrower. The Company may modify cardmember loans and receivables and such modifications may include reducing the interest rate/delinquency fees on the loans and receivables and/or placing the cardmember on a fixed payment plan not exceeding 60 months. If the cardmember does not comply with the modified terms, then the loan or receivable agreement reverts back to its original terms. In addition to TDRs, the Company has instituted other modification programs that include short-term (12 months or less) interest rate and fee reductions to cardmembers experiencing financial difficulty (“Short Term Modification Programs”). As of December 31, 2009, 2008 and 2007, approximately $701 million, $497 million and $0, respectively, in cardmember loans and receivables have been modified under these Short Term Modification Programs and are not included in the schedule above, except for $46 million, $69 million and $0, respectively, which are included within loans contractually 90 days past due and still accruing interest.
(d) Certain reclassifications of prior year amounts have been made to conform to the current presentation.

 

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IMPACT OF NON-PERFORMING LOANS ON INTEREST INCOME

The following table presents the gross interest income for both non-accrual and restructured loans for 2009 that would have been recognized if such loans had been current in accordance with their original contractual terms, and had been outstanding throughout the period or since origination if held for only part of 2009. The table also presents the interest income related to these loans that was actually recognized for the period. These amounts are segregated between U.S. and non-U.S. borrowers.

 

Year Ended December 31, (Millions)

   2009
   U.S.    Non-U.S.    Total

Gross amount of interest income that would have been recorded in accordance with the original contractual terms (a)

   $ 53    $ 4    $ 57

Interest income actually recognized

     3      1      4
                    

Total interest revenue foregone

   $ 50    $ 3    $ 53
                    

 

(a) Based on the contractual rate that was being charged at the time the loan was restructured or placed on non-accrual status.

POTENTIAL PROBLEM RECEIVABLES

This disclosure presents outstanding amounts as well as specific reserves for certain receivables where information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present repayment terms. At December 31, 2009, the Company did not identify any potential problem loans or receivables within the cardmember loans and receivables portfolio that were not already included in “Risk Elements” above.

 

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CROSS-BORDER OUTSTANDINGS

Cross-border disclosure is based upon the Federal Financial Institutions Examination Council’s (“FFIEC”) guidelines governing the determination of cross-border risk. The Company has adopted the FFIEC guidelines for its cross-border disclosure starting with 2009 reporting. Accordingly, the amounts for 2008 and 2007 have been revised from the previously reported amounts to conform to the current presentation.

The primary differences between the FFIEC and Guide 3 guidelines for reporting cross-border exposure are: i) available-for-sale investment securities are reported based on amortized cost for FFIEC instead of fair values for Guide 3; ii) net local country claims are reduced by local country liabilities (regardless of currency denomination) excluding any debt that is funding the local assets through a foreign domiciled subsidiary for FFIEC compared to Guide 3 where only amounts in the same currencies are offset and such debt noted above is a reduction to local country claims; iii) the FFIEC methodology includes mark-to-market exposures of derivative assets which are excluded under Guide 3; and iv) investment in unconsolidated subsidiaries are included under FFIEC but excluded under Guide 3.

The following table presents the aggregate amount of cross-border outstandings from borrowers or counterparties for each foreign country that exceeds 1 percent of consolidated total assets for any of the periods reported below. Cross-border outstandings include loans, receivables, interest-bearing deposits with other banks, other interest-bearing investments and monetary assets that are denominated in either dollars or other non-local currency.

The table separately presents the amounts of cross-border outstandings by type of borrower including governments and official institutions, banks and other financial institutions and other, along with an analysis of local country assets net of local country liabilities.

 

Years Ended
December 31,
(Millions)
         Governments
and official
institutions
  

Banks and
other
financial

institutions

   Other    Net
local
country
claims
  

Total

cross-border

outstandings

   Cross-border
commitments (b)
   Total
exposure

Australia

   2009    $ —      $ 1,026    $ 1    $ 3,869    $ 4,896    $ —      $ 4,896
   2008      —        278      5      3,686      3,969      —        3,969
     2007      —        45      6      4,517      4,568      —        4,568

United Kingdom

   2009      —        959      314      1,264      2,537      —        2,537
   2008      —        844      379      2,286      3,509      —        3,509
     2007      —        339      637      2,067      3,043      —        3,043

France

   2009      —        1,136      7      876      2,019      —        2,019
   2008      —        1,213      9      800      2,022      —        2,022
     2007      —        263      9      858      1,130      —        1,130

Canada

   2009      4      25      3      1,667      1,699      —        1,699
   2008      5      782      3      1,451      2,241      —        2,241
     2007      6      155      3      1,432      1,596      —        1,596

Netherlands

   2009      —        35      188      —        223      —        223
   2008      —        886      223      183      1,292      —        1,292
     2007      —        264      271      108      643      —        643

Other countries (a)

   2009      1      5      223      2,156      2,385      —        2,385
   2008      —        1,003      227      1,984      3,214      —        3,214
     2007      —        250      288      1,992      2,530      —        2,530

 

(a) Includes the following countries each of whose cross-border outstandings are between 0.75 percent and 1.0 percent of consolidated total assets: (i) Mexico; (ii) Italy; and (iii) Sweden.
(b) Generally, all charge and credit cards have revocable lines of credit, and therefore, are not disclosed as cross border commitments. Refer to loan concentrations on page 56 for amount of unused lines of credit.

 

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SUMMARY OF LOAN LOSS EXPERIENCE

ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

The following table summarizes the changes to the Company’s allowance for cardmember loan losses. The table segregates such changes between U.S. and non-U.S. borrowers.

 

Years Ended December 31, (Millions, except percentages)    2009     2008     2007     2006     2005  

Cardmember loans

          

Allowance for loan losses at beginning of year

          

U.S. loans

   $ 2,164      $ 1,457      $ 836      $ 727      $ 727   

Non-U.S. loans

     406        374        335        269        245   
                                        

Total allowance for losses

     2,570        1,831        1,171        996        972   
                                        

Cardmember lending provisions (a)

          

U.S. loans

     3,276        3,490        2,179        993        895   

Non-U.S. loans

     990        741        582        630        454   
                                        

Total cardmember lending provisions

     4,266        4,231        2,761        1,623        1,349   
                                        

Write-offs

          

U.S. loans

     (2,914     (2,816     (1,630     (946     (867

Non-U.S. loans

     (810     (708     (655     (600     (412
                                        

Total write-offs

     (3,724     (3,524     (2,285     (1,546     (1,279
                                        

Recoveries

          

U.S. loans

     230        207        198        108        56   

Non-U.S. loans

     97        94        97        79        68   
                                        

Total recoveries

     327        301       295        187        124  
                                        

Net write-offs (b) (c)

     (3,397     (3,223     (1,990     (1,359     (1,155
                                        

Other (d)

          

U.S. loans

     (215     (174     (126     (46     (84

Non-U.S. loans

     44        (95     15        (43     (86
                                        

Total other

     (171     (269     (111     (89     (170
                                        

Allowance for loan losses at end of year

          

U.S. loans

     2,541        2,164        1,457        836        727   

Non-U.S. loans

     727        406        374        335        269   
                                        

Total allowance for losses

   $ 3,268      $ 2,570      $ 1,831      $ 1,171      $ 996   
                                        

Net write-offs / average cardmember loans
outstanding (b) (c) (e)

     8.5     5.5     3.5     3.3     3.5

 

(a) Refer to Note 5 on page 82 in the Annual Report for a discussion of management’s process for evaluating allowance for loan losses.
(b) In the third quarter of 2008, the Company revised its method of reporting the cardmember lending net write-off rate. Historically, the net write-off rate has been presented using net write-off amounts for principal, interest, and fees. However, industry convention is generally to include only the net write-offs related to principal in write-off rate disclosures. The write-off rate for 2009, 2008 and 2007 is a principal only write-off rate consistent with industry convention. The write-off rate for 2006 and 2005 reflects principal only write-offs in the U.S. and total write-offs (principal, interest, and fees) outside the U.S. as principal only write-off information was not available outside the U.S. for 2006 and prior periods.
(c) For purposes of calculating the net write-off rate in accordance with (b) above, net write-offs were $2.9 billion, $2.6 billion, $1.6 billion, $1.2 billion and $985 million for 2009-2005, respectively.
(d) The amount for 2009 primarily includes $160 million of reserves that were removed in connection with securitizations during the year. The offset is in the allocated cost of the associated retained subordinated securities. For 2008, this amount includes reclassification of waived fee reserves to contra-cardmember loans. This amount, for all periods, also includes foreign currency translation adjustments.
(e) Average cardmember loans are based on monthly balances.

 

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The following table summarizes the changes to the Company’s allowance for other loan losses. The table segregates such changes between U.S. and non-U.S. borrowers. (a) (b)

 

Years Ended December 31, (Millions, except percentages)    2009     2008     2007     2006     2005

Other loans

          

Allowance for loan losses at beginning of year

          

U.S. loans

   $ 15      $ 12      $ 16      $ 19     

Non-U.S. loans

     24        33        24        19     
                                      

Total allowance for losses

     39        45        40        38     $ 17
                                      

Provisions for other loan losses (c)

          

U.S. loans

     5        10        4        1     

Non-U.S. loans

     45        53        41        21     
                                  

Total provisions for other loan losses

     50        63        45        22     
                                  

Write-offs

          

U.S. loans

     (19     (8     (9     (6  

Non-U.S. loans

     (50     (72     (36     (19  
                                  

Total write-offs

     (69     (80     (45     (25  
                                  

Recoveries

          

U.S. loans

     1        1        1        2     

Non-U.S. loans

     10        7        6        4     
                                  

Total recoveries

     11        8        7        6     
                                  

Net write-offs

     (58     (72     (38     (19  
                                  

Other (d)

          

U.S. loans

     —          —          —          —       

Non-U.S. loans

     (4     3        (2     (1  
                                  

Total other

     (4     3        (2     (1  
                                  

Allowance for loan losses at end of year

          

U.S. loans

     2        15        12        16     

Non-U.S. loans

     25        24        33        24     
                                      

Total allowance for losses

   $ 27      $ 39      $ 45      $ 40      $ 38
                                      

Net write-offs/average other loans outstanding (e)

     8.7     8.8     4.0     1.2  

 

(a) Not all information for 2005 has been presented as the information was not available.
(b) Certain reclassifications of prior year amounts have been made to conform to the current presentation.
(c) Provisions for other loan losses are determined based on a specific identification methodology and models that analyze specific portfolios statistics.
(d) Includes primarily foreign currency translation adjustments.
(e) Calculated as net write-offs as a percentage of average other loans, which are based on monthly balances.

 

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The following table summarizes the changes to the Company’s allowance for losses on cardmember receivables. The table segregates such changes between U.S. and non-U.S. borrowers.

 

Years Ended December 31, (Millions, except percentages)

   2009     2008     2007     2006     2005  

Cardmember receivables

          

Allowance for losses at beginning of year

          

U.S. receivables

          

Consumer

   $ 474      $ 844      $ 666      $ 659      $ 533   

Commercial

     113        104        99        96        90   
                                        

Total U.S. receivables

     587        948        765        755        623   

Non-U.S. receivables

          

Consumer

     173        167        188        166        156   

Commercial

     50        34        28        21        27   
                                        

Total non-U.S. receivables

     223        201        216        187        183   
                                        

Total allowance for losses

     810        1,149        981        942        806   
                                        

Provisions for losses (a)

          

U.S. receivables

          

Consumer

     492        899        824        567        696   

Commercial

     106        130        96        68        97   
                                        

Total U.S. provisions

     598        1,029        920        635        793   

Non-U.S. receivables

          

Consumer

     196        255        170        264        206   

Commercial

     63        79        50        36        39   
                                        

Total non-U.S. provisions

     259        334        220        300        245   
                                        

Total provisions for losses

     857        1,363        1,140        935