American Express is taking tough action
on costs, cutting 10 percent of its workforce, as its three-party
payments model looks increasingly shaky in the midst of the ongoing
turmoil in credit markets. The news comes after a relatively
positive third quarter trading statement.

American Express is to cut 7,000 jobs, reduce its investment in
technology and alter its cardholder pricing and rewards policy in a
bid to save $1.8 billion in the next financial year. The measures
include an anticipated 100 to 300 basis point increase in APRs for
certain segments and a cutback in its trademark rewards

Shortly after it revealed third quarter net income of $815
million – down 24 percent on last year – Amex CEO and chairman
Kenneth Chenault announced the re-engineering initiative would cost
Amex $370 to 440 million in the fourth quarter, ahead of the
projected $1.8 billion savings in 2009.

Chenault said: “We’ve been engaged for the past few months in an
intensive, company-wide review of priorities and staffing levels.
The re-engineering programme we announced will help us through one
of the most challenging economic environments we’ve seen in many
decades. It will also put us in position to ramp up investment
spending as economic conditions improve so that we can take
advantage of the substantial opportunities that will be available
to us over the medium to long term.”

The staff cuts will be focused on management and other positions
that do not interact directly with customers in an attempt to
minimise the impact of the cuts on cardholder service. Amex will
also suspend management level salary increases in 2009 and is
implementing a hiring freeze. The overall staffing initiatives are
expected to amount to $700 million in savings in 2009.

Cuts in technology spending

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Cuts in investment spending are anticipated to create $1 billion
in savings. The company said it will scale back its technology,
marketing, business development spending and streamline costs
related to certain rewards programmes.

Savings of $125 million are expected from reductions in other
operating costs. Amex’s statement specifically cited reducing
expenses for consulting and professional services, travel and
entertainment. The business first announced in July 2008 it would
complete a company-wide re-engineering initiative in the fourth
quarter of 2008. But the process has been accelerated because of
the worsening economic environment.

A senior industry figure told CI: “Amex has been hit
hard in the US with write-offs because the dynamics of the credit
crunch has meant things are different this time around. In almost
every previous crisis, businesses which cater for the wealthy have
been relatively better off than their peers, but in this case we
are seeing the very rich and the very poor both being hit. Now,
Amex is positioned within a segment which is becoming unprofitable
– which they had not anticipated – without any other obvious
strategy in the market.”

Three-party model vulnerable

In particular, the business’s three-party closed-loop payments
model, which had previously been seen as giving it a competitive
advantage to Visa and MasterCard, has left it exposed to borrowers
defaulting on loans, which both of its rivals are immune to.
Provisions for loan losses in the third quarter were $1.37 billion,
up 51 percent on the same period last year.

On its owned portfolio – which reflects only cardmember loans
included in the company’s consolidated balance sheets – the net
write-off rate was 5.8 percent. The same measure on its total
cardmember lending, which includes securitised assets, stood at 5.7

Its third quarter earnings were ahead of expectations, although
Keefe, Bruyette & Woods analyst Sanjay Sakhrani said the extra
earnings came largely from lower provisioning and a lower tax

Amex’s management statement said the business suffered from a
slowing of cardmember spending and loan volumes in the latter part
of the third quarter and into October because of the increasing
stress in financial markets, which has eroded consumer and business
confidence levels. The statement said it expects that sentiment is
likely to deteriorate further.

There were also concerns about funding and the level of
benchmark LIBOR rates above the prime rate, which changes with the
targeted Federal Reserve funds rate, which continued to remain
above historical levels.

Amex needs to refinance around $24 billion of its funding in the
next 12 months, including $4 billion in net commercial paper and
$20 billion in maturing long-term debt.