American Express (AXP)
Q3 2010 Earnings Call
October 21, 2010 5:00 pm ET
Daniel Henry - Chief Financial Officer, Executive Vice President and Member of Operating Committee
Previous Statements by AXP
» American Express Q2 2010 Earnings Call Transcript
» American Express Company Q1 2010 Earnings Call Transcript
» American Express Company Q4 2009 Earnings Call Transcript
Kenneth Chenault - Chairman, Chief Executive Officer, Member of Operating Committee, Chairman of American Express Travel Related Services Company Inc and Chief Executive Officer of American Express Travel Related Services Company Inc
Ron Stovall - Senior Vice President of Investor Relations
Robert Napoli - Piper Jaffray Companies
Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.
Michael Taiano - Sandler O’Neill & Partners
Craig Maurer - Credit Agricole Securities (USA) Inc.
John Stilmar - SunTrust Robinson Humphrey Capital Markets
Jason Arnold - RBC Capital Markets Corporation
Betsy Graseck - Morgan Stanley
Bradley Ball - Evercore Partners Inc.
Kenneth Bruce - BofA Merrill Lynch
David Hochstim - Bear Stearns
Bill Carcache - Macquarie Research
Ladies and gentlemen, thank you for standing by. Welcome to the American Express Third Quarter 2010 Earnings Release Conference Call. [Operator Instructions] I would now like to turn the conference over to our host, Mr. Ron Stovall. Please go ahead, sir.
Okay, thank you very much, Kathy and welcome. We appreciate all of you for joining us today on the call.
As usual it's my job to remind you that the discussion today contains certain forward-looking statements about the company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today. The words believe, expect, anticipate, optimistic, intent, plan, aim, will, should, could, likely and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements including the company's financial and other goals are set forth within today's earnings press release, which was filed in an 8-K report and in the company's 2009 10-K report, and 2010 first and second quarter 10-Q reports, all already on file with the Securities and Exchange Commission, in the third quarter 2010 earnings release and earnings supplement as well as the presentation slides, all of which are now posted on our website at ir.americanexpress.com.
We have provided information that describes certain non-GAAP financial measures used by the company and the comparable GAAP financial information. We encourage you to review that information in conjunction with today's discussion.
Today's discussion will be structured differently than recent calls. We will begin with our Chairman and Chief Executive Officer, Ken Chenault, who will provide some perspective on the evolving regulatory environment surrounding the payments industry and the DOJ's anti-trust lawsuit against the company. Then Dan Henry, Executive Vice President and Chief Financial Officer will review some key points related to the quarter's earnings through the series of slides included with the earnings document and provide some summary or a brief summary remarks. Once Dan completes his remarks, we will turn to the moderator who will announce your opportunity to get in to the queue for the Q&A period where both Ken and Dan will be available to respond to your questions. Up until then, no one is actually registered to ask questions.
While we will attempt to respond to as many of your questions as possible, before we end the call, we do have a limited amount of time. Based on this, we ask that you limit yourself to one question at a time during the Q&A.
With that, let me turn the discussion over to Ken.
Good afternoon, and thank you all for joining our call today. As Ron said, given the news that hit this month about the DOJ lawsuit, we're going to break from our norm on today's conference call. So before turning things over to Dan to cover the third quarter, I'm going to spend a few minutes sharing my views on the various regulatory and legislative changes that have occurred over the last two years, including the DOJ lawsuit.
I'm going to discuss the issues raised by all of these changes, not just for our company but for the payments industry overall. First, I want to assure you that we're taking the DOJ lawsuit very seriously. However, a number of the changes we're currently seeing are likely to have far greater impact on industry growth, pricing, consumer behavior and merchant relationships than the DOJ suit alone. The lawsuit after all is about steering between credit products. Merchants are already allowed to offer a discount or incentive for customers who pay by cash, check, or debit card, but few do. For bank issued credit products, there is some rate differential between products. For example, for Visa credit products, the difference between their high and low interchange rates is approximately 90 basis points. That's $0.90 on a $100 purchase. All things being equal, it seems questionable whether merchants would disrupt the transaction at the point-of-sale and risk a potential loss of customer goodwill for the sake of a relatively small differential.
For me, the core issue of the lawsuit is a simple one. It's about consumer choice and the right of a customer to select the card they want to use at the point-of-sale. Now I don't believe the government or the merchant should be making this choice. This choice should belong to the customer. And I also believe that we, as a company, like American Express, should have the right to negotiate freely with our merchants on the terms of our contract. Our contract requires the welcome acceptance of our card products and our customers at the point-of-sale. And I don't believe that government intervention in this manner, or in any legal commercial negotiation, will lead to a positive outcome.
Finally, I disagree strongly with the DOJ's assertion that we have market power, that merchants are forced to accept our products. This is not the case, and I believe it's one of the many reasons why we'll win this suit. In terms of merchant acceptance, we’re the smallest network, smaller even than Discover who is not a party to this suit. In the DOJ's own anti-trust case against Visa and MasterCard several years ago, they explicitly stated, and the courts agreed, that we did not have market power. Merchants chose to accept Amex because they understand the value we bring them. Higher spending customers, our superior service and our marketing expertise to help them expand their business. Our actions in the marketplace are all about competition, not coercion.
Now, as I said earlier, while we certainly take this lawsuit seriously, it's also essential to put into perspective, and in fact, connect the dots against all the changes across the payments and card industry in recent years. Just over the last two years, we've seen the CARD Act, the Dodd-Frank bill, we've seen Durbin on interchange regarding debit and new regulatory limits on over limit fees. Now this regulation and the legislation has clearly been the most significant in the history of the card industry. Each clearly reflects the political environment and have turned back towards regulation rather than competition in the banking, financial services and card industry. And while they share a common starting point, each one is likely to have a different impact on the market, on the consumer and on different players in the industry.
For example, among other impacts, the CARD Act has changed how some consumer products are priced. On one side, it has simplified terms, conditions and made disclosure more transparent. It has insulated some consumers from higher interest rates and fees if they fall behind on payments. And it forced some issuers to stop practices that were misleading or at best, very hard for customers to understand.