Don't Leave Home Without A Freebie

Can AmEx lure customers online--and still make money?

American Express, loss leader. That would have been an oxymoron for most of AmEx' 140-year history. But now, free stock trades, dirt-cheap credit cards, and aggressive rates on bank deposits are key to the travel and financial-services giant's strategy as it tries to leverage its trusted brand name into the online world.

Cutting prices to move customers onto the Web isn't new. What AmEx hopes, though, is to keep its cardholders and clients enmeshed in a seamless web of financial planning, banking, travel, and shopping services. "We are the only company that is so well-integrated across all these channels of service," boasts Ruediger Adolf, senior vice-president for strategic planning and AmEx' Internet guru.

But offering services is one thing--making money on them another. Stressing the high value of AmEx' vaunted brand while flaunting cheap prices raises doubts about whether notoriously fickle online customers will stick around. "They'll have to raise prices--and when they do, there will be no shortage of new low-cost competitors," warns PaineWebber Inc. analyst Gary Gordon.

AmEx execs insist they can make money even with their current pricing. The new products--the Blue credit card, an online bank called Membership B@nking, and a revamped online broker--are "profitable value propositions," says James P. Bush, senior vice-president for consumer marketing. And Wall Street may see value in the strategy: Since the online bank was unveiled in July, AmEx' stock is up almost 10%, while the Standard & Poor's Financials Index has fallen more than 12%.

Investors are betting that AmEx can keep customers by insinuating itself into every phase of their online lives. Take the newest product, a "digital wallet" that AmEx will soon introduce. The free service--offered in November with the Blue card and early next year to other cardholders--will store all of a customer's key shopping information, such as addresses and credit-card numbers, on a secure AmEx site. At "e-tailers" that accept the wallet--including, CDnow, and Gap Online--AmEx will zap that information to the merchant. That's quicker than filling out separate registries at each merchant's site, AmEx says.

SECURITY BLANKET. Low pricing and security are also key selling points for AmEx' newest credit card. AmEx is pitching its Blue card as an ultrasafe way to shop online: Equipped with a built-in computer chip, the card can be plugged into a special reader attached to the user's computer to verify the shopper's identity and unlock the digital wallet. "It gives you physical security with a card and virtual security with a password for all your shopping, banking, and brokerage needs under one ID," says Bush.

But the young, techno-savvy customers AmEx says Blue is targeting don't need a security blanket to shop online. They're more likely to be drawn by Blue's ultralow pricing--zero interest for six months, followed by fixed rates of 9.99% to 15.99% with no annual fee.

Indeed, analysts see another strategy behind the card: Jump-starting bankers' long-held dream of getting "smart cards" into consumers' wallets. Blue's chip, analysts predict, will store user information that American Express can use with hotels, airlines, and merchants to create frequent-shopper and corporate-travel programs. AmEx' Bush says only that "additional functionalities" are on tap.

Pricing is also a key pitch at Membership B@nking. While analysts praise the new offering's ease of use, they note that the bank is paying top rates--currently, 6.1% for one-year certificates of deposit--to snare savers who cruise the Net for high returns. Adolf insists that AmEx is well-positioned to afford these high rates. Like a Web-only bank, Membership B@nking doesn't pay for a branch network. But unlike those upstarts, it needn't spend heavily to acquire customers, drawing instead on AmEx' name and 24 million existing customers.

"MARKETING BONUS." The loss-leader strategy is clearest at American Express Brokerage, AmEx' second attempt to build an online broker. Leapfrogging past $29.95 trades at Merrill Lynch and Morgan Stanley Dean Witter, American Express will provide stock trades with no commission or money-management fee for customers who keep at least $100,000 on deposit. Customers can also tap research used by American Express mutual-fund managers and new online planning tools. The goal: to draw more customers to American Express Financial Advisors Inc., bolstering the firm's $228 billion in assets under management and creating new opportunities for AmEx' 9,300 financial planners to sell estate plans, mutual funds, and insurance policies.

This is one area where AmEx needn't worry about giving up revenues: Its previous online brokerage effort, Financial Direct, barely registered a blip among fast-growing Internet trading firms. "This is a nice marketing bonus, a good way to capture more customers for their planners," says analyst Jaime P. Punishill of Forrester Research Inc.

American Express has other uses for the Internet as well: The firm saves $1 every time a cardholder checks her balance on the Web rather than over the phone. But its splashy push into online banking, brokerage, and shopping shows that AmEx wants to be taken seriously among the Net's financial players. Using AmEx' name and service to turn that position into profits will be the real challenge.

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