oct_nov

2006
A mAgAzine providing current content And pertinent context for the people of AmericAn express

Points of Difference: The Business of Rewards at AXP Defining the Merchant Discount Rate

Additional Online Content for This Issue of Context

www.express.aexp.com/Context/
rewards marketplaCe this online sidebar to our cover story on rewards looks at a sample of aXp and competitor offers and how they work.

ONLINE oct_nov.2006

IN PRINT tHIS ISSUE

On The COveR Cover Art_carl Zapp Editor_Janet A. Lee Managing Editor_cynthia Aquila Design_Bernhardt Fudyma Design Group Printer_Bannon Group Ltd.

2
AXP Shorts
Global eXpress Whats happening in Argentina, france, germany, Korea and the u.s. Fares take FliGht Airfares and lodging costs are on the rise as more people travel. savinGs For small business owners travel just got easier for small business owners with the addition of delta and JetBlue to open savings.

4
Points of Difference: The Business of Rewards at AXP
Cover story

12
Defining the Merchant Discount Rate
Bill glenn, president of establishment services north America and head of the global merchant network group, talks about merchant discount rate what it is, the value we offer merchants in exchange, external pressures and more.

16
At Work
Kasif Atun, AeB senior country executive and head, financial institutions group, turkey

by Cynthia Aquila American express is keeping its competitive edge with enhancements to membership rewards and other programs in the u.s. and international markets.

{Global ExprEss}
Buenos Aires

American Express recently introduced the Platinum Credit Card and the Corporate Meeting Card in Argentina. The Platinum card offers exclusive presale access to entertainment events, and special discounts and benefits in
$ $ $ $ $ called El Nuevo Elemento en El Universo American Express. The Corporate $ $ $ Meeting Card helps clients consolidate all expenses related to business events $ $ $ and meetings, and streamline billing and accounts payable processes. $ $ $ $ $ PAris $ $ $ thanks to the support of the American express foundation, more visitors to $ $ the louvre will have a better understanding of what they see. the louvre has $$ $ translated into english and spanish 185 information panels about works of $ $ $ art throughout the museum. previously, this information was only available in $ $ $ french. the foundation has funded the translation and production of the $panels, $ $ which provide historical information and chronological, geographic, stylistic or $ $ $ thematic connections among works on display. $ $ $ $ $ On The neT WORk: The lATeST GlOBAl neT WORk SeRvICeS $ $ PARTneRShIPS AnD CARD lAunCheS $ $ $ $ sEoul $ $

dining, delivery, catering and health centers. The launch of the card included

a new interactive advertising campaign, based on the periodic table of elements,

FrAnkFurt

commerzbank, the second-largest bank in germany, has joined with American express to distribute American express charge cards to the banks high-net-worth customers. one of the key features of the gold card is direct ticket, which allows cardmembers to use membership rewards points to pay for flights anywhere in the world.
nEw York

$ $$ $ $$ $ $ $ $ $ $ $ $$ $ $ $ $ $ $$ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $$ $ $ $ $ $$ $ $ $ $$ $ $ $ $ $ $ $$ $ $$$ $$ $$ $ $ $ $ $

ShORTS
items of interest to the people of AmericAn express

American express and guaranty Bank have expanded their relationship to include a cobranded American express preferred rewards gold card, which the bank will market to its existing customers. in 2005, guaranty Bank introduced a checking account program that features membership rewards. it also offers a cobranded small Business gold card and a platinum Business cash rebate credit card. guaranty Bank is a major real estate construction lender and provides financing to middle-market businesses. With more than $17 billion in assets, it operates a network of more than 150 locations throughout california and texas.

global network services (gns), in partnership with samsung card and Korean

Air, has launched the samsung skypass American express card to appeal to the countrys premium frequent travelers. cardmembers can earn double mileage for overseas spending, which can be redeemed for Korean Air flights and upgrades. they also are entitled to benefits from American express selects merchants, and savings and rewards through the samsung Bonus points program. since 2002, gns has partnered with samsung card, the second-largest card company in Korea, to offer American express cards. the samsung skypass card is the first airline cobranded card the companies have launched together in this country.

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Fares Take Flight

if youre planning any business travel in the coming year, be prepared to pay more. Heightened demand for seats and hotel rooms coupled with tightened capacity and higher supplier operating costs will continue to push costs upward in 2007, according to the American Express Global Business travel Forecast. Global domestic economy fares are expected to increase 3 to 5 percent in 2007, while global international business-class fares will rise 3 to 7 percent. Australia, Argentina and Brazil can expect the biggest increases in both domestic and international fares. skyrocketing demand for hotels across all regions, limited growth in the supply of available rooms and competition between leisure and corporate travelers will continue their growth trend. key business centers may experience significant increases rates may rise as high as 18 percent in new York, 3 to 6 percent for upper range hotels in london, 9 to 11 percent in Hong kong and 20 to 25 percent in india. the American Express Global Business travel Forecast is a benchmarking service for corporations that provides pricing information across major travel and entertainment categories. Forecast results are published annually, with the full report available to American Express Business travel clients only.
| american express ranked 14th on the Business Week/interbrand 2006 list of the 100 top global brands. rankings are based on the economic value brands generate. interbrand estimated aXps brand value to be $19.6 billion, up 6 percent from 2005. the top three brands on the list are Coca-Cola, microsoft and ibm.

$ $ $ $$ $ $ $$ $ $ $ $ $$ $ $ $$ $ $$ $$ $$ $ $$ $ $$ $ $ $$ $ The numbers $

19.6 billion

SavingS For Small BuSineSS ownerS

in september, delta Airlines and JetBlue Airways joined open savings, which entitles American express small business cardmemJetBlues frequent-flier program and can be redeemed for free flights. starwood cardmembers earn one starpoint for every dollar spent, as well as double points for stays at participating starwood hotels and resorts and purchases at select retail outlets. points can be redeemed for free nights at more than 825 starwood properties around the world and award flights with more than 30 airline partners. American express is the long-standing leader in serving small business owners. the Nilson Report, a consumer payments industry newsletter, estimates that half of u.s. small business spending on plastic at the end of 2005 was on American express cards. this segment continues to represent a significant growth opportunity with total u.s. small business spending estimated at more than $2 trillion. only 15 percent of this amount is currently on plastic. small business payments volume is growing at twice the rate of credit cards overall, according to the mercator Advisory group, an independent research company focused on the payments industry.

bers to automatic savings on purchases with select partners. small a 3 percent discount on the cost of delta and JetBlue flights. cardmembers receive an additional 2 percent discount when they purchase delta flights with the delta skymiles or skypoints Business cards, or JetBlue flights with the JetBlue Business card. open savings has delivered more than $100 million in savings

business owners using any open business card automatically receive

to small business cardmembers since 2004. other program partners include fedex Kinkos, At&t, hertz car rentals, hyatt hotels and resorts, and marriott hotel properties. the JetBlue Business card and the starwood preferred guest Business credit card are our most recent offerings tailored to small

business owners. in addition to discounts on flights and access to open savings, JetBlue cardmembers earn Award dollars on every purchase and double Award dollars on select purchases including JetBlue travel, gasoline, office supplies, wireless phone charges and car rentals. Award dollars are automatically converted to points in

by_Cynthia Aquila

in the heated competition among card issuers for affluent customers, rewards have become standard fare. American express has long been a leader in using rewards to grow its business. But in an environment where nearly every card product is tied to rewards, what are we doing to keep that competitive edge?

Consumers look for them, collect them and have come to expect them. What are they? Rewards. Whether traveling, shopping or using a credit card, consumers are loyal to companies that value their business and give them something in return. Rewards products have taken a firm hold in the payments industry. Nearly two-thirds of U.S. consumers today carry at least one credit card with a rewards component, compared to 2002 when only half held a rewards card, reports the Auriemma Consulting Group. Studies have shown that consumers consider rewards the single most important factor in choosing a card. And there certainly are a lot to choose from. Of the more than 6 billion card offers mailed to U.S. households in 2005, more than half included a rewards feature. Four years ago, less than a quarter of offers were rewards related, according to Synovate, a consumer research company.
Photograph_carl Zapp

Theres an expectation and sense of entitlement among consumers that if they give a company their loyalty, theyll get their rewards, says Randy Petersen, editor of Inside Flyer, a magazine that covers trends in loyalty programs. People want choice and flexibility not just in how they use and redeem their points, but in how they can earn them. Higher customer expectations and a surge in offers mean companies have to work harder to come up with richer rewards that will keep customers coming back for more. American Express was an early leader and set a high standard with Membership Rewards (MR). Its the largest card-based program in the world, offering travel, dining, retail, merchandise, entertainment and experiences from top brandname companies more than 140 partners in the U.S. and over 1,200 partners internationally.

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In addition to MR, weve added airline, hotel and retail cobrands, cash-back products and cards with city-specific rewards (see Something for Everyone sidebar on p. 7). Our 15 years of experience effectively managing and using rewards gives us a key competitive advantage, says American Express Chairman and CEO Ken Chenault. We continue to build the value of our rewards and use this powerful tool to grow our business.
a rewardS Primer

Rewards have come a long way since Discover introduced the first cash-back product in 1986, and Citibank followed suit two years later with the American Airlines Advantage Card. While cash back and travel are still sought-after redemptions, rewards today include merchandise, dining, entertainment and experiences. The offers available generally fall into a few basic categories: v Broad-based programs consumers earn points for card purchases that can be redeemed for a range of travel, retail, dining, entertainment and experiential awards in programs such as Membership Rewards, Diners Club and Citis Thank You network. v Cobrand programs consumers loyal to an airline, hotel or retailer earn points in the partners program, such as Delta SkyMiles, Costco, Citibank AAdvantage, Qantas or Aeroplan, and generally earn points faster on purchases of the partners products or services. v Cash rebate programs consumers receive a percentage of every dollar spent with cards such as Discover or Blue Cash.

Travel rebate programs consumers can book flights on any airline with few restrictions and redeem points for a rebate on those travel purchases on cards such as BlueSky or CapOne No Hassle Miles. Theres no doubt that consumers have more ways to earn points. But their ability to redeem, or burn, those points, especially for air travel, has become more challenging. Some airlines have reduced the number of seats reserved for rewards, freeing up more seats for paying customers. Theyve also imposed restrictions on when customers can use their points and have increased the amount needed for free flights and upgrades. In response, consumers are looking for easier ways to redeem and are turning to non-air categories.
v

rewardS aT aXP

Virtually every American Express product worldwide has a rewards component. These programs are integral to our spend-centric model helping deliver more high-spending, loyal cardmembers to our merchants. Consider the following: v U.S. cardmembers enrolled in MR spend five times more than those not enrolled. In other markets, the average is three times. v Since 2002, spending on MR products is up 77 percent. v High-value cardmembers in international markets generate 88 percent of billings, and more than 90 percent have an MR, cobrand or cash-back card. v Rewards-based cardmembers generally have higher retention and better credit performance.

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SOMETHING FOR

EVERYONE
even with a rich, broad-based program like membership rewards, american express invests in other programs to meet the needs of customers who are interested in different rewards. whether cash back, travel rebates or points in a partners loyalty program, the goal is the same: to attract and keep more high-spending, creditworthy cardmembers.
Cobrand partnerships

partnerships give us an opportunity to reach new segments our partners customers. a cobrand card helps deepen relationships with those customers. Cardmembers benefit from accumulating points faster and achieving elite status sooner. elite status has become more important as people have built up their points banks, says pam Codispoti, senior vice president, strategic Card partnerships. by working with partners to increase the value of our products, we help customers reach their goals sooner and keep them engaged. the refresh of the hiltonhhonors platinum Credit Card cobrand in 2005 is one example. enhancements included higher bonus points for first-time users and everyday spending, an automatic upgrade to elite status for $20,000 annual spending, and discounted multi-night redemptions. as a result, average spending per cardmember increased 1 percent from 2004, the highest increase since 2002. we achieved similar results with the american express singapore airlines pps Club platinum Credit Card, targeted exclusively to the top tier of the airlines frequent-flier program. Cardmembers can earn miles at an enhanced rate and receive bonus miles at enrollment, among other benefits. in July 2006, average spend on the pps platinum card was more than three times the average of all our singapore airlines cobrand cards.
proprietary lendinG produCts

Cardmembers who do not have an airline or hotel preference may be just as interested in travel rewards as are frequent fliers. others may like the flexibility of using a cash award. blue Cash, our largest proprietary lending card in the u.s. after blue, stands out as one of the richest cash rewards programs for medium to high spenders. it offers up to 5 percent cash back on supermarket, gasoline and drugstore purchases, and there is no cap on spending. Competing products, such as the Citi dividend masterCard and Chase Freedom card, have caps, and these issuers have cut back on how much customers can earn for everyday purchases. blue Cash has been growing at a healthy rate, says larry sharnak, executive vice president and general manager, Consumer lending. and unlike the competition, weve been enhancing the value of our product. Cash-back products are common in international markets where rewards are more developed. in the u.k., the american express platinum and blue Credit Cards are considered some of the most generous offers of their kind in a market where most issuers have either reduced the amount of cash back or dropped these products from their portfolios altogether. we recently enhanced both products in July, offering new cardmembers higher earning rates for the first three months  percent for platinum cards, and up to 2 percent for blue cards. after the introductory period, platinum cardmembers earn up to 1.5 percent and blue cardmembers up to 1 percent. we also have cash-back products in mexico and Canada. in 2005, we launched a travel rebate card in the u.s. called bluesky in response to cardmember demand for an easier way to use points for travel. Cardmembers can book travel with any airline or hotel and not be limited by blackout dates, seat availability or other restrictions. Competitors have similar offers. but unlike those products, fewer points are needed for a free ticket with bluesky, and points dont expire. even with limited marketing, spending on bluesky is already exceeding expectations, larry says. theres no indication that competition among rewards products will be slowing down anytime soon. american express will continue to invest in its rewards programs, which are valuable tools in the spend-centric model, to help grow the business and sustain its competitive advantage.

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With so many offers vying for the attention of consumers, how do we stand out from our competitors?
The memBerShiP rewardS diFFerence

We have a keen understanding of our cardmembers, says Ralph Andretta, senior vice president and general manager, U.S. Membership Rewards. Thats a tremendous advantage for Membership Rewards, he adds. Our closed-loop network shows us where our cardmembers shop, how they spend, and what theyre buying. We can make the right offers with the right partners to the right customers. I think MR does that better than any other program. Giving cardmembers something that no other issuer can offer is more important than ever in such a competitive environment. Thats why the MR team took a critical look at every aspect of the U.S. program over the past year. They compared MR to other rewards programs, as well as top online retailers such as Amazon.com, Barnes & Noble, and Lands End. They also conducted surveys and focus groups, as well as analyzed spending patterns, to gain insights into what would motivate cardmembers to use their American Express cards even more. Based on this research, the team introduced a number of enhancements to the customer experience, signed more partners offering rewards at lower point levels,

OUR CLOSED-LOOP NETWORK IS A TREMENDOUS ADVANTAGE FOR MEMBERSHIP REWARDS. WE CAN MAKE THE RIGHT OFFERS WITH THE RIGHT PARTNERS TO THE RIGHT CUSTOMERS.
and improved the companys return on our investment in Membership Rewards. The customer experience: When our most loyal cardmembers call us or go online to redeem points, its a moment of truth, Ralph says. We need to ensure that the customer experience is easy and problem-free. That seamless process includes delivering rewards to cardmembers soon after they redeem points. In most programs, this process can take several weeks. But the best online retailers are able to deliver merchandise in significantly less time and we wanted to match that standard. So the team put new technology in place that enables redemptions to be fulfilled in an average of four days. Items like travel certificates and gift cards can take just two days while various merchandise can be delivered within two weeks. We also provided our customer service representatives with new software tools that bring together in one place all the information they need to help a customer, making the process easier and more efficient. In July, the team launched a new Web site with enhanced search capabilities, easier navigation and more visually appealing graphics. As a result, customer satisfaction with the new site and the improved fulfillment process has been consistently higher. More attainable rewards: A successful loyalty program must give customers the ability to earn points but it also has to allow them to redeem those points for the rewards they want. There are a number of different ways to make rewards more attainable, says David Kroner, vice president, Membership Rewards

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Product Development. You can help customers build their point banks faster, make it easier for them to redeem, allow them to combine points with cash to acquire more substantial rewards and offer rewards at more affordable levels. Were doing things on all these fronts. When redeeming for travel, cardmembers have a great deal of flexibility. They can transfer points to an MR partners frequentflier or guest program, redeem points for travel certificates, or use points to pay for all or a portion of travel. With this option Pay with Points in the U.S. and Any Airline Anytime in our international markets cardmembers are not limited by blackout dates, seat availability or other restrictions. Since introduced in 2005, paying for travel with points has become a top 10 redemption choice. Cardmembers can also choose from a wider variety of rewards at lower point levels. The MR team has signed more retail, merchandise and casual dining partners such as iTunes Music Store, Barnes & Noble, and California Pizza Kitchen. Exclusive partner offers are also available for redemption through the MR site everything from electronics to entertainment. Not only do our customers have more choice, but they can take advantage of new ways to accumulate points faster. When shopping at more than 100 of the most popular online retailers, such as Saks, Target and Barnes & Noble, U.S. cardmembers

earn double points by accessing the partners site through American Express Bonus Points Mall (bonuspointsmall.com). This benefit replaces double points for everyday spending, and is only one of several changes introduced to simplify and enhance U.S. charge card offerings. Return on investment: It takes significant resources and focus to build and maintain a broad-based program like Membership Rewards. We keep a watchful eye on controlling costs and maintaining our margins, Ralph says. But that doesnt mean taking value out of the program. Everything we do delivers premium value to our cardmembers. Although our costs may increase, they are more than offset by higher billings and revenue, and lower delinquency rates. Efforts over the past decade to move more cardmember transactions online, such as MR redemptions, have helped reduce costs significantly. Today, nearly 60 percent of redemptions are online, and it costs 86 percent less to process these redemptions than those made by phone. Shifting the mix of rewards to nontravel categories, such as retail and casual dining, that are less costly for the company also helps to improve economics. By offering more attractive rewards at lower point levels, we are able to drive more cardmembers to those redemption options. Over the next several months, there are more changes in store for MR. What can

our cardmembers expect? Innovations to further enhance the value of the program and that our competitors just cant match, Ralph says. For example, the recent launch of the Membership Rewards First Collection. This program, which is exclusively for Platinum and Centurion cardmembers, includes premium partners and offers in the lifestyle, jewelry, watch and travel categories, such as a lease for a Lamborghini convertible, a custom-built Monarch billiards table, a unique cultured pearl necklace from Mikimoto and a round-trip business-class ticket from New York to London. The team will also continue to develop unique and tailored offers, such as the World Golf Championship where cardmembers had VIP access at the tournament and dined with professional golfers Fred Couples and Chris DiMarco. This event brought together Delta, Fairmont Hotels and the World Golf Championship to deliver an exclusive and unforgettable experience for our customers. We know our cardmembers well, Ralph says. We want to give them interesting partners, great deals and one-of-a-kind experiences that no other card company can offer. The best compliment we can get is I didnt know I wanted that until American Express sent it to me.
tAKe A looK At A sAmple of Axp And competitor reWArds offers And hoW they WorK At WWW.express.Aexp.com/context.

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A WORLD OF

REWARDS
rewards play an important role in growing american express global business. but how we use rewards to stand out in each market can sometimes be very different depending on a countrys culture, customers and competitors. Consumers in australia and Canada, for example, are highly educated about rewards and can choose from a wide variety associated with banks, loyalty programs and professional associations. australia alone has more than 50 competing rewards products Qantas telstra visa card from anZ bank, national australia banks velocity card and Flybuys, a non-bank loyalty program, to name only a few. with so many choices, consumers have high expectations about rewards. Consumers want to accumulate points faster, earn rewards sooner and have more choices for how they use their points, says lisa axel, senior vice president, international partnerships and rewards. to stay competitive, we have to deliver the best offers that help them reach those goals, like point accelerator programs, easier access to travel and valuable non-travel rewards. in countries like italy and Germany, consumers are less driven by rewards and there are fewer available in the marketplace. this gives us more flexibility in how we structure programs how points are earned, how many are needed to redeem and the kinds of rewards offered.
Global, yet loCal

also can redeem for wine club offers in France, saris in india, the hottest toy in Japan or mooncakes in singapore. smaller markets are also good testing grounds for developing new features that can be shared with other regions. take new Zealand, for example. in 200, air new Zealand decided not to continue as an mr partner, so the mr team had to act quickly to find an alternative. the solution was direct ticket a program that lets cardmembers use mr points to pay for any flights within new Zealand or to australia. direct ticket has since been expanded to include travel on any airline, anywhere in the world, and now represents 60 percent of all redemptions in new Zealand. based on this success, the program has been rolled out to australia, Canada, Germany, spain, sweden and the u.k. Cardmembers in Japan who travel frequently can redeem points for experiential rewards in other markets. Cardmembers in Canada and 11 markets across europe, asia and latin america who enroll in accelerator programs can earn points at a higher rate, which helps them accumulate points faster. innovations such as direct ticket, international rewards and accelerator programs improve the customer experience by providing greater choice and flexibility. this goal, in addition to improving overall economics, has been a key focus for lisa and her team. over the past several years, theyve signed new partners that offer attractive rewards at lower point levels, have driven more cardmembers online to redeem their points and made the mr web site more customer friendly.
the power oF partnerships

membership rewards is a key feature on hundreds of american express consumer, small business and corporate cards, giving us a strong competitive advantage in all of our international markets. we have 21 proprietary mr programs involving 1,200 partners, lisa says. each program has a similar look and feel, and were able to share processes and best practices across markets to build scale and strengthen our position. but consumers are motivated by different things, so we tailor each program to fit their preferences. while the program is consistent from market to market, there are many examples of how we develop local benefits to meet cardmembers needs and differentiate ourselves from other bank rewards programs. For example, cardmembers can redeem for travel, retail, dining and entertainment rewards everything from points transfers to frequent-flier programs to avis car rentals to ipods. but they

american express has more than 400 partnerships in our international markets, which include both cobrand and distribution agreements with a wide range of partners airlines, hotels, loyalty programs, retailers, banks and professional associations. these relationships have generated more than a third of billings and are responsible for more than 5 percent of new card acquisitions. were using our expertise in designing and managing rewards to reach more cardmembers and help partners deepen their relationships with their best customers, lisa says. we do that with both traditional cobrand products and custom-made offers using membership rewards. Cobrand partnerships: Cobrand products are most commonly based on a partners pre-existing loyalty program, such as

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airline and hotel benefits. over the last 10 years, american express has established 1 cobrand partnerships with major airlines around the world. in 2005, we signed Qantas and resigned british airways, singapore airlines, thai airways and alitalia. throughout a relationship, we work with each partner to enhance our offerings and keep cardmembers engaged. For example, after thai airways renewed its partnership in 2005, we launched a cobranded platinum credit card with higher mileage earnings for selected routes, lower miles needed to redeem for companion tickets and bonus miles. Cardmember response was strong average spending per cardmember increased  percent and monthly billings more than doubled two months after launch, compared with the same period the prior year. we also partner with companies that may not have the size or resources to develop their own loyalty programs. we work with them to create a cobrand that meets their customers needs by adding redemption options to mr designed for that partner and only available to its customers. For example, the bmw cobrand credit card and indian airlines Gold Card use mr in this way. bmw cardmembers in six markets can redeem points for vehicle servicing and car purchases. with the indian airlines cobrand, cardmembers can earn discounts on fares, complimentary upgrades and triple mr points. Distribution partnerships: in many of our international markets, our proprietary card business partners with banks, professional associations, insurance companies and retailers to distribute american express cards with membership rewards to their customers. this is an alternative way for us to target different groups of highvalue, affluent customers and build greater scale. For banks that have distribution agreements with us, we can provide additional value by offering a customized version of membership rewards. in return for agreeing to distribute american express cards, the partner can offer cardmembers mr points on their bank transactions. we first launched this concept with banca mediolanum in italy in 2004. For example, cardmembers earn one mr point on their american express cards for every 1,000 euros taken out on a mortgage. the retention rate for enrolled cardmembers is 5 percent higher than for those not enrolled.

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we know that discount rate the fees charged to merchants for card acceptance is an important part of our business at american express. but what is it, really? how do we set our fees, what value do we provide to merchants in exchange, and what pressures does our discount rate face from competitors, merchants and others outside the company? Context sat down with bill Glenn, president of establishment services north america and head of the Global merchant network Group, to get answers to these questions and more.

Defining the

Merchant Discount Rate

what role does our discount rate play in the overall performance of our business?

Today discount rate revenue makes up about 48 percent of total company revenues. Its the single largest revenue source for American Express, which demonstrates how significant discount revenue is in terms of company performance. Our objective is to make sure were delivering premium value to merchants so that we can continue to earn a premium discount rate.
why does American Express charge a higher average discount rate compared to our competitors?

American Express delivers greater value to merchants, and we price based on the value we deliver. That value takes four different forms:

First and foremost, we provide merchants access to our high-spending cardmember base. Consumers spend, on average, about four times as much on their American Express cards as they do on Visa and MasterCard, which means that more high-spending, loyal cardmembers frequent merchants that accept our cards. We offer marketing programs to help merchants grow their businesses programs like My WishList, Going Once, Business Savings and merchant-specific programs. Weve launched a variety of programs over the past few of years, and merchants see tremendous value in them. We provide our merchants with valuable business insights from helping them determine where their best customers

are to analyzing their performance relative to the competition. We help them answer questions such as Im opening a new store: Whats the best location to do that? and Where are the best places to advertise? We are always looking for new ways to enhance the information we provide our merchants to help them grow their business. We are also focused on deepening relationships with our merchants, which includes facilitating relationships across the company. Whether its a cobrand, corporate card, GNS, Membership Rewards, or travel relationship, my team is charged with making sure we have the right assets from across the Blue Box to work with our partners.

illustration_James Steinberg

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How do we set discount rates with our merchants?

We set our discount rate directly with our merchants. We have several pricing tables across different industries and across volumes within those industries. For example, our restaurant customers would pay a different rate than our supermarket customers. And within the restaurant segment, there would be different rates based on the volume of each merchant.

charges merchants an all-in discount rate for accepting cards. This fee is generally expressed as a percentage of the amount charged on a card. Interchange is just one component of the discount rate merchants pay to accept Visa and MasterCard. Its the amount passed on to the issuing bank the bank that issues the card when the cardholder makes a purchase at the merchant. The merchant may also be charged a range of additional

We have strong relationships with merchants, industry experience and teams that are committed to working with our merchant customers everyday. this allows us to provide knowledge and expertise, and, most importantly, deliver results.
We review these tables on an ongoing basis because our value proposition is constantly changing as it relates to cardmember spend performance, our marketing programs, and other services we provide. So pricing is an important discipline for us.
what is the difference between discount rate and interchange?

cardmember spending at merchants. We use this information to design customized offers and experiences for our cardmembers that drive spending at our merchant partners. This model is unique and is a differentiator for American Express it allows us to offer premium value to our merchants in exchange for a premium discount rate. We can do this even with outside issuers because GNS issuers provide us with information that enables the closed loop to continue. Visa and MasterCard dont have direct relationships with merchants or cardmembers. They have relationships with thousands of acquirers and issuers. And nowhere does all that information come together in a way that would allow them to provide the benefits, insights and marketing programs that we provide to merchants.
what marketing programs do we offer our merchants?

fees by processors or the acquiring bank, which contracts with the merchant to accept Visa and MasterCard.
what role does our closed-loop network play in setting our discount rate?

Discount rate is the amount that merchants pay for card acceptance. American Express

The closed-loop network refers to the direct relationships we have with both merchants and cardmembers. These relationships allow us to gather and analyze information that flows through our payment network about

We run hundreds of marketing programs with merchants. These include programs like My WishList, and the travel auction called Going Once, which allow merchants to work with us to attract our high-spending cardmembers, stimulate spend and build loyalty. We also offer hundreds of targeted offers with individual merchants, giving cardmembers special incentives for spending on their American Express cards.

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Another program that has been well received is Business Savings, where weve delivered savings to smaller merchants that they arent able to negotiate on their own from larger merchants such as FedEx or Enterprise.
Do Visa and MasterCard run similar marketing programs?

How do we measure the success of our relationships with merchants?

They run some sweepstakes and promotions, but they dont have the information or capabilities that we have from our closedloop network. Weve heard a lot about Visas Incentive Network (VIN) as an attempt to replicate the closed loop. When you listen to people talking about VIN, you hear about sweepstakes and promotions, or incentives that are offered to only a segment of its customers. Visa is trying to get some information from issuers, acquirers and customers that may allow it to offer limited programs. It does not allow Visa to provide the in-depth modeling that American Express does. The data from our closed-loop network is just one element of our overall information management capabilities. We have strong relationships with merchants, industry experience and teams that are committed to working with our merchant customers everyday. This allows us to provide knowledge and expertise, and, most importantly, deliver results.

We evaluate our relationships with merchants by looking at both quantitative and qualitative outcomes. For larger merchants, we look at share performance, volume growth, their level of participation in marketing programs and additional relationships across the company. We also look at the depth of our relationships with our merchants how well we know senior leaders of the company, their goals, what theyre trying to achieve and how our programs are helping meet those needs. In addition, we conduct regular merchant satisfaction surveys to make sure our relationships are working well and meeting the needs of our partners.
regulators in some markets are scrutinizing fees that card companies charge merchants and, in some cases, moving to regulate those fees. where are we seeing the most significant activities, and what are the latest trends?

Regulators around the world have been looking at the card payments industry for a number of years. They have focused on the dominant card networks that engage in collective price setting, particularly Visa and MasterCard. In Australia, government regulation in 2003 required Visa and MasterCard

to lower their fees, resulting in a nearly 50 percent decrease in interchange rates. The bank card industry reacted by raising fees to cardholders and reducing the benefits and loyalty programs associated with their cards. While the regulators believed that merchants would pass on savings from reduced discount rate costs by lowering prices to customers, there is no indication this has happened. The American Express merchant business in Australia was not regulated. To reflect competitive trends, we lowered our merchant discount rate in that country, but not as much as Visa and MasterCard rates. Our business continues to do very well in Australia. We are growing billed business and increasing the number of merchants that accept our cards. Our focus on reengineering has also helped our results. In other regions like Europe, the United States and Mexico theres been a lot of dialogue around fees. Our role has been to continue to educate and communicate with regulators and industry associations about how the American Express network is different from Visa and MasterCard, and the potential risks to competition and possible consequences for consumers if industry pricing is regulated.

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For kasif atun, there is no such thing as a typical client meeting. a customer visit might mean sitting down with a banks executive team to discuss economic and regulatory developments, or a brainstorming session with operations staff about how to improve payment processing. or it may just be a weekly check-in call to make sure things are running smoothly.

at work

{ KASIF AtUn | AEB Senior country Executive and Head, Financial Institutions Group (FIG), turkey }
he says. this strengthens the relationship with our customers and creates a sense that AEB understands their business. Born and raised in cyprus, Kasif came to the U.S. for college and graduate studies in business administration. He started working for AEB in new York in 1990, then moved to the banks turkey office three years later. In 2001, he became head of FIG and senior country executive in turkey, leading a team of five people. two of the people on Kasifs team have their own portfolio of banking clients. the other members of his staff provide marketing and servicing support for AEBs clients. there is a great level of team spirit among us, and I try to foster that, he says. Everyone feels a sense of accountability and ownership for our business and success in turkey. Kasif is also involved in local business and government affairs, and has a host of responsibilities that go beyond the scope of his job as a banker. In a typical week, he might juggle a meeting with the national banking regulator, dinner with the U.S. ambassador to turkey, and a presentation at the American Business Forum, where he has served as a board member and treasurer. AEB has had a long-standing presence in turkey, says Kasif. In many respects, weve been the face of the company here. As the head of this office, I see myself as a representative of American Express as well as the brand. Im proud of that.
Roberta C. Di Giorgio

Whatever the meeting is about and whomever its with, Kasif has the know-how and experience to make sure the relationship is working. Hes been in charge of American Express Banks (AEB) correspondent banking business in turkey since 2001. Under Kasifs watch, AEB has built strong relationships with the top financial institutions in turkey, and this market has grown into one of FIGs highest revenue generators in the world. these organizations rely on the bank to process thousands of crossborder payments every day. AEB booking centers in Frankfurt, chennai and new York process close to 5,000 payments for turkish client banks which translates into an average daily volume of US$4.6 billion and over US$1 trillion annually. When client banks entrust AEB with managing transactions worth millions of dollars, they expect the best results. teams in our booking centers are available around the clock to handle any kind of transaction, Kasif explains. that doesnt mean we dont get involved in the nuts and bolts of processing payments. Whether its finding a more efficient way to format instructions or getting to the bottom of a delayed transaction, we work with the banks local staff to find the right solution. Kasif says that knowing the client organization and the people in it is essential to delivering seamless service. I wear many different hats and interact with people at all levels of the organization, including operations and technical staff,

Photography_Ali Kabas

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