Charge!

By John Greenwald New York

Managers at American Express must have taken particular delight last month when AT&T Corp. announced that it was selling its Universal credit-card business to Citibank. AT&T's no-annual-fee entry into the credit-card game in 1990 made this industry universally ugly, particularly for Amex. With free Visa and MasterCard bank cards bulging their wallets, consumers were increasingly leaving home without American Express plastic. Instead of paying membership fees for cards that many merchants refused to honor--since American Express took a heavy bite out of purchases--more than 2 million Amex holders cut up their cards in the early 1990s. "We were in fairly sharp decline," says Kenneth Chenault, American Express's president.

No longer. While poor profits have chased AT&T and others from their plastic perches, American Express is soaring. Shoppers today are gladly flashing Amex cards for everything from gasoline to groceries to trips to China. The card was so hot in 1997 that American Express reversed a decade-long slide in its share of the U.S. card market. With a slew of new consumer cards to go with its traditional strength in corporate plastic, American Express raised its share of the $469 billion general purpose card volume in the first half of 1997 from 18.3% to 18.9%--as Visa saw its No. 1 position slip very slightly from 48.88% to 48.85%.

American Express's turnaround surprised everyone, including H. Spencer Nilson, publisher of the Nilson Report, which tracks spending on credit cards. Nilson is impressed that Amex was able to "come away with any kind of stabilization." He applauds the company for its "significant advances in improving product line and in growth of cardholders and volume. I would not have given them any chance of doing that several years ago."

That change of fortune reflects the revolution that Chenault and CEO Harvey Golub have quietly wrought at American Express (1996 revenues: $16.2 billion). Golub, 58, took command in 1993 after directors dumped James Robinson III for turning the company into an unwieldy financial supermarket. Golub promptly lopped off the brokerage, investment-banking and life-insurance units that Robinson had assembled, leaving American Express focused on credit cards, travel and financial services, including mutual funds. Golub, a sometimes abrasive native of Brooklyn, N.Y., initially slashed $2 billion out of a $13.4 billion cost structure, and has kept expenses in line with sales growth through such moves as downsizing the work force and streamlining procedures.

Wall Street has loved his less-is-more philosophy. Shares of American Express have more than quadrupled in value since Golub began running the company. (The stock closed last week at $88.68 a share, not far from its recent all-time high of $91.50.) Analysts expect the company to produce its third straight year of record profits in 1997.

But not everyone has been wowed by the company's turnaround. Carl Pascarella, CEO of Visa U.S.A., scoffs at American Express as little more than a small-fry compared with his company. That's because Visa puts its brand on nearly 600 million cards that are accepted by more than 14 million merchants around the world, vs. 42.3 million cards and more than 5 million merchants for American Express. "They haven't changed much," Pascarella says of his rival. "Over the past eight or nine years, consumers have been pulling out their Visa card significantly more often than their American Express card."

Pascarella is targeting corporate and small-business markets, where American Express holds a commanding 65% edge. To make inroads, Visa wants to tap the more than $300 billion that U.S. companies spend each year on everything from pencils to planes without using credit cards. "The big opportunity is to displace cash and checks," says Michael Beindorff, Visa's executive vice president for marketing and product management. "It's a market that's there for the taking." Beindorff points out that Visa has already raised its share of the business market from 3% to 20% since 1991, in part by signing up companies that hadn't been using cards.

For its part Amex vows that the wars have just begun. "We are by no means uncorking the champagne bottle," says Chenault, 46, Golub's heir apparent and the architect of the company's comeback in cards. "But we are very much in the game, which is a very different situation from three or four years ago." Chenault still winces at the memory of a focus group back then, when the holder of a rival card that earned free airline miles declared, "I want to go with you guys, but you guys are so stupid that you're not offering this product to me."

That was an epiphany of sorts for a company that had long relied on slogans like "Membership has its privileges." American Express now offers 35 different consumer and business cards, many of them free and co-branded with other companies, up from just five cards a decade ago. "We've introduced more products in a period of 18 months than we did in the past decade," Chenault says.

Many are offshoots of Optima, the company's first credit card. (The venerable green and gold cards are not credit cards that can carry over a balance but charge cards that require payment-in-full each month.) Want to earn discounts on golf lessons or a new set of clubs, for example? The American Express Golf Card, an Optima card issued with Callaway Golf, was designed for that. Or how about dollars off hotel rooms or a chance to rack up frequent-flyer miles? Among other programs, American Express offers Hilton Optima and Delta AirLines Skymiles cards.

Yet such cards have little value unless merchants accept them, so American Express has been scrambling to sign up retailers. Result: the plastic once touted as chic and prestigious now pays for gas or buys cereal at the local supermarket. Based on cardholder surveys, American Express says consumers can use its cards at 92% of the places where they want to shop, vs. 72% just five years ago. But that wider acceptance has come at a price. To persuade more merchants to honor its cards, the company had to lower its discount--the bite it takes out of every purchase--from an average of 3.22% in 1990 to 2.74%. That's more attractive to retailers but still higher than charges by Visa, which says its own cut of purchases averages less than 2%.

For all their success in signing up service establishments, Golub and Chenault must still persuade members to flash their cards every day. American Express customers are already big spenders who charged an average of $6,000 on their cards in 1996, in contrast to some $3,200 for charges per Visa card. "For people who have our cards, we get a very high percentage of their spending for business purposes and for traveling and entertainment," Golub maintains. But at the same time, he concedes, "we don't get as high a percentage of their spending for personal purchases" at places such as supermarkets.

To help remedy that, American Express has been aiming ads at what Golub calls "a younger, hipper audience." The company, which spent a reported $266 million on advertising in 1996--21% more than Visa did--has been relying heavily on spots showing Jerry Seinfeld pulling out his card everywhere from the corner gas station to London fish-and-chip shops. Intended message: American Express lets its members do more with their cards. Nor is Seinfeld the only celebrated face; Amex hired golfer Tiger Woods for an estimated $30 million last spring to tout American Express Financial Advisors. He will also be a spokesman for the card abroad.

The company's most notable asset, however, could be its worldwide electronic network, which enables American Express to increase its charge volume while simultaneously holding down fraud. By slicing and dicing the data from countless points of purchase, the company can match customers and merchants and send cardholders mailings notifying them of specials at restaurants and stores that they favor. The same network enables American Express to pinpoint bad risks and bad actors before they turn into bad debt. Thus the company wrote off 6.5% of its loans in the third quarter, below the industry average of 6.7%. "To be successful at [stopping] fraud, you simply have to be better than your competitors," Golub says. That way, when fraud rings decide to strike, "they'll use somebody else's card."

Last spring the company also started getting tough with holders of its green and gold cards who don't pay up each month. Amex will now withhold incentives like frequent-flyer miles from those who do not pay on time. The company says that's only fair, because it has already advanced money to pay for purchases by tardy members.

Golub's most ambitious plan so far remains only a gleam in his eye. He wants to transform the credit-card business by plugging U.S. banks into the American Express network and thereby enabling the lenders to issue Amex credit cards. That's the last thing Visa and MasterCard want to see happen, and they've stymied Golub with bylaws that prevent their U.S. bank partners from offering other cards. Golub may get some help from the Justice Department, which is reportedly investigating the competitive behavior of the two big credit-card associations.

Meanwhile, American Express has signed up banks in 19 countries, which are not bound by the U.S. bylaws, in a drive to boost foreign business from 30% of the company's total to 50% within a decade. Such banks as Britain's NatWest and France's Credit Lyonnais now put their names on American Express cards. As a result, Golub says, the number of merchants that accept American Express plastic outside the U.S. "is coming up rapidly." That means the card will be even less exclusive than ever, but Amex has learned that it no longer pays to thumb its nose at the masses.

--Reported by Valerie Marchant

With reporting by VALERIE MARCHANT