Fitch: AmEx Charges Highlight Intense Prime Card Competition
CHICAGO -- January 11, 2013
American Express Co.'s (AmEx) pre-announcement of significant fourth-quarter
charges related to cardholder reimbursements and changes to estimates
surrounding reward redemption rates reflects an intensification of competition
in the prime card space, as well as evolving customer preferences, according
to Fitch Ratings.
In addition to a $400 million restructuring charge linked to the decision to
reduce headcount by 5,400 employees in 2013, the company booked charges of
$342 million driven by redemption rate adjustments and $153 million resulting
from customer reimbursements.
The increase in redemption rate assumptions, to 94% from 93%, for AmEx
cardholders reflects the increasingly competitive environment in the prime
card space, where issuers are focused on creating more attractive reward
programs, while customers appear focused on the need to extract more value
from their card spending. Discover Financial also announced an increase in
reward expenses in its fourth-quarter of 2012, ending Nov, 30, 2012,
reflecting strong customer engagement in a recent promotional program, which
expired at year end.
The AmEx charge highlights the increased cost of customer retention as
cardholders weigh more carefully the value of rewards offered by competing
card companies. Furthermore, AmEx's decision to move ahead with a cost
restructuring program in 2013 reflects, in part, the evolving competitive
realities of the business in a slow growth environment.
The cardholder reimbursement charge resulted from AmEx's review of certain
business practices dating back as far as six years. The company and U.S.
banking regulators entered into a consent order agreement in October that led
AmEx to reimburse some customers for items such as bonus reward
misclassification and improper assessment of late fees. The Consumer Financial
Protection Bureau (CFPB) has made the elimination of such practices in the
card industry a regulatory priority and others have incurred similar
The customer reimbursement charge was sizeable, given the length of the
look-back period, but we expect periodic charges of this kind could recur in
future periods as AmEx and other card companies respond to greater regulatory
scrutiny by adjusting certain business practices.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article can be accessed at
www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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Meghan Neenan, CFA
One State Street Plaza
New York, NY 10004
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Brian Bertsch, +1-212-908-0549 (New York)
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