10-K 1 d131774d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

 

  þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
       OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

OR

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
       OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File No. 1-7657

 

 

 

LOGO

American Express Company

(Exact name of registrant as specified in its charter)

 

New York

  13-4922250

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

200 Vesey Street

New York, New York

  10285

(Address of principal executive offices)

  (Zip Code)

 

Registrant’s telephone number, including area code: (212) 640-2000

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

 

Name of each exchange on which registered

Common Shares (par value $0.20 per Share)   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ        No   ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨         No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ        No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for a shorter period that the registrant was required to submit and post such files).    Yes  þ        No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  þ   Accelerated filer   ¨    Non-accelerated filer   ¨   Smaller reporting company  ¨

                                     (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨        No   þ

As of June 30, 2015, the aggregate market value of the registrant’s voting shares held by non-affiliates of the registrant was approximately $77.7 billion based on the closing sale price as reported on the New York Stock Exchange.

As of February 10, 2016, there were 964,045,452 common shares of the registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III: Portions of Registrant’s Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Shareholders to be held on May 2, 2016.

 

 

 

 

 


Table of Contents

TABLE OF CONTENTS

 

 

Form 10-K

Item Number

        Page
   PART I   

1.

  

Business

  
  

Introduction

   1
  

U.S. Card Services

   3
  

International Card Services

   10
  

Global Commercial Services

   11
  

Global Network & Merchant Services

   12
  

Corporate & Other

   20
  

Supervision and Regulation

   21
  

Foreign Operations

   31
  

Segment Information and Classes of Similar Services

   31
  

Executive Officers of the Company

   31
  

Employees

   32
  

Guide 3 — Statistical Disclosure by Bank Holding Companies

   33

1A.

  

Risk Factors

   33

1B.

  

Unresolved Staff Comments

   46

2.

  

Properties

   46

3.

  

Legal Proceedings

   46

4.

  

Mine Safety Disclosures

   48
   PART II   

5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    48

6.

  

Selected Financial Data

   50

7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)    51
  

Executive Overview

   51
  

Consolidated Results of Operations

   54
  

Business Segment Results

   62
  

Consolidated Capital Resources and Liquidity

   73
  

Off-Balance Sheet Arrangements and Contractual Obligations

   83
  

Risk Management

   84
  

Critical Accounting Estimates

   90
  

Other Matters

   93

7A.

  

Quantitative and Qualitative Disclosures about Market Risk

   98

8.

  

Financial Statements and Supplementary Data

   98
  

Management’s Report on Internal Control Over Financial Reporting

   98
  

Report of Independent Registered Public Accounting Firm

   99
  

Index to Consolidated Financial Statements

   100
  

Consolidated Financial Statements

   101
  

Notes to Consolidated Financial Statements

   106

9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    160

9A.

  

Controls and Procedures

   160

9B.

  

Other Information

   160

 

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Form 10-K

Item Number

        Page
   PART III   

10.

  

Directors, Executive Officers and Corporate Governance

   160

11.

  

Executive Compensation

   160

12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    160

13.

  

Certain Relationships and Related Transactions, and Director Independence

   160

14.

  

Principal Accounting Fees and Services

   161
   PART IV   

15.

  

Exhibits, Financial Statement Schedules

   161
  

Signatures

   162
  

Guide 3 — Statistical Disclosure by Bank Holding Companies

   A-1
  

Exhibit Index

   E-1

This Annual Report on Form 10-K, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. You can identify forward-looking statements by words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” “estimate,” “predict,” “potential,” “continue” or other similar expressions. We discuss certain factors that affect our business and operations and that may cause our actual results to differ materially from these forward-looking statements under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements.

 

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PART I

 

 

 

ITEM 1. BUSINESS

INTRODUCTION

Overview

American Express Company, together with its consolidated subsidiaries (“American Express,” the “Company,” “we,” “us” or “our”), is a global services company that provides customers with access to products, insights and experiences that enrich lives and build business success. Our principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world.

We were founded in 1850 as a joint stock association. We were incorporated in 1965 as a New York corporation. American Express Company and its principal operating subsidiary, American Express Travel Related Services Company, Inc. (“TRS”), are bank holding companies under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), subject to supervision and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).

Our headquarters are located in New York, New York in lower Manhattan. We also have offices in other locations throughout the world.

During 2015, we principally engaged in businesses comprising four reportable operating segments, with corporate functions and certain other businesses in Corporate & Other:

 

  

 

U.S. Card Services (“USCS”)

 

 
    
  

 

International Card Services (“ICS”)

 

 
    
  

 

Global Commercial Services (“GCS”)

 

 
    
  

 

Global Network & Merchant Services (“GNMS”)

 

 
    
  

 

Corporate & Other

 

 

During the fourth quarter of 2015, we announced organizational changes that combined our corporate and small business organizations into a business-to-business focused group and combined our merchant-related businesses, among other changes. Our financial disclosures will reflect these organizational changes starting in the first quarter of 2016, which is consistent with when our executives will begin to review financial information aligned to the new segments. Our reportable operating segments will be as follows:

 

   

U.S. Consumer Services, including our U.S. Consumer Card Services business and American Express Travel & Lifestyle Services in the United States

 

   

International Consumer and Network Services, including our International Consumer Card Services business, American Express Travel & Lifestyle Services outside the United States and our Global Network Services (“GNS”) business (from GNMS)

 

   

Global Commercial Services, including our Global Corporate Payments business, American Express OPEN and small business services businesses in the United States and internationally (from USCS and ICS, respectively), merchant financing products (from GNMS) and foreign exchange services operations (from Corporate & Other)

 

   

Global Merchant Services, including our Global Merchant Services business and our Plenti and Loyalty Partner businesses (from USCS and ICS, respectively)

 

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This report discusses the reportable operating segments consistent with financial information as presented in the Consolidated Financial Statements.

Securities Exchange Act Reports and Additional Information

We maintain an Investor Relations website on the internet at http://ir.americanexpress.com. We make available free of charge, on or through this website, our annual, quarterly and current reports and any amendments to those reports as soon as reasonably practicable following the time they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). To access these materials, click on the “SEC Filings” link under the caption “Financial Information” on our Investor Relations homepage.

You can also access our Investor Relations website through our main website at www.americanexpress.com by clicking on the “Investor Relations” link, which is located at the bottom of our homepage. Information contained on our Investor Relations website, our main website and other websites referred to in this report is not incorporated by reference into this report or any other report filed with or furnished to the SEC. We have included such website addresses only as inactive textual references and do not intend them to be active links.

This report includes trademarks, such as American Express®, which are protected under applicable intellectual property laws and are the property of American Express Company or its subsidiaries. This report also contains trademarks, service marks, copyrights and trade names of other companies, which are the property of their respective owners. Solely for convenience, our trademarks and trade names referred to in this report may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names.

Products and Services

Our range of products and services includes:

 

   

Charge and credit card products

 

   

Network services

 

   

Merchant acquisition and processing, servicing and settlement, merchant financing, and point-of-sale, marketing and information products and services for merchants

 

   

Fee services, including fraud prevention services and the design and operation of customer loyalty and rewards programs

 

   

Expense management products and services

 

   

Travel-related services

 

   

Stored value/prepaid products

Our various products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations. These products and services are sold through various channels, including direct mail, online applications, in-house and third-party sales forces and direct response advertising. Business travel-related services are offered through our non-consolidated joint venture, American Express Global Business Travel (the “GBT JV”).

Our general-purpose card network, card-issuing and merchant-acquiring and processing businesses are global in scope. We are a world leader in providing charge and credit cards to consumers, small businesses and corporations. These cards include cards issued by American Express as well as cards issued by third-party banks and other institutions that are accepted by merchants on the American Express network. American Express® cards permit Card Members to charge purchases of goods and services in most countries around the world at the millions of merchants that accept cards bearing our logo. At December 31, 2015, we had total worldwide cards-in-force of 117.8 million (including cards issued by third parties). In 2015, our worldwide billed business (spending on American Express cards, including cards issued by third parties) was $1.04 trillion.

Our business as a whole has not experienced significant seasonal fluctuations, although card billed business tends to be moderately higher in the fourth quarter than in other quarters. As a result, the amount of Card Member loans and receivables outstanding tend to be moderately higher during that quarter. The average discount rate also tends to be slightly lower during the fourth quarter due to a higher level of retail-related billed business volumes.

 

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Competitive Advantages of Our Closed-Loop Network and Spend-Centric Model

We believe our “closed-loop” network and “spend-centric” business model continue to be competitive advantages by giving us the ability to provide differentiated value to Card Members, merchants and our card-issuing partners.*

Wherever we manage both the acquiring relationship with merchants and the card-issuing side of the business, there is a “closed loop,” which distinguishes our network from the bankcard networks, in that we have access to information at both ends of the card transaction. We maintain direct relationships with both our Card Members (as a card issuer) and merchants (as an acquirer), and we handle all key aspects of those relationships. Through contractual relationships, we also obtain data from third-party card issuers, merchant acquirers and processors with whom we do business. This “closed loop” allows us to analyze information on Card Member spending and build algorithms and other analytical tools that we use to underwrite risk, reduce fraud and provide targeted marketing and other information services for merchants and special offers and services to Card Members through a variety of channels, while at the same time respecting Card Member preferences and protecting Card Member and merchant data in compliance with applicable policies and legal requirements.

Our “spend-centric” business model focuses on generating revenues primarily by driving spending on our cards and secondarily by finance charges and fees. Spending on our cards, which is higher on average on a per-card basis versus our competitors, offers greater value to merchants in the form of loyal customers and higher sales. This enables us to earn discount revenue that allows us to invest in value-added services for merchants and Card Members. Because of the revenues generated from having higher-spending Card Members, we have the flexibility to invest in attractive rewards and other benefits to Card Members, as well as targeted marketing and other programs and investments for merchants, all of which create incentives for Card Members to spend more on their cards and positively differentiate American Express cards. The significant investments we make in rewards and other compelling value propositions for Card Members incent card usage at merchants and Card Member loyalty.

The American Express Brand

Our brand and its attributes — trust, security and service — are key assets of the Company. We continue to focus on our brand, and our products and services are evidence of our commitment to its attributes. Our brand has consistently been rated one of the most valuable brands in the world in published studies, and we believe it provides us with a significant competitive advantage.

We believe our brand and its attributes are critical to our success, and we invest heavily in managing, marketing, promoting and protecting it. We place significant importance on trademarks, service marks and patents, and seek to secure our intellectual property rights around the world.

U.S. CARD SERVICES

We offer a wide range of card products and services to consumers and small businesses in the United States. Our consumer travel business, which provides travel services to Card Members and other consumers, complements our core card business. We also operate a coalition loyalty business in the U.S. called Plenti and offer deposit products directly to consumers through American Express Personal Savings.

The proprietary card business offers a broad set of card products, rewards and services to acquire and retain high-spending, creditworthy Card Members. Core elements of our strategy are:

 

   

Designing card products with features that appeal to our target customer base in traditional and newer customer segments

 

   

Using incentives to drive spending on our various card products and generate loyal customers, including our Membership Rewards® program, cash-back reward features and participation in loyalty programs sponsored by our cobrand and other partners, such as Delta SkyMiles®

 

   

Providing an array of other benefits and services across card products to address travel and other needs

 

   

Driving spending in online and offline channels and accommodating spending wherever and however Card Members desire

 

   

Developing and nurturing wide-ranging relationships with cobrand and other partners

 

*

The use of the term “partner” or “partnering” does not mean or imply a formal legal partnership, and is not meant in any way to alter the terms of American Express’ relationship with third-party issuers and merchant acquirers.

 

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Promoting and using incentives for Card Members to use their cards in new and expanded merchant categories, including everyday spend and traditional cash and check categories

 

   

Providing solutions to support the everyday business operations of our small business customers

 

   

Providing exceptional customer service

Consumer and Small Business Services

We offer individual consumer charge cards such as the American Express® Green Card, the American Express® Gold Card, the Platinum Card® and the Centurion® Card, as well as small business charge cards, including the Plum Card®. We also offer revolving credit cards such as the Amex EveryDay® Credit Card, Blue Cash Everyday® Card from American Express, Blue Sky from American Express® and, for small businesses, Blue for Business® Credit Card and SimplyCash® Business Card. In addition, we offer a variety of cards sponsored by and cobranded with other corporations and institutions for consumers and small businesses, such as the Delta SkyMiles® Credit Card from American Express, Starwood Preferred Guest Credit Card from American Express, Hilton HHonorsTM Card from American Express and Lowe’s Business Rewards Card. For the year ended December 31, 2015, billed business from charge cards comprised 56 percent of total U.S. Card Services billed business.

Centurion Bank and American Express Bank as Issuers of Certain Cards and Deposit Products

We have two U.S. bank subsidiaries, American Express Centurion Bank (“Centurion Bank”) and American Express Bank, FSB (“American Express Bank”), which are both FDIC-insured depository institutions. Certain information regarding each bank is set forth in the table below:

 

     Centurion Bank   American Express Bank
Type of Bank   Utah-chartered industrial bank   Federal savings bank
Regulatory Supervision  

Regulated, supervised and regularly examined by the Utah Department of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”)

 

Subject to supervision, examination and enforcement by the Consumer Financial Protection Bureau (“CFPB”) with respect to marketing and sale of consumer financial products and compliance with federal consumer financial laws

 

Regulated, supervised and regularly examined by the Office of the Comptroller of the Currency (“OCC”), an independent bureau of the U.S. Department of the Treasury

 

Subject to supervision, examination and enforcement by the CFPB with respect to marketing and sale of consumer financial products and compliance with federal consumer financial laws

Types of Cards Issued   Consumer charge and credit cards  

•  Consumer charge and credit cards

•  All OPEN small business credit and charge cards

Card Marketing Methods   Primarily direct mail, online and other remote marketing channels  

•  Direct mail, online and other remote marketing channels

•  In-person marketing, including by third-party cobrand partners

Deposit Programs

  Deposits obtained only through third-party brokerage channels   Deposits obtained through third-party brokerage channels and accepted directly from consumers
Capital Adequacy Requirements at December 31, 2015*   Well capitalized   Well capitalized

 

* As of December 31, 2015, a bank generally was deemed to be well capitalized if it maintained a common equity Tier 1 capital ratio of at least 6.5 percent, a Tier 1 capital ratio of at least 8 percent, a total capital ratio of at least 10 percent and a Tier 1 leverage ratio of at least 5 percent. For further discussion regarding capital adequacy, see “Capital Adequacy” under “Supervision and Regulation.”

Charge Cards

Our charge cards, which generally carry no preset spending limits, are designed as a method of payment. Charges are approved based on a variety of factors including a Card Member’s current spending patterns, payment history, credit record and financial resources. Card Members generally must pay the full amount billed each month. Charge

 

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cards do offer several ways for eligible Card Members to pay off purchases over time. For example, Select & Pay Later® allows enrolled Card Members to select individual charges to pay over time and the Extended Payment Option provides eligible Card Members with the ability to extend payment for eligible charges above a certain dollar amount. Charge card accounts that are past due are subject, in most cases, to a delinquency assessment and, if not brought to current status, may be suspended or cancelled. The no-preset spending limit and pay-in-full nature of these products attract high-spending Card Members, while allowing us to manage risk accordingly.

Revolving Credit Cards

We offer a variety of revolving credit cards that have a range of different payment terms, interest rate and fee structures. Revolving credit card products provide Card Members with the flexibility to pay their bill in full each month or carry a monthly balance on their cards to finance the purchase of goods or services. Along with charge cards and cobrand cards, these revolving credit cards promote increased relevance for our expanding merchant network.

Cobrand Cards

We issue cards under cobrand agreements with selected commercial firms in the United States. Attaining attractive cobrand card partnerships is intensely competitive among card issuers and networks as these partnerships can generate high-spending loyal customers. Cobrand arrangements are entered into for a fixed period, generally ranging from five to eight years, and will terminate in accordance with their terms, including at the end of the fixed period unless extended or renewed at the option of the parties, or upon early termination as a result of an event of default or otherwise. Card Members typically earn rewards provided by the partners’ respective loyalty programs based upon their spending on the cobrand cards, such as frequent flyer miles, hotel loyalty points and cash back.

We make payments to our cobrand partners, which can be significant, based primarily on the amount of Card Member spending and corresponding rewards earned on such spending and, under certain arrangements, on the number of accounts acquired and retained. The amount we pay to our cobrand partners has increased and will continue to increase as arrangements are renegotiated due to increasingly intense competition for cobrand partners among card issuers and networks. In some cases, the partner is solely liable for providing rewards to the Card Member under the cobrand partner’s own loyalty program. As the issuer of the cobrand card, we retain all the credit risk with the Card Member and bear the receivables funding and operating expenses for such cards. The cobrand partner retains the risk associated with the miles, points or other currency earned by the Card Member under the partner’s loyalty program. For further discussion of the competition for cobrand partners, see “Card-Issuing Business — Competition” and “We face substantial and increasingly intense competition for partner relationships, which could result in a loss or renegotiation of these arrangements that could have a material adverse impact on our business and results of operations” in “Risk Factors.”

Card Pricing and Account Management

On certain cards we charge an annual fee that varies based on the type of card and the number of cards for each account. We also offer many revolving credit cards on which we assess finance charges for revolving balances. Depending on the product, we may also charge Card Members an annual program fee to participate in the Membership Rewards programs and fees for account performance (e.g., late fees) or for certain optional services. We apply standards and criteria for creditworthiness to each Card Member through a variety of means both at the time of initial solicitation or application and on an ongoing basis during the card relationship. We use sophisticated credit models and techniques in our risk management operations. For a further description of our risk management policies, see “Risk Management” under “MD&A.”

Membership Rewards® Program

Our Membership Rewards program allows Card Members to earn one point for virtually every dollar charged on eligible, enrolled American Express cards, and then use points for a wide array of rewards, including travel, retail merchandise, dining and entertainment, financial services and donations to benefit charities. Memberships Rewards is our largest card-based rewards program and a significant portion of our cards by their terms allow Card Members to earn bonus points for purchases at merchants in particular industry categories. Points generally have no expiration date and there is no limit on the number of points one can earn. Membership Rewards program tiers are aligned with specific card products to better meet Card Member lifestyle and rewards program usage needs. American Express Card Members participate in various Membership Rewards program tiers based on their credit or charge card.

We believe our Membership Rewards “point bank” is a substantial asset and a competitive advantage. We continue to evolve Membership Rewards to provide innovative ways to use points. For example, in 2015 we announced a partnership with Airbnb to allow eligible U.S. Card Members to use points to book accommodations directly on the Airbnb website. We also partnered with Best Buy to allow eligible U.S. Card Members to use their points for online purchases on BestBuy.com.

 

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Membership Rewards® program Emergency Card Replacement Global Assist® Hotline Online Account Management Car Rental Loss and Damage Insurance Online Year-End Summary Extended WarrantyAdvance Ticket Sales Purchase Protection Exclusive Access to Card Member Events Return Protection

 

When a Card Member enrolled in the Membership Rewards program uses their card, we establish reserves to cover the cost of estimated future reward redemptions for points earned to date. When a Membership Rewards program enrollee redeems a reward using Membership Rewards points, we make a payment to the Membership Rewards program partner providing the reward pursuant to contractual arrangements. Membership Rewards expense is driven by Card Member charge volume, customer participation in the program and contractual arrangements with redemption partners. For more information on our Membership Rewards program, see “Critical Accounting Estimates — Liability for Membership Rewards Expense” under “MD&A.”

Membership Rewards continues to be an important competitive differentiator and driver of Card Member spending and loyalty. We believe, based on historical experience, Card Members enrolled in rewards programs yield higher spend, stronger credit performance and greater profit for us. By offering a broader range of redemption choices, we have given our Card Members more flexibility in the use of their rewards points on a cost-effective basis. Our program is also valuable to merchants that become redemption partners as we bring them high-spending Card Members and new marketing channels to reach these Card Members.

Card Member Benefits and Services

Our Card Members have access to a variety of special benefits and services, some of which are fee-based, depending on the type of cards they have. Examples of these special benefits and services include:

 

 

LOGO

OPEN

In addition to our U.S. consumer card business, through American Express Bank we are also a leading payment card issuer for small businesses (generally, firms with fewer than 100 employees and/or annual sales up to $10 million). American Express OPEN offers small business owners a wide range of products, services, tools and savings designed to meet their evolving payment and business needs, including:

 

   

Charge and credit cards

 

   

Rewards on eligible spend and business-relevant rewards redemption options

 

   

Travel and concierge services

 

   

Retail and travel protections such as purchase protection and baggage insurance

 

   

A five percent discount or two Membership Rewards points for each eligible dollar spent at select suppliers of travel, business services and products through OPEN Savings®

 

   

Expense management tools and reporting

 

   

Online account management capabilities

 

   

Resources to help grow and manage a business through our community-driven website, OPEN Forum®

 

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Client managers for our top-spending and higher-revenue clients to support business growth

OPEN engages in advocacy efforts on behalf of small businesses. These advocacy efforts include our OPEN for Government Contracting program to help small businesses learn how to obtain government contracts, programs designed to help women entrepreneurs learn how to grow and sustain businesses, and our efforts to increase awareness of the importance of small businesses in our communities generally. For example, in 2015 we led the sixth Small Business Saturday®, a day to increase consumer awareness and patronage of local businesses and their role in the economy and local neighborhoods. Small Business Saturday now takes place in the United States, the United Kingdom and Australia, with similar initiatives in Israel and South Africa.

Card-Issuing Business — Competition

Our payment products face substantial and intense competition and generally compete with a wide variety of financial payment products including cash, foreign currency, checks, debit, prepaid and ATM cards, bank accounts, virtual currencies, alternative financial services such as check cashing and money orders, store-branded gift cards, other network-branded credit and charge cards and other payment accounts and services. As a card issuer, we compete in the United States with financial institutions that issue general-purpose charge and revolving credit cards (such as Bank of America, Capital One Financial, Citibank, Discover Financial Services and JPMorgan Chase). We also encounter competition from businesses that issue their own private label cards or otherwise extend credit to their customers, such as retailers and airline associations, although these cards are generally accepted only at limited locations. We face increasing competition for cobrand relationships, as both card issuer and network competitors have targeted key business partners with attractive value propositions for access to high-spending loyal customers. For example, although we competed aggressively to renew our cobrand and merchant acceptance agreements with Costco Wholesale Corporation in the United States, we were unable in the end to reach terms that would have made economic sense for our Company and our shareholders and in February 2015, we announced that such agreements are set to end in 2016.

The largest competing issuers have continued to grow, in several cases by acquiring card portfolios, and also by cross-selling through their retail branch networks. Competing card issuers offer a variety of products and services to attract cardholders, including premium cards with enhanced services or lines of credit, airline frequent flyer program mileage credits, cash rebates and other reward or rebate programs, services for small business owners, “teaser” promotional interest rates and rewards points for both credit card acquisition and balance transfers, and cobranded arrangements with partners that offer benefits to cardholders.

Most financial institutions that offer demand deposit accounts also issue debit cards to permit depositors to access their funds. Use of debit cards for point-of-sale purchases has grown as most financial institutions have replaced ATM cards with general-purpose debit cards bearing either the Visa or MasterCard logo. Debit cards were historically marketed as replacements for cash and checks, and transactions made with debit cards have typically been for smaller dollar amounts. However, debit cards are increasingly perceived as an alternative to credit or charge cards and used in that manner. Additionally, overdraft accounts can be used by our competitors to extend credit to customers when transaction values exceed monies available in a linked demand deposit account.

As the payments industry continues to evolve, we are also facing increasing competition from non-traditional players, such as online networks, telecommunication providers and software-as-a-service providers, which leverage new technologies and customers’ existing charge and credit card accounts and bank relationships to create payment or other fee-based solutions. In addition, the evolution of payment products in emerging markets may be different than it has been in developed markets. Instead of migrating from cash to checks to plastic, technology and consumer behaviors in these markets may result in the skipping of one or more steps to alternative payment mechanisms such as mobile payments. For a further discussion of the evolving competitive landscape in the payments industry, see “Global Network & Merchant Services — Competition” under “Global Network & Merchant Services.”

The principal competitive factors that affect the card-issuing business include:

 

   

The features, value and quality of the products and services, including customer care, rewards programs, partnerships, benefits and digital resources, and the costs associated with providing such features and services

 

   

The number, spending characteristics and credit performance of customers

 

   

The quantity, diversity and quality of the establishments where the cards can be used

 

   

The pricing, payment and other card account terms and conditions

 

   

The number and quality of other payment cards and other forms of payment, such as debit cards and electronic wallets, available to customers

 

   

Reputation and brand recognition

 

   

The success of marketing and promotional campaigns

 

   

The nature and quality of expense management data capture and reporting capability, particularly for small businesses

 

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The ability to manage credit and interest rate risk throughout the economic cycle and implement operational and cost efficiencies

In addition to the discussion in this section, see “Our operating results may suffer because of substantial and increasingly intense competition worldwide in the payments industry” in “Risk Factors” for further discussion of the potential impact of competition on our business.

Financing Activities

We meet our funding needs through a variety of sources, including direct and third-party sourced deposits and debt instruments, such as senior unsecured notes, asset securitizations and secured borrowing facilities. The cost of funding Card Member receivables and loans is a major expense of our card operations.

Centurion Bank and American Express Bank finance their charge card receivables and credit card loans, in part, through the issuance of medium-term notes and by accepting consumer deposits in the United States. TRS, Centurion Bank and American Express Bank also fund receivables and loans through asset securitization programs. American Express Credit Corporation, a wholly owned subsidiary of TRS, along with its subsidiaries (collectively, “Credco”) acquires or finances charge card receivables arising from the use of corporate cards issued in the United States and consumer and corporate charge cards issued in certain countries outside the United States. Credco also acquires or finances revolving credit card loans arising from the use of consumer cards issued in certain countries outside the United States. Credco funds the acquisition or financing of receivables and loans principally through the issuance of medium-term notes.

There is a discussion of our financing activities in “Consolidated Capital Resources and Liquidity” under “MD&A” and Notes 6 and 9 to our Consolidated Financial Statements. In addition, see “Adverse financial market conditions may significantly affect our ability to meet liquidity needs, access to capital and cost of capital” in “Risk Factors.”

Deposit Programs

Centurion Bank and American Express Bank accept deposits from individuals through third-party brokerage networks. American Express Bank also accepts deposits directly from consumers through American Express® Personal Savings, a set of deposit products, including High-Yield Savings and Certificate of Deposit accounts. As of December 31, 2015, we had approximately $54.1 billion in total U.S. retail deposits. Our deposit-taking activities compete with those of other deposit-taking organizations that source deposits through telephone, internet and other electronic delivery channels, brokerage networks and/or branch locations. We compete primarily in the deposit sector on the basis of rates and our brand and its attributes.

Card-Issuing Business and Deposit Programs — Regulation

We are subject to a variety of laws and regulations applicable to financial institutions that have become increasingly complex and robust, and supervisory efforts to apply relevant laws, regulations and policies have become more intense. Further changes in such laws and regulations or in the regulatory application or judicial interpretation thereof could continue to impact the manner in which we conduct our business and the costs of compliance. We regularly review and, as appropriate, refine our business practices in light of existing and anticipated developments in laws, regulations and industry trends so we can continue to manage our business prudently and consistent with regulatory requirements and expectations.

Our charge card, consumer lending and deposit operations are subject to extensive regulation in the United States, including pursuant to:

 

   

The Equal Credit Opportunity Act (which generally prohibits discrimination in the granting and handling of credit)

 

   

The Fair Credit Reporting Act (“FCRA”), as amended by the Fair and Accurate Credit Transactions Act (“FACT Act”) (which, among other things, regulates use by creditors of consumer credit reports and credit prescreening practices and requires certain disclosures when an application for credit is rejected)

 

   

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act”) (which prohibits certain acts and practices in connection with consumer credit card accounts)

 

   

The Truth in Lending Act (“TILA”) (which, among other things, requires extensive disclosure of the terms upon which credit is granted), including the amendments to TILA that were adopted through the enactment of the Fair Credit and Charge Card Disclosure Act (which mandates certain disclosures on credit and charge card applications)

 

   

Regulation Z (which implements TILA and was amended by the Federal Reserve to extensively revise the open end consumer credit disclosure requirements and implement the requirements of the CARD Act)

 

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The Consumer Financial Protection Act (Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”)) (“CFPA”)

 

   

The Fair Credit Billing Act (which, among other things, regulates the manner in which billing inquiries are handled and specifies certain billing requirements)

 

   

The Truth in Savings Act (which requires certain disclosures about rates paid and other terms of deposit accounts)

 

   

The Electronic Funds Transfer Act (which, among other things, governs disclosures and settlement of transactions for electronic funds transfers and customer rights and liability arising from the use of ATMs and other electronic banking services and, after the enactment of Dodd-Frank, imposes a cap on debit card interchange fees and prohibits exclusivity arrangements for payment card networks)

 

   

The Telephone Consumer Protection Act (which prohibits contacting customers on their cellular telephones without their express consent, and provides for significant statutory damages)

 

   

The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (which established national requirements for sending of commercial email messages and which provides for significant statutory damages for violations)

 

   

Federal and state laws and regulations that generally prohibit engaging in unfair, deceptive and abusive acts and practices in offering consumer financial products and services

In the United States, our marketing and sale of consumer financial products and our compliance with certain federal consumer financial laws, including the CFPA and TILA, are supervised and examined by the CFPB. The CFPB has broad rulemaking and enforcement authority over providers of credit, savings and payment services and products and authority to prevent “unfair, deceptive or abusive” acts or practices. The CFPB has the authority to write regulations under federal consumer financial protection laws and to enforce those laws against and examine for compliance large financial institutions like the Company, TRS, Centurion Bank and American Express Bank. It is also authorized to collect fines and require consumer restitution in the event of violations, engage in consumer financial education, track consumer complaints, request data and promote the availability of financial services to underserved consumers and communities. In addition, a number of U.S. states have significant consumer credit protection and disclosure laws (in certain cases more stringent than U.S. federal laws). U.S. federal law also regulates abusive debt collection practices. Bankruptcy and debtor relief laws can affect our ability to collect amounts owed to us.

In October 2012, the Company, TRS, Centurion Bank and American Express Bank reached settlements with several bank regulators relating to certain aspects of our U.S. consumer card practices. In December 2013, TRS, Centurion Bank and American Express Bank reached settlements with the FDIC, OCC and CFPB to resolve regulatory reviews of marketing and billing practices related to several credit card add-on products. Internal and regulatory reviews are likely to continue to result in changes to practices, products and procedures. Such reviews are also likely to continue to result in increased costs related to regulatory oversight, supervision and examination and additional restitution to Card Members, and may result in additional regulatory actions, including civil money penalties.

We are subject to certain applicable federal and state privacy, data protection and information security laws, rules and regulations, including certain requirements related to breach notification. Such laws also govern the collection, use, sharing and safeguarding of personal information. Since American Express Company and TRS are bank holding companies, our business is also subject to certain activity restrictions under the BHC Act and to certain provisions of the Currency and Foreign Transactions Reporting Act and the accompanying regulations issued by the U.S. Department of the Treasury (collectively referred to as the “Bank Secrecy Act”), as amended by the USA PATRIOT Act of 2001 (the “Patriot Act”), with regard to maintaining effective anti-money laundering (“AML”) programs. For a discussion of these and other regulations and legislation that impact our business, see “Supervision and Regulation.”

In 2003, the Federal Financial Institutions Examination Council issued guidance on credit card account management and loss allowance practices. Centurion Bank and American Express Bank regularly evaluate and discuss the guidance with their respective regulators and, as a result, may refine their practices from time to time based on regulatory input. The guidance has not had, nor do we expect it to have, any material impact on our businesses or practices.

American Express Travel & Lifestyle Services

American Express Travel & Lifestyle Services (“TLS”) is focused on delivering premium leisure travel and lifestyle-related services to Card Members and other customers in the United States and internationally. Services are provided through a proprietary network of travel and lifestyle consultants, consumer travel websites available in 14 countries and the U.S. American Express Travel Representative Network (which consists of independently owned travel agencies that license the American Express Travel brand). Additional services are offered to Gold, Platinum and Centurion Card Members when booking through TLS.

 

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TLS competes with a variety of competitors including traditional “brick and mortar” travel agents, travel networks, travel agencies that provide travel benefits through competitors of our proprietary card business and online travel agencies.

Plenti

During 2015, we launched Plenti®, a U.S.-based loyalty coalition, with AT&T, ExxonMobil, Macy’s, Nationwide, Rite Aid, Direct Energy, Enterprise Rent-A-Car and Hulu. Coalition loyalty programs such as Plenti and our Payback® program (which is operated by our Loyalty Partner subsidiary and is described in “International Card Services”) enable consumers to earn rewards points and use them to save on purchases from a variety of participating merchants through a multi-category rewards platform that is payment agnostic. Merchants generally fund the consumer offers and are responsible to us for the cost of loyalty points; we earn revenue from operating the loyalty platform and by providing marketing support.

Our ability to generate revenue will depend on our ability to differentiate ourselves through the products and services we provide and the attractiveness of our loyalty programs to consumers. The continued attractiveness of our loyalty programs will also depend on our ability to remain affiliated with partners that are desirable to consumers and to offer rewards that are both attainable and attractive to consumers.

INTERNATIONAL CARD SERVICES

We offer our charge and credit cards to consumers and small businesses in numerous countries around the globe. Our geographic scope is widespread and we focus primarily on those countries we believe offer us the greatest financial opportunity. For a discussion of cards issued internationally through our GNS partner relationships, see “Global Network Services.”

We continued to bolster our international proprietary card business through the launch of a number of new or enhanced card products during 2015, including the American Express Essential™ Credit Card in Australia and the Blue Cash® Credit Card from American Express in Hong Kong. We offer many of the same programs and services in our international proprietary card-issuing business as we do in our U.S. proprietary issuing business. Also, as in the United States, we issue cards internationally under distribution agreements with financial services institutions. Another example of our distribution partnerships is affinity cards with fraternal, professional, educational and other organizations. For instance, we have been successful in penetrating the affinity card segment in Australia, where we issue cards with some of the largest professional associations in that country. In Australia, affinity cards are a significant part of our consumer lending portfolio.

As in the United States, the Membership Rewards program is a strong driver of Card Member spending in the international consumer business. Our redemption options include travel, retail merchandise, entertainment, shopping and recreation gift certificates, experiences, financial services and donations to benefit charities. In 2015, we continued to enhance our rewards programs. We provided more flexibility in the way Card Members can use their rewards points by upgrading our capabilities in certain countries to allow Card Members to use rewards to pay for eligible transactions on the Card Member’s statement as well as at the point of sale in select retail locations in store and online. We also offer the opportunity to pay for travel services by allowing International Consumer Card Members to use their Membership Rewards points to pay for their travel purchases and other charges in 19 countries outside the United States.

We continue to build on our strengths and look for further opportunities to increase our presence internationally. Through Loyalty Partner, our marketing services company, we build coalition loyalty programs, such as the Payback® program, and offer loyalty cards good for discounts and rewards at participating coalition partners. Loyalty Partner operates the Payback program in Germany, India, Italy, Mexico and Poland. Loyalty Partner also provides market analysis, operating platforms and consulting services that help merchants grow their businesses. Using these services, participating merchants are able to run targeted and tailored campaigns across various channels. Loyalty Partner has deepened our merchant relationships in certain countries, added consumers to our international customer base and expanded our range of rewards and loyalty marketing services. It also provides us opportunities to offer American Express products and services to new customer segments and develop new cobrand card products, such as the Payback cobrand card products in Germany, India, Italy and Mexico.

International Card Services — Competition

Compared with the United States, consumers outside the United States use general-purpose charge and credit cards for a smaller percentage of their total payments, with some large emerging-market countries only just beginning to transition to card usage in any meaningful way. Although our geographic scope is widespread, we generally do not have significant share of spend on general-purpose charge, credit and debit cards in the countries in which we operate internationally. Our proprietary card-issuing business is subject to competition from multinational banks, such as Banco Santander, Citibank and HSBC, as well as many local banks and financial institutions.

 

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International Card Services — Regulation

As discussed elsewhere in this report, regulators continued to propose and enact a variety of new regulatory changes to the payments industry during the course of 2015.

In Europe, the EU continued in its efforts to work towards greater harmonization on a number of fronts, in particular in relation to payments, AML, consumer rights, data protection and information security. These pan-European initiatives have been supplemented by a broad range of consumer protection and transparency initiatives at an individual Member State level.

In countries outside Europe, we have seen regulators initiate new regulations in relation to a number of key themes, particularly responsible lending (such as Australia, Mexico, New Zealand and Singapore), privacy and data protection (such as Australia, Canada, Mexico and Singapore), fairness and financial crime.

Regulators in a number of countries are shifting their focus from just ensuring compliance with local rules and regulations towards paying greater attention to the product design and operation with a focus on customers and outcomes. Regulators’ expectations of firms in relation to their compliance, risk and control frameworks continue to increase and regulators are placing significant emphasis on a firm’s systems and controls relating to the identification and resolution of issues. We have also seen a further increase in regulatory focus on consumer protection, with a number of regulators (such as those in the United Kingdom and Canada) being given a stronger mandate in this area.

We expect this activity to continue in 2016. We continue to evaluate our business planning in light of changing market circumstances and the evolving political, economic and regulatory environments.

GLOBAL COMMERCIAL SERVICES

In our GCS segment, we offer a wide range of payments and expense management solutions to large and mid-sized companies and organizations worldwide. GCS also offers a variety of business travel-related services to its corporate clients through the GBT JV, including: full-service online and offline travel booking and reservation services and support; travel program management services; consulting services; and meetings and events management services. Until June 30, 2014, the business travel operations were wholly owned. For more information on the GBT JV transaction, see Note 2 to our Consolidated Financial Statements.

Corporate Card Programs

The American Express® Corporate Card is a charge card that individual employees may obtain through a corporate account established by their employer for business purposes. Through our corporate card program, companies can manage their travel, entertainment and everyday business expenses. We use our closed-loop and direct relationships with merchants to offer corporate card clients enhanced data about company spending as well as the ability to efficiently manage and resolve disputes. We issue local currency corporate cards in more than 65 countries and territories, and have global U.S. dollar and euro corporate cards available in more than 100 countries and territories.

We are focused on continuing to expand our business with mid-sized companies (defined in the United States as firms with annual revenues of $10 million to $1 billion worldwide), which we believe represents a significant growth opportunity. Businesses of this size often do not have a corporate card program; however, once enrolled, mid-sized companies typically put a significant portion of their business spending on the corporate card because they are seeking greater control over their business expenses and the potential savings and employee benefits that can result.

Corporate Card Members can also take advantage of our Membership Rewards program to earn points that can be redeemed for air travel and hotel stays, as well as retail, home and recreation items. In select regions we also offer Corporate Membership Rewards that allows a company to earn points to redeem for enterprise-level rewards. Membership Rewards is an effective tool for encouraging corporate card usage.

Business-to-Business Payment Solutions

We offer a suite of business-to-business payment solutions to help companies manage their spend and recognize other potential benefits, including cost savings, process control and efficiency, improved cash flow and increased visibility on spend. This type of spending by companies also helps diversify our spend mix. Our corporate purchasing card helps large corporations and mid-sized companies manage their everyday spending. It is used to pay for everyday and large-ticket business expenses, such as office supplies, industrial supplies and business equipment. We issue local currency corporate purchasing cards in 25 countries.

vPayment, which offers companies single-use virtual account numbers, allows corporate clients to make payments with enhanced controls, data capture and reconciliation capabilities. Charges are authorized for a specified amount during a designated time window. The solution automates reconciliation, eliminates manual check requests

 

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and interfaces with a client’s enterprise resource planning, procurement and accounts payable systems. vPayment can be used as the form of payment throughout the stages of a typical procure-to-pay process.

Buyer Initiated Payments (“BIP”) allows companies to pay merchants electronically, which gives them more control over their payments, extends their own days payable outstanding (or “float”) and increases their cash on hand. Examples of BIP purchases by our clients include hospital equipment, industrial supplies, and construction and building materials. This solution is best suited for mid- to large-sized companies that want to convert from paper to electronic payments and optimize cash flow. BIP is currently available to companies in Australia, Canada, France, Germany, Mexico, the Netherlands, Spain, the United Kingdom and the United States.

Global Commercial Services — Competition

The corporate payments sector is dynamic and highly competitive, with much overlap between corporate and consumer payment cards and services and competition increasingly intense at both the payment provider and network levels. We are seeing increased product and price competition from payment providers, including larger regional and national banks. Customers are increasingly seeking payment products that integrate with their expense management tools and support electronic payment methods. With respect to competition at the network level, both Visa and MasterCard continue to support card issuers such as Citibank, JPMorgan Chase and U.S. Bank, including by improving data collection and reporting to meet customers’ requirements. In addition to product and price competition, other key competitive factors in the corporate payments business include global servicing capability, merchant coverage, quality of data, and access to additional services, such as reporting and program management tools, and customer experience.

Global Commercial Services — Regulation

The GCS business, which engages in the extension of commercial credit, is subject to more limited regulation than our consumer lending business. In the United States, we are subject to certain of the federal and state laws applicable to our consumer lending business, including the Equal Credit Opportunity Act, the FCRA (as amended by the FACT Act), as well as laws that generally prohibit engaging in unfair or deceptive acts or business practices. We are also subject to certain state laws that regulate fees and charges on our products. In the United States, we are subject to certain applicable privacy, data protection and information security laws, including certain requirements related to breach notification. Such laws also govern the collection, use, sharing and safeguarding of personal information. Other countries in which we operate also have certain applicable privacy, data protection and information security laws, in some cases more stringent than the requirements in the United States. We are also subject to bankruptcy and debtor relief laws that can affect our ability to collect amounts owed to us. As discussed above, along with the rest of our business, we are subject to certain provisions of the Bank Secrecy Act as amended by the Patriot Act, with regard to maintaining effective AML programs. For a discussion of this legislation and its effect on our business, see “Supervision and Regulation.” In some countries, regulation of card practices and consumer protection legislation may apply to some corporate payments relationships.

GLOBAL NETWORK & MERCHANT SERVICES

The GNMS segment operates a global payments network that processes and settles proprietary and non-proprietary card transactions. GNMS acquires merchants, provides financing products for qualified merchants and leverages our closed-loop network to offer multi-channel marketing programs and capabilities, services, and reporting and analytical data to our merchants around the world. It also enters into partnership agreements with third-party card issuers and acquirers to license the American Express brand and broaden the Card Member and merchant base for our network worldwide.

Our GNS business establishes and maintains relationships with banks and other institutions around the world that issue cards and, in certain countries, acquire local merchants on the American Express network. Cards bearing our logo are accepted at all merchant locations worldwide that accept American Express-branded cards and, depending on the product, are generally accepted at ATM locations worldwide that accept our cards.

Our Global Merchant Services (“GMS”) business provides us with access to transaction and merchant data through our closed-loop network, which encompasses relationships with Card Members, merchants and merchant acquirers and processors. This capability helps us acquire new merchants, deepen relationships with existing merchants, process transactions, underwrite risk, reduce fraud and provide targeted marketing, analytics and other value-added services to merchants on our network. In addition, it allows us to analyze trends and spending patterns among various segments of our customer base.

Global Network Services

GNS focuses on partnering with select third-party banks and other institutions to issue cards and, in some countries, act as merchant acquirers on the American Express network. By leveraging our global infrastructure and the appeal of the American Express brand, we broaden our Card Member and merchant bases for our network worldwide. This strategy also enables us to enhance our presence in countries where we already do business and

 

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expand our presence into new geographic areas generally without assuming additional Card Member credit risk or having to invest a large amount of resources, as our GNS partners already have established attractive customer bases and are responsible for managing the credit risk associated with the cards they issue.

In assessing whether we should pursue a proprietary or GNS strategy in a given country, or some combination thereof, we consider a wide range of country-specific factors, including the stability and attractiveness of financial returns, the size of the potential Card Member base, the strength of available marketing and credit data, the size of cobrand opportunities and how we can best create strong merchant value.

Although we customize our network arrangements to the particular country and each partner’s requirements, as well as to our strategic plans in that marketplace, all GNS arrangements are designed to help issuers develop products that are relevant and attractive to their customers and to support the value of American Express card acceptance to merchants. We choose to partner with institutions that share a core set of attributes compatible with the American Express brand, such as commitment to high quality standards and strong marketing expertise, and we require adherence to our product, brand and service standards.

The GNS business has established 158 card-issuing and/or merchant-acquiring arrangements with banks and other institutions in 141 countries. Since 1999, cards-in-force issued by GNS partners have grown at a compound annual growth rate of approximately 20 percent, totaling over 47 million cards at the end of 2015. Outside the United States, approximately 80 percent of new cards issued in 2015 were cards issued by GNS partners. Spending on GNS cards has grown at a compound annual rate of 21 percent since 1999, with spending on these cards totaling $166 billion in 2015, up 3 percent from a year ago. With the total number of American Express-branded GNS partner products standing at over 1,350, GNS strengthens our brand visibility around the world, drives more transaction volume onto our merchant network and increases the number of merchants choosing to accept the American Express card.

GNS Arrangements

Although the structures and details of each of the GNS arrangements vary, all of them generate revenues for us from the card transaction volumes they drive on the American Express network. Gross revenues we receive per dollar spent on a card issued by a GNS partner are generally lower than those from our proprietary card-issuing business. However, because the GNS partner is responsible for most of the operating costs and risk of its card-issuing business, our operating expenses and credit losses are generally lower than those in our proprietary card-issuing business. The GNS business model generates an attractive earnings stream and risk profile that requires a lower level of capital support. The return on equity in our GNS business can thus be significantly higher than that of our proprietary card-issuing business. In addition, since the majority of GNS costs are fixed, the business is scalable. GNS partners benefit from their association with the American Express brand and their ability to gain attractive revenue streams and expand and differentiate their product offerings with innovative marketing programs.

Our GNS arrangements fall into the following three main categories: Independent Operator Arrangements, Network Card License Arrangements and Joint Venture Arrangements.

Independent Operator Arrangements. The first type of GNS arrangement is known as an independent operator (“IO”) arrangement. As of the end of 2015, we had 71 of these arrangements around the world. We pursue these arrangements to expand the presence of the American Express network in countries in which we do not offer a proprietary local currency card. The partner’s local presence and relationships help us enhance the impact of our brand in the country, reach merchant coverage goals more quickly, and operate at economic scale and cost levels that would be difficult for us to achieve on our own. Subject to meeting our standards, IO partners are licensed to issue local currency cards in their countries, including the American Express® classic Green, Gold, Platinum and Centurion cards. In addition, most of these partners serve as the merchant acquirer and processor for local merchants. American Express retains the relationship with multinational merchants. Our IO partners make the decisions about which customers will be issued cards, own the customer relationships and bear the credit and fraud risk for the American Express cards they issue. GNS generates revenues in IO arrangements from card licensing fees, commissions on Card Member billings, foreign exchange conversion revenue, commissions on charge volume at merchants, share of discount revenue and, in some partnerships, commissions on net interest income or commissions on cards-in-force. Our IO partners are responsible for transaction authorization, billing and pricing, Card Member and merchant servicing, and funding card receivables for their cards and payables for their merchants.

We bear the credit risk arising from the IO partner’s potential failure to meet its settlement obligations to us. This exposure arises when their Card Members make purchases at merchants on the American Express network or use the card for cash advances at ATMs and we submit such transactions to the IO partner for settlement. We mitigate this risk by partnering with institutions we believe are financially sound and will meet their obligations, and by monitoring their financial health, their compliance with the terms of their relationship with us and the political, economic and regulatory environment in which they operate. In addition, depending on an IO partner’s credit rating and other indicators of financial health, we may require an IO partner to post a letter of credit, bank guarantee or other collateral to reduce this risk.

 

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Examples of countries where we have entered into IO arrangements include Brazil, Colombia, Indonesia, Malaysia, Peru, Russia, South Africa, South Korea, Turkey and Vietnam. Through our IO partnerships, we believe we can accelerate growth in Card Member spending, cards-in-force and merchant acceptance in these countries.

Network Card License Arrangements. The second type of GNS arrangement is known as a network card license (“NCL”). At the end of 2015, we had 83 of these arrangements in place worldwide. We pursue these arrangements to increase our brand presence and gain share in countries in which we have a proprietary card-issuing and/or merchant acquiring business and, in a few cases, those in which we have IO partners. In an NCL arrangement, we grant the third-party institution a license to issue American Express-branded cards. The NCL issuer owns the customer relationships for all cards it issues, provides customer service to its Card Members, authorizes transactions, manages billing and credit and designs card product features (including rewards and other incentives for Card Members), subject to meeting certain standards. The NCL issuer bears the credit and fraud risk for the issued cards, marketing and acquisition costs, and costs of rewards and other loyalty initiatives. We (or an IO partner) operate the merchant network, route and process card transactions from the merchant’s point of sale through submission to the issuer, and settle with issuers.

Our revenues in NCL arrangements are driven by a variety of factors, including the level of Card Member spending, commissions, currency conversions and licensing fees paid by the NCL issuer and fees charged to the NCL issuer based on charge volume, plus the value-added services such as card features and benefits we provide for the NCL issuer’s Card Members. As with IO arrangements, we bear the risk arising from the NCL issuer’s potential failure to meet its settlement obligations to us, and, as a result, engage in similar monitoring and risk mitigation activities as described above.

Examples of NCL arrangements include our relationships with Wells Fargo and U.S. Bank in the United States, Santander in Mexico, Minsheng Bank in China and NOVO BANCO in Portugal.

Joint Venture Arrangements. The third type of GNS arrangement is a joint venture (“JV”) arrangement. We have utilized this type of arrangement in Switzerland, as well as in other countries. In these countries, we join with a third party to establish a separate business in which we have a significant ownership stake. The JV typically signs new merchants to accept cards on the American Express network and issues local and U.S. dollar-denominated currency cards that carry our logo. In a JV arrangement, the JV bears the credit and fraud risk for the American Express cards it issues and is responsible for the operating and marketing costs. Unlike the other two types of GNS arrangements, we share management, risk, and profit and loss responsibility with our JV partners. Income is generated by discount revenues, card fees and net interest income. The economics of the JV are similar to those of our proprietary card-issuing business, which we discuss under “U.S. Card Services,” and we receive a portion of the JV’s income depending on, among other things, the level of our ownership interest. Our subsidiary, American Express Overseas Credit Corporation Limited, purchases card receivables from certain of the GNS JVs from time to time.

Global Merchant Services

Our GMS business builds and maintains relationships with merchants and merchant acquirers and processors, processes card transactions and settles with merchants that choose to accept cards for purchases. We sign merchants to accept cards and provide marketing information and other programs and services to merchants, leveraging the capabilities provided by our closed-loop network. We also offer support for card acceptance, fraud prevention and other value-added services.

Our objective is for Card Members to be able to use the card wherever and however they desire, and to increase merchant acceptance in key geographic areas, industries and businesses that have not traditionally accepted the card. We add new merchants to our network through a number of sales channels: an in-house sales force; third-party sales and service agents; third-party acquirers; aggregators; strategic alliances with banks and processors; the internet; telemarketing; and inbound “Want to Honor” calls (i.e., where merchants desiring to accept our card contact us directly). As discussed in the “Global Network Services” section, our IO partners and JVs also add new local merchants to the American Express network.

With our direct and inbound channels, we acquire the merchant, own the contract, agree with the merchant on the discount rate and handle servicing. Since 1995, we have worked with third-party acquirers to acquire small- and medium-sized merchants using several different models. External sales agents, for example, acquire the merchant on our behalf, while we retain the card acceptance agreement with participating merchants, agree on the discount rate and handle servicing. In 2014, we established a new merchant-acquiring program, OptBlue, to expand card acceptance by U.S. small merchants that have a projected American Express charge volume of less than $1 million per year. In the OptBlue® program, third-party acquirers or processors contract directly with merchants for card acceptance and determine merchant pricing. The OptBlue program provides an alternative for eligible small merchants who may prefer to deal with one acquirer for all their card acceptance needs. OptBlue acquirers provide relevant merchant data back to us so we can maintain our closed loop of transaction data. In 2015, we announced the launch of OptBlue in Canada.

GMS continues to expand the number of merchants that accept our cards as well as the kinds of businesses that accept the card in order to address Card Member needs. For example, 40 percent of our U.S. billings came from the

 

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travel and entertainment sectors in 2001 and 60 percent came from retail and other sectors. In 2015, only 26 percent of U.S. billings came from the travel and entertainment sectors. This shift resulted, in part, from the growth, over time, in the types of merchants that began to accept payment cards in response to consumers’ increased desire to use these cards for more of their purchases, our focus on expanding card acceptance to meet Card Members’ needs, and increased competition for travel and entertainment sector spending.

Globally, acceptance of general-purpose cards continues to increase and we continue to grow merchant acceptance of American Express cards around the world, as well as refine our approach to calculating merchant coverage. We estimate that, as of the end of 2015, our merchant network in the United States could accommodate more than 90 percent of general-purpose card spending. Our international spend coverage is more limited, although we continue to expand our merchant network in locations outside the United States. We estimate that our international merchant network as a whole could accommodate approximately 80 percent of general-purpose card spending. These percentages are based on comparing spending on all networks’ general-purpose credit and charge cards at merchants that accept American Express cards with total general-purpose credit and charge spending at all merchants.

Discount Revenue

We earn “discount” revenue from fees charged to merchants for accepting our cards as payment for goods or services sold. The merchant discount, or discount rate, is a fee charged to the merchant for accepting our cards and is generally expressed as a percentage of the charge amount. In some instances, an additional flat transaction fee is assessed as part of the merchant discount. The merchant discount is generally deducted from the amount of the payment that the merchant acquirer (in most cases, one of our subsidiaries) pays to a merchant for charges submitted. A merchant acquirer is the entity that contracts for American Express card acceptance with the merchant, accepts transactions from the merchant, pays the merchant for these transactions and submits the transactions to the American Express network, which in turn submits the transactions to the appropriate card issuer. When a Card Member presents our card for payment, the merchant creates a record of charge for the transaction and submits it to the merchant acquirer for payment. To the extent that we are the merchant acquirer, we record the merchant discount as discount revenue at the time we receive the transaction. We may also charge additional fees to merchants, such as a variable fee for “non-swiped” card transactions or for transactions using cards issued outside the United States and used at merchants located in the United States.

Where we act as the merchant acquirer and the card presented at a merchant is issued by a third-party bank or financial institution, such as in the case of our GNS partners, we will make financial settlement to the merchant and receive the discount revenue. In our role as the operator of the card network, we will also receive financial settlement from the GNS card issuer, which in turn receives an issuer rate that is individually negotiated between the issuer and us (i.e., the amount the GNS card issuer receives for a transaction on our network with a card they issue — usually expressed as a percentage of the charge amount). The difference between the merchant discount received by us from the merchant (which is directly agreed between a merchant and us and is not based on the issuer rate) and the issuer rate received by the GNS card issuer generates a return to us. In cases where American Express is the card issuer and the merchant acquirer is a third party (which can be the case in a country in which an IO partner is the local merchant acquirer or in the United States under our OptBlue program with certain third-party merchant acquirers), we receive a network rate in our settlement with the merchant acquirer, which is individually negotiated between us and the merchant acquirer and is recorded by us as discount revenue. In contrast with networks such as those operated by Visa and MasterCard, there are no collectively set interchange rates on the American Express network, issuer rates do not serve as a basis for merchant discount rates and no fees are agreed or due between third-party bank or financial institution participants on the network.

We work hard to persuade merchants to choose to accept our payment products in addition to those of our competitors. As such, we compete on our ability to innovate and deliver meaningful value to merchants to justify the cost of acceptance. The merchant discount we charge reflects the value we deliver to the merchant and the investments we make in providing that value. We deliver greater value to merchants as compared to our competitors in a variety of ways, including through higher spending by our Card Members relative to users of cards issued on competing card networks, our product and network features and functionality, our marketing expertise and programs, information services, fraud prevention services, our dedicated client management group, and other investments that enhance the merchant value propositions associated with American Express card acceptance.

The merchant discount varies with, among other factors, the industry in which the merchant does business, the merchant’s charge volume, the timing and method of payment to the merchant, the method of submission of charges and, in certain instances, the geographic scope of the card acceptance agreement signed with us (e.g., local or global) and the charge amount. In the United States and Canada, we charge a different discount rate for our prepaid cards. We may also charge a different discount rate for our corporate purchasing cards if the merchant meets certain requirements.

While we believe merchants that accept our cards understand our merchant discount pricing in relation to the value provided, we do encounter merchants that accept our cards, but tell their customers that they prefer to accept another type of payment or otherwise seek to suppress use of the card. Our Card Members value the ability to use their cards where and when they want to, and we, therefore, take steps to meet our Card Members’ expectations and to protect the American Express brand, subject to local legal requirements, such as Dodd-Frank in the United States.

 

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We make efforts to limit card suppression by focusing on acquiring merchants where Card Members want to use our card; continuing to enhance the value we provide to merchants through marketing programs such as our Small Business Saturday® and Shop Small® campaigns to encourage Card Members and other consumers to shop at small merchants; addressing factors that influence merchant satisfaction; and providing earlier and more frequent communication of our value proposition. We have a client management organization dedicated to growing our merchants’ businesses and finding ways to enhance the effectiveness of our relationships with these key business partners. Most importantly, we recognize that it is the merchant’s choice whether or not to accept American Express cards and that all merchants have numerous options given the intense competition from other card networks with larger cardholder bases and from new as well as traditional forms of payment. Therefore, we dedicate substantial resources to delivering superior and differentiated value to attract and retain merchants on our network.

The laws of a number of states in the United States prohibit the surcharging of credit card purchases, although the laws in four of these states (California, Florida, New York and Texas) are being challenged in litigation brought by merchant groups. Conversely, there are certain countries in which surcharging is specifically permitted, such as Australia. Where permitted by local law, our card acceptance agreements generally include a provision under which the merchant agrees not to discriminate against our cards, such as by surcharging higher amounts on purchases with our cards than on purchases with any other cards the merchant accepts or by imposing a surcharge only on American Express card purchases, but not on purchases made with other cards. We do not prohibit merchants from offering discounts to customers who pay with cash, check or inter-bank transfers (i.e., Automated Clearing House or “ACH”). In addition, we do not prohibit U.S. merchants from offering discounts or in-kind incentives to customers who pay with particular forms of payment in accordance with the provisions of Dodd-Frank.

Enhancing Merchant Satisfaction

GMS is focused on understanding and addressing factors that influence merchant satisfaction, including developing and executing programs that increase the usage of American Express cards at merchants, using technology resources and innovative marketing tools such as social media, and applying our closed-loop capabilities and deep marketing expertise. Our closed-loop network and other relationships allow us to analyze merchant data and information on Card Member spending. This enables us to offer a range of targeted marketing services, network capabilities and special offers for the benefit of merchants and Card Members through a variety of channels. At the same time, we protect the confidentiality of Card Member and merchant information in compliance with applicable privacy, data protection and information security laws, other applicable legal requirements and our internal policies. We also work closely with our card-issuing and merchant-acquiring partners to maintain the information that supports key elements of this closed loop, providing value to Card Members and merchants.

For example, we connect merchants and Card Members through Amex Offers, a centralized portal that provides Card Members with merchant offers. Card Members can access these offers on their online account and mobile app and redeem them for couponless savings, reflected as statement credits. Amex Offers can help merchants attract new customers and generate repeat business by targeting relevant offers to Card Members. In 2015, we launched Amex Offers in the UK and Australia.

We offer fraud prevention services to merchants for transactions on the American Express network, and our subsidiary, Accertify, Inc., is a leading provider of solutions that help merchants combat fraudulent online and other card-not-present transactions. Accertify provides a hosted software application that offers an extra level of security for transactions on any of the major payment networks, including American Express, Visa, MasterCard, Discover and PayPal, or using any other alternative payment method. Accertify also offers merchants the option to outsource their end-to-end fraud management process to Accertify and provides other value-added services.

We also offer Merchant Financing, a set of products providing qualified American Express accepting merchants with access to convenient, attractively priced fixed-fee financing to support their business needs. The financing offered is a commercial loan, repaid automatically through the merchant’s daily charge submissions or business bank account.

We continue to focus our efforts in areas that make use and acceptance of our cards more secure and convenient for merchants and Card Members. We participate in standard-setting bodies, such as EMVCo and PCI Security Standards Council, LLC, designed to help drive secure and interoperable payments globally. Our goal is to make it easier for merchants to accept our cards, for Card Members to have safe and seamless experiences at the point of sale, and for issuers and acquirers that have more than one network relationship to have uniform technology standards across their card products and platforms. These efforts are particularly important as emerging technologies enabled on contactless cards, mobile phones and new payment devices offer consumers new, convenient ways to pay for their purchases.

Billing Disputes

As the merchant acquirer, we have certain exposures that arise if a billing dispute between a Card Member and a merchant is settled in favor of the Card Member. Drivers of this liability are returns in the normal course of business, disputes over fraudulent charges, the quality or non-delivery of goods and services, and billing errors. Typically, we offset the amount due to the Card Member against payments for the merchant’s current or future charge

 

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submissions. We can realize losses when a merchant’s offsetting charge submissions cease, such as when the merchant decides to no longer accept our card or goes out of business. We monitor our merchant base to assess the risk of this exposure. When appropriate, we will take action to reduce the net exposure to a given merchant by establishing reserves of charge payable holdbacks from a merchant, lengthening the time between when the merchant submits a charge for payment and when we pay the merchant, requiring the merchant to secure a letter of credit or a parent company guarantee, or implementing other appropriate risk management tools. We also establish reserves on our balance sheet for these contingencies in accordance with relevant accounting rules.

Global Network & Merchant Services — Competition

Our global card network competes in the global payments industry with other card networks, including, among others, Visa, MasterCard, Discover (primarily in the United States), Diners Club International (which is owned by Discover Financial Services) and JCB and China UnionPay (primarily in Asia). We are the fourth largest general-purpose card network on a global basis based on purchase volume, behind China UnionPay, Visa and MasterCard. In addition to such networks, a range of companies globally, including merchant acquirers and processors and companies such as PayPal, carry out some activities similar to those performed by our GMS and GNS businesses. No other single entity engages on a global basis in the full range and scale of activities that are encompassed by our closed-loop business model.

The principal competitive factors that affect the network and merchant service businesses include:

 

   

The number of cards-in-force and amount of spending on those cards

 

   

The quantity, diversity and quality of the establishments where the cards can be used

 

   

The economic attractiveness of the network to card issuers, cardholders and merchants

 

   

The success of marketing and promotional campaigns

 

   

Reputation and brand recognition

 

   

Innovation and investment in systems, technologies and product and service offerings

 

   

The quality of customer service

 

   

The payments industry expertise and capabilities that can be provided to partners in areas such as customer servicing, loyalty, fraud prevention and data analytics

 

   

The security of cardholder and merchant information

 

   

The impact of court orders and litigation settlements, ongoing litigation, legislation and government regulation

Another aspect of network competition is the dynamic and rapid growth of alternative payment mechanisms and systems, which include aggregators (such as PayPal, Square and Amazon), wireless payment technologies (including using mobile telephone networks to carry out transactions), electronic wallet providers (including handset manufacturers, retailers, banks and technology companies), prepaid systems and systems linked to payment cards, and bank transfer models such as ACH and wire transfers. Partnerships are also being formed to create various competitors, such as merchant coalitions like the Merchant Customer Exchange. New payments competitors continue to emerge in response to evolving consumer habits and merchant needs.

New technologies and evolving consumer behavior are rapidly changing the way people interact with each other and transact business all around the world. Traditional and non-traditional competitors such as technology companies, telecommunication providers and aggregators are working to deliver digital and mobile payment services for both consumers and merchants. Competition remains fierce for obtaining and retaining online and mobile spend in the ever-increasing digital world. Alternative business models represent potentially disintermediating factors in the card payment industry and new entrants to the digital payments space may have large cash reserves and other resources available to develop new platforms and technologies, large existing customer bases and the ability to use payments as a tool to support other sources of revenue. To the extent alternative payment mechanisms and systems, such as aggregators, continue to expand successfully, discount revenues and potentially other revenues, as well as our ability to access transaction data and conduct merchant marketing through our closed-loop network, could be negatively impacted. In the United States, alternative payment vehicles that seek to redirect customers to payment systems based on ACH continue to emerge and grow, merchants with recurring billing models actively seek to switch customers to payment through direct debits from bank accounts, and existing debit networks also continue to expand both on- and off-line and are making efforts to develop online PIN functionality, which could further reduce the relative use of charge and credit cards online.

Some of our competitors have attempted to replicate our closed-loop functionality. For example, JPMorgan Chase launched ChaseNet, a merchant-processing platform developed with Visa. Efforts by some card networks, payment providers and non-traditional competitors to replicate the closed loop reflect both its continued value and the intensely competitive environment in which we operate.

Some third-party processors and acquirers offer merchants the capability of converting payment card transactions from the local currency to the currency of the cardholder’s residence (i.e., the cardholder’s billing

 

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currency) at the point of sale, and submitting the transaction in the cardholder’s billing currency, thus bypassing the traditional foreign currency conversion process of the card network. Some merchants also offer this option to customers. This practice is known as “dynamic currency conversion.” Our policy generally requires merchants to submit charges and be paid in the currency of the country in which the transaction occurs, and we convert the transaction to the Card Member’s billing currency.

In addition to the discussion in this section, see “Our operating results may suffer because of substantial and increasingly intense competition worldwide in the payments industry” in “Risk Factors” for further discussion of the potential impact of competition on our business, and “Ongoing legal proceedings regarding provisions in our merchant contracts could have a material adverse effect on our business, result in additional litigation and/or arbitrations, subject us to substantial monetary damages and damage to our reputation and brand” in “Risk Factors” for a discussion of the potential impact on our ability to compete effectively if ongoing legal proceedings limit our ability to prevent merchants from engaging in various actions to discriminate against our card products.

Global Network & Merchant Services — Regulation

Legislators and regulators in various countries in which we operate have focused on the operation of card networks, including through antitrust actions, legislation and rules that would or do impose changes on pricing or practices of card issuers, merchant acquirers and payment networks, and the establishment of broad and ongoing regulatory oversight regimes for payment systems. Regulators and legislators have focused on the fees merchants pay to accept cards, including the way bankcard network members collectively set the “interchange” (that is, the fee paid by the bankcard merchant acquirer to the card issuer in payment networks like Visa and MasterCard), as well as the rules, contract terms and practices governing merchant card acceptance. Although, unlike the Visa and MasterCard networks, the American Express network does not have interchange fees or collectively set fees or rules, antitrust actions and government regulation relating to merchant pricing or terms of merchant rules and contracts could affect all networks directly or indirectly, as well as adversely impact consumers and merchants. Among other things, lower interchange and/or merchant discount revenue may lead card issuers to look for other sources of revenue from consumers such as higher annual card fees or interest charges, as well as to reduce costs by scaling back or eliminating rewards, services or benefits to cardholders and merchants.

In certain countries where regulations have required our competitors to lower their fees, we have made adjustments to our pricing to merchants to reflect local competitive trends. For example, reductions in bankcard interchange mandated by the Reserve Bank of Australia in 2003 resulted in lower merchant discount rates for Visa and MasterCard acceptance. As a result of these regulation-driven changes in the marketplace, we reduced our own merchant discount rates in Australia over time, although we have been able to increase billed business and the number of merchants accepting our cards. We have also experienced selective, but increasing, merchant surcharging on our cards in certain industries and, in some cases, on a basis that is greater than that applied to cards issued on the bankcard networks, which is known as differential surcharging. The Australian surcharging standards allow us and other networks to limit merchant surcharges to “the reasonable cost of card acceptance.” This could lead to differential surcharging of American Express cards if a surcharging merchant takes the position that the cost of American Express acceptance is higher than that of other payment cards.

Following a formal review of the regulatory framework for card payments in Australia, the Reserve Bank of Australia published a consultation paper on December 3, 2015, proposing new regulations, including the following:

 

   

The inclusion of our GNS business in Australia under interchange regulation, which would subject GNS payments to bank partners to the same interchange caps that apply to Visa and MasterCard in Australia

 

   

Broadening interchange fee caps to include all amounts payable to card issuers in regulated payment systems as well as other payments to card issuers across both three- and four-party card payment networks

 

   

Introducing a maximum interchange fee cap, increasing the frequency of periodic weighted-average benchmark calculations and including all transactions at Australian merchants in benchmark calculations (thereby capturing foreign-issued cards, which had previously been excluded)

 

   

Changing the rules on merchant surcharging to limit surcharging to the actual costs of card acceptance paid to the merchant acquirer, as recorded on the merchant statement issued by the merchant acquirer

Responses to the consultation paper were due by February 3, 2016. We do not expect any changes to take effect before mid-2016.

In the European Union, the Payment Services Directive (“PSD”), adopted in 2007 and subsequently implemented by EU Member States, prescribes common rules across the EU for licensing and supervision of payment services providers, including card issuers and merchant acquirers, and for their conduct of business with customers. The objective of the PSD is to facilitate the operation of a single internal payments market in the EU through harmonization of EU Member State laws governing payment services. One provision of the PSD permits merchants to surcharge, subject to disclosure requirements, but also allows individual Member States to override this rule by prohibiting or limiting surcharging. To date, the Member States are split on whether they prohibit or permit surcharging, with countries such as the United Kingdom (which for a number of years has permitted it for credit card purchases), the

 

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Netherlands and Spain permitting it and other countries such as France, Italy and Sweden prohibiting it. All Member States permit merchants to offer discounts for particular forms of payment.

The PSD has complemented another European initiative, the Single Euro Payments Area (“SEPA”), which is an industry-led initiative with support from EU institutions. Among other changes, SEPA has involved the adoption of new, pan-European technical standards for card transactions and the introduction of new direct debit and credit transfer systems, which we can use for collecting and initiating payments with Card Members, merchants and other counterparties. Compliance with the PSD, SEPA and related requirements has involved significant costs to implement and maintain. In addition, the Consumer Rights Directive (“CRD”) prohibits merchants from surcharging card purchases more than the merchants’ cost of acceptance in those Member States that permit surcharging pursuant to the PSD. The CRD provides no guidance to merchants on how to assess the cost of acceptance or take into account the relative value of different payment methods. A cost-based limit on surcharging could result in merchants imposing higher surcharges on American Express transactions if, in the absence of clear guidance, a surcharging merchant took the position that the cost of American Express acceptance is higher than other payment cards. These elements of the CRD may be superseded by proposals now under consideration as part of the EU Payments Package discussed above.

In July 2013, the European Commission (the “Commission”) proposed legislation in two parts, covering a wide range of topics across the payments industry. The first part was a proposed EU-wide regulation on interchange fees (the “Interchange Fee Regulation”); the second consisted of revisions to the PSD (the “PSD2”).

The Interchange Fee Regulation was formally adopted in April 2015. The substantive terms as adopted include the following:

 

   

Price caps — Interchange fees on consumer card transactions in the EU are capped as of December 2015, generally at 20 basis points for debit and prepaid cards and 30 basis points for credit and charge cards, with the possibility of lower caps in some instances. Although we do not have interchange fees and “three-party” networks such as American Express are exempt from the application of the caps, the regulation provides that “three-party” networks should be treated as “four-party” networks (such as Visa and MasterCard, which have interchange fees) when they license third-party providers to issue cards and/or acquire merchants or when they issue cards with a cobrand partner or through an agent. This means, for example, the caps will apply to elements of the financial arrangements agreed to between us and each of our GNS partners in the EU, which may undermine our ability to attract and retain GNS partners. While the discount rates we agree to with merchants are not capped, the interchange caps have exerted, and will likely continue to exert, downward pressures on merchant fees across the industry, including our discount rates. The Interchange Fee Regulation excludes commercial card transactions from the scope of the caps.

 

   

Card acceptance terms —“Anti-steering” and honor-all-cards rules across all card networks, including non-discrimination and honor-all-cards provisions in our card acceptance agreements, are prohibited with some exceptions. Removal of these provisions creates significant risk of customer confusion and Card Member dissatisfaction, which would result in harm to the American Express brand. The prohibition on “anti-steering rules” took effect immediately upon effectiveness of the regulation; the prohibition on honor-all-cards rules takes effect in June 2016.

 

   

Network licensing — In December 2015, the geographic scope of network licenses within the EU, including those we agree to with our GNS partners, was amended to cover the entire EU. This allows GNS partners to actively pursue their American Express business throughout the EU, including countries where we or other GNS partners are present, and may undermine the value of licenses granted to some GNS partners to date, which have been subject to varying levels of exclusivity to incentivize development of the American Express business in relation to a particular country.

 

   

Separation of network processing — From June 2016, card networks will be required to separate their network processing functions (in which transactions between different issuers and acquirers are processed for authorization, clearing and settlement). This provision does not generally apply to “three-party” payment networks, such as American Express, but may be deemed applicable, for example, where a different GNS issuer and acquirer is involved in a transaction, which represent a very small percentage of transactions on our network.

 

   

Co-badging of cards — From June 2016, a single card may bear the brand of multiple networks and be used to process transactions on any of those networks. Merchants may install automatic mechanisms in point-of-sale equipment to prioritize selection of a particular network, subject to override by the cardholder. These provisions may harm the American Express brand insofar as GNS issuing partners will be able to offer multiple networks on a single card and merchants may program their point-of-sale equipment to prioritize selection of another network on such cards.

The PSD2 was adopted on November 25, 2015, and was published in the Official Journal of the EU on December 23, 2015. Each Member State has until January 2018 to transpose the PSD2 into national law.

Among other terms, the published text of PSD2 includes provisions that will (i) further regulate surcharging so that transactions falling in scope of the interchange caps could not be surcharged, but transactions falling outside the scope of

 

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the caps could be surcharged up to cost, subject potentially to the ability of an individual Member State to prohibit surcharging altogether; and (ii) require all networks, including three-party payment networks that operate with licensing arrangements, such as our GNS business, to establish objective, proportionate and non-discriminatory criteria under which a financial institution may access the network, for example, as a licensed issuer or acquirer. The potential surcharging regulation may increase instances of differential surcharging of our cards, prompt customer and merchant confusion as to which transactions may be surcharged and lead to Card Member dissatisfaction. The access requirements will undermine the flexibility and discretion we have had to date in deciding with whom to partner in our GNS business.

We see a trend toward regulation of the payments industry in other countries, too. For example, in Mexico, the central bank issued rules in March 2014 for the regulation of payment instruments and the authorization of payment clearinghouses, including requirements on non-discrimination and access; however, “closed-loop” networks such as American Express are exempt as are also our licensing arrangements, provided that volumes under these arrangements fall below a certain sector share (as do currently our GNS volumes in Mexico). In Canada, regulators have prompted the major international card networks to make voluntary commitments on pricing, specifically interchange fee levels; in the case of American Express, our commitment extends to maintaining current pricing practices whereby issuer rates received by GNS partners are agreed to bilaterally with each partner, rather than multilaterally, and merchant pricing is simple, transparent and value-based with the same rate for the acquiring of credit and charge card transactions for a particular merchant regardless of the type of card that is presented. In Malaysia, the central bank introduced rules that impose caps on interchange fees, permit steering by merchants and co-badging of debit cards with other card networks, and require issuers to offer cardholders the option of taking up a basic card product with minimal or no cardholder incentives or rewards and at zero or nominal cost to the cardholder.

In some countries governments have established regulatory regimes that require international card networks to be locally licensed and/or to localize aspects of their operations. For example, card network operators in India must obtain authorization from the Reserve Bank of India, which has broad power under the Payment and Settlement Systems Act 2007 to regulate the membership and operations of card networks. In Indonesia, bank regulations require participants in a card payment and settlement business to obtain a license and establish a local legal entity, and the central bank is now considering the establishment of a domestic processing infrastructure for local transactions. In Russia, card network operators must be authorized by the central bank, and newly enacted regulation requires networks to place security deposits with the central bank, process all local transactions using government-owned infrastructure and insure that local transaction data remains within the country. Governments in some countries also provide resources or protection to select domestic payment card networks. For example, China recently proposed new regulation that will permit foreign card networks to operate domestically in the country for the first time, subject to licensing, capital and other requirements. The development and enforcement of these and other similar laws, regulations and policies in international markets may adversely affect our ability to compete effectively in such countries and maintain and extend our global network.

As the operator of a general-purpose card network, we are also subject to certain provisions of the Bank Secrecy Act, as amended by the Patriot Act. We conduct due diligence on our GNS partners to ensure that they have implemented and maintain sufficient AML controls to prevent our network from being used for money laundering or terrorist financing purposes. As aggregators and other third parties add merchants to the American Express network, we have expanded our due diligence to review the AML and “know your customer” policies and controls of those third parties, and retain the right to require termination of merchants’ card acceptance under appropriate circumstances. Since American Express Company and TRS are bank holding companies, our business is also subject to further regulation and regulatory oversight by the Federal Reserve. As a service provider to regulated U.S. banks, our GNS business is subject to review by certain federal banking regulators, including the Federal Reserve, the FDIC and the OCC. For additional information about our regulatory status, see “Supervision and Regulation.”

CORPORATE & OTHER

Corporate & Other consists of corporate functions and certain other businesses, including our prepaid services business (which offers stored value/prepaid products, such as American Express Serve®, Bluebird®, the American Express® Gift Card and Travelers Cheques), LoyaltyEdge® and our foreign exchange services. Our support functions, including servicing, credit and technology, are organized by process rather than business unit, which we believe serves to streamline costs, reduce duplication of work, better integrate skills and expertise and improve customer service.

        As an issuer of stored value/prepaid products, we are regulated in the United States under the “money transmitter” or “sale of check” laws in effect in most states. We hold the funds received for stored value/prepaid products in accordance with applicable law, predominantly in highly rated debt securities consisting primarily of intermediate- and long-term federal, state and municipal obligations and bank deposit accounts. Sales of Travelers Cheques and net interest income from the Travelers Cheque investment portfolio continued to decline in 2015. We are also required by the laws of many states to comply with unclaimed and abandoned property laws, under which we must pay to states the face amount of any Travelers Cheque or prepaid card that is uncashed or unredeemed after a period of time depending on the type of product.

In November 2014, the CFPB proposed regulatory standards for prepaid cards, including uniform disclosures, certain protections for consumers and other requirements. Because the proposed rule is not final, the ultimate impact of these measures on us is not certain.

 

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SUPERVISION AND REGULATION

Overview

Federal and state banking laws, regulations and policies extensively regulate the Company, TRS, Centurion Bank and American Express Bank. They prescribe standards relating to, among other things, capital, earnings, liquidity, stress tests, resolution planning, dividends, the repurchase or redemption of shares, loans or extension of credit to affiliates and insiders, corporate governance, internal controls, information systems, risk management, internal audit systems, compensation, loan documentation, credit underwriting, asset growth and impaired assets. Such laws, regulations and policies are intended primarily for the protection of our depositors and other customers and the federal deposit insurance funds, as well as to minimize systemic risk, and not for the protection of our shareholders or other creditors. The costs of compliance with this extensive regulatory regime are substantial. In recent years, the financial services industry has been subject to rigorous examination scrutiny, high regulatory expectations, and a stringent and unpredictable regulatory enforcement environment. American Express Company and TRS are bank holding companies and financial holding companies under the BHC Act. As bank holding companies under the BHC Act, American Express Company and TRS are subject to supervision and examination by the Federal Reserve. Under the system of “functional regulation” established under the BHC Act, the Federal Reserve supervises the Company, including all its non-bank subsidiaries, as an “umbrella regulator” of the consolidated organization and generally defers to the primary U.S. regulators of the Company’s U.S. bank subsidiaries with respect to the supervision and regulation of those institutions. Banking regulators have broad examination and enforcement power over bank holding companies and their subsidiaries, including the power to impose substantial fines, limit dividends and other capital distributions, restrict operations and acquisitions and require divestitures. Bank holding companies and banks, as well as subsidiaries of both, are prohibited by law from engaging in practices that the relevant regulatory authority deems unsafe or unsound (which such authorities generally interpret broadly). We are also subject to supervision, examination and enforcement by the CFPB with respect to marketing and sale of consumer financial products and compliance with certain federal consumer financial laws, including, among other laws, the CFPA and the TILA.

Many aspects of our business also are subject to rigorous regulation by other U.S. federal and state regulatory agencies and securities exchanges and by non-U.S. government agencies or regulatory bodies. To the extent that different regulatory systems impose overlapping or inconsistent requirements on the conduct of our business, we face complexity and additional costs in our compliance efforts. New laws or regulations or changes to existing laws and regulations (including changes in interpretation or enforcement), as well as the enforcement of both existing and new laws and regulations, could materially adversely affect our financial condition or results of operations. In addition to the discussion in this section, see “Risk Factors — Legal and Regulatory Risks” for a further discussion of the potential impact legislative and regulatory changes may have on our results of operations and financial condition.

See also “Card-Issuing Business and Deposit Programs — Regulation” under “U.S. Card Services,” “International Card Services — Regulation,” “Global Commercial Services — Regulation” and “Global Network & Merchant Services — Regulation” for a discussion of certain regulatory considerations specifically applicable to our business segments.

Financial Holding Company and Bank Holding Company Status and Activities

The BHC Act limits the non-banking activities of bank holding companies. The activities of bank holding companies that are not “financial holding companies” are restricted to those activities that the Federal Reserve has determined are “so closely related to banking as to be a proper incident thereto.” An eligible bank holding company may elect to become a financial holding company, which is authorized to engage in a broader range of financial and related activities. As a financial holding company, American Express engages in various activities permissible only for a financial holding company including, in particular, providing travel agency services, acting as a finder and engaging in certain insurance underwriting and agency services.

For a bank holding company to be and remain eligible for financial holding company status, the bank holding company and each of its subsidiary U.S. depository institutions must be “well capitalized” and “well managed,” and each of its subsidiary U.S. depository institutions must have received at least a “satisfactory” rating on its most recent assessment under the Community Reinvestment Act of 1977 (the “CRA”). If the bank holding company fails to meet applicable standards for financial holding company status, it is likely to be barred from engaging in new types of financial activities or making certain types of acquisitions or investments in reliance on its status as a financial holding company, and ultimately could be required to either discontinue the broader range of activities permitted to financial holding companies or divest its subsidiary U.S. depository institutions.

Acquisitions and Investments

Applicable federal and state laws place limitations on the ability of persons to invest in or acquire control of us without providing notice to or obtaining the approval of one or more of our regulators. In addition, we are subject to banking laws and regulations that limit our investments and acquisitions and, in some cases, subject them to the prior review and approval of our regulators, including the Federal Reserve, the OCC and the FDIC. The banking agencies have broad discretion in evaluating proposed acquisitions and investments that are subject to their prior review or approval.

 

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Source of Strength

A bank holding company is required by statute to act as a source of strength to all of its insured depository institution subsidiaries. Therefore, the Company is required to act as a source of strength to Centurion Bank and American Express Bank and may be required to commit capital and financial resources to support both institutions. Such support may be required at times when, absent this requirement, the Company otherwise might determine not to provide it.

Capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal banking regulator to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Heightened Prudential Requirements for Large Bank Holding Companies

Dodd-Frank imposes heightened prudential requirements on bank holding companies with at least $50 billion in total consolidated assets, including the Company, and requires the Federal Reserve to establish prudential standards for such large bank holding companies that are more stringent than those applicable to other bank holding companies. The Federal Reserve’s final rule implementing certain enhanced prudential requirements, including enhanced liquidity and overall risk management, became effective on January 1, 2015. The Federal Reserve has not yet finalized rules for two heightened prudential requirements mandated by Dodd-Frank — namely, bank holding company-consolidated limits on exposures to single counterparties and early remediation requirements for large bank holding companies experiencing financial distress. Apart from Dodd-Frank’s requirements, the Federal Reserve has discretionary authority to establish additional prudential standards on its own, or at the recommendation of the Financial Stability Oversight Council.

Stress Testing

As part of its implementation of the enhanced prudential requirements of Dodd-Frank, the Federal Reserve issued rules relating to annual supervisory and semiannual company-run analyses of certain large bank holding companies, such as the Company, to evaluate whether the companies have sufficient capital on a total consolidated basis to absorb losses and support operations under adverse economic conditions (so-called “stress tests”). The Federal Reserve applies its stress test rules and its capital planning requirements, discussed in “Capital Planning,” on a consolidated basis.

The FDIC and the OCC have also issued rules consistent with the Federal Reserve’s regulations governing company-conducted stress testing to implement annual company stress testing requirements applicable to certain banking organizations, including Centurion Bank and American Express Bank.

Centurion Bank and American Express Bank began reporting the results of their stress tests in 2015 and we publish the stress test results for the Company, Centurion Bank and American Express Bank on our Investor Relations website.

Capital Planning

Bank holding companies with $50 billion or more in total consolidated assets, including the Company, are required to develop and maintain a capital plan, and to submit the capital plan to the Federal Reserve for review under its Comprehensive Capital Analysis and Review (“CCAR”) process. CCAR is designed to evaluate the capital adequacy, capital adequacy process and planned capital distributions, such as dividend payments and common stock repurchases, of a bank holding company subject to CCAR. As part of CCAR, the Federal Reserve evaluates whether a bank holding company has sufficient capital to continue operations under various scenarios of economic and financial market stress (developed by both the bank holding company and the Federal Reserve, including “adverse” and “severely adverse” stress scenarios developed by the Federal Reserve). The scenarios are designed to stress our risks and vulnerabilities and assess our pro-forma capital position and ratios under hypothetical stressed environments. The Federal Reserve will also evaluate whether the bank holding company has robust, forward-looking capital planning processes that account for its unique risks.

The capital plan must cover a “planning horizon” of at least nine quarters (beginning with the quarter preceding the submission of the plan). The Federal Reserve has broad authority to object to capital plans, and to require bank holding companies to revise and resubmit their capital plans. Bank holding companies are also subject to an ongoing requirement to revise and resubmit their capital plans upon the occurrence of certain events specified by rule, or when required by the Federal Reserve. In addition to other limitations, our ability to make any capital distributions (including dividends and share repurchases) is contingent on the Federal Reserve’s non-objection to our capital plan under both quantitative and qualitative tests. Should the Federal Reserve object to a capital plan, a bank holding company may not make any capital distribution other than those capital distributions to which the Federal Reserve has indicated its non-objection in writing. Beginning in 2016, participating bank holding companies are required to submit their capital plans and stress testing results to the Federal Reserve on or before April 5 of each year, instead of on or before January 5 of each year as previously required.

 

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The Federal Reserve is expected to publish the decisions for all the bank holding companies participating in CCAR 2016, including the reasons for any objection to capital plans, by June 30, 2016. In addition, the Federal Reserve will separately publish the results of its supervisory stress test under both the supervisory severely adverse and adverse scenarios. The information to be released will include, among other things, the Federal Reserve’s projection of company-specific information, including post-stress capital ratios and the minimum value of these ratios over the planning horizon.

Dividends

The Company and TRS, as well as Centurion Bank and American Express Bank, are limited in their ability to pay dividends by banking statutes, regulations and supervisory policy. In general, federal and applicable state banking laws prohibit, without first obtaining regulatory approval, insured depository institutions, such as Centurion Bank and American Express Bank, from making dividend distributions if such distributions are not paid out of available recent earnings or would cause the institution to fail to meet capital adequacy standards. As described in “Prompt Corrective Action,” the Federal Deposit Insurance Act (“FDIA”) also generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. In addition to specific limitations on the dividends that subsidiary banks can pay to their holding companies, federal banking regulators have authority to prohibit or limit the payment of a dividend if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization.

Dividend payments by the Company and TRS to shareholders are subject to the oversight of the Federal Reserve. It is Federal Reserve policy that bank holding companies generally should pay dividends on common stock only out of net income available to common shareholders generated over the past year and only if prospective earnings retention is consistent with the organization’s current and expected future capital needs, asset quality and overall financial condition. See also “Heightened Prudential Requirements for Large Bank Holding Companies — Capital Planning.” Moreover, bank holding companies should not maintain dividend levels that place undue pressure on the capital of depository institution subsidiaries or that may undermine the bank holding company’s ability to be a source of strength to its banking subsidiaries. The Federal Reserve could prohibit a dividend by the Company or TRS that the Federal Reserve believes would constitute an unsafe or unsound practice in light of the financial condition of the banking organization.

In addition, the Company generally is required to obtain prior approval from the Federal Reserve before it can make capital distributions, including dividend payments, under any of the following circumstances (regardless of whether the distribution is part of a capital plan to which the Federal Reserve has not objected):

 

   

The Company will not meet a minimum regulatory capital ratio after giving effect to the capital distribution;

 

   

The Federal Reserve has notified the Company that it has determined that either (i) the capital distribution will result in a material adverse change to the Company’s capital or liquidity structure, or (ii) the Company’s earnings are materially underperforming projections;

 

   

The dollar amount of the capital distribution will exceed the projected distribution described in the Company’s approved capital plan; or

 

   

The capital distribution will occur after the occurrence of an event requiring the resubmission (other than pursuant to an objection) of the Company’s capital plan and before the Federal Reserve has acted on the resubmitted plan.

Resolution Planning

In December 2015, we filed an updated plan for the rapid and orderly resolution of the Company under the Bankruptcy Code in the event of material distress or failure. Under rules adopted by the Federal Reserve and the FDIC pursuant to Dodd-Frank, we are required to update this resolution plan annually and may be required to update it upon the occurrence of material changes in our business, structure or operations. This resolution planning requirement may, as a practical matter, present additional constraints on our structure, operations and business strategy, and on transactions and business arrangements between our bank and non-bank subsidiaries, because we must consider the impact of these matters on our ability to prepare and submit a resolution plan that demonstrates that we may be resolved under the Bankruptcy Code in a rapid and orderly manner. If the Federal Reserve and the FDIC determine that our plan is not credible and we fail to cure the deficiencies, we may be subject to more stringent capital, leverage or liquidity requirements, or restrictions on our growth, activities or operations, or may ultimately be required to divest certain assets or operations to facilitate an orderly resolution.

Capital Adequacy

The Company, Centurion Bank and American Express Bank are required to comply with the applicable capital adequacy rules established by federal banking regulators. These rules are intended to ensure that bank holding companies and banks (collectively, “banking organizations”) have adequate capital given the level of assets and off-balance sheet obligations, and to minimize disincentives for holding liquid assets.

 

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Since January 1, 2014, subject to certain transitional provisions, the Company, Centurion Bank and American Express Bank have been subject to the federal banking regulators’ revised capital rules (the “New Capital Rules”). The New Capital Rules substantially revised the general risk-based capital rules previously applicable to banking organizations to make them more risk sensitive and largely implement the Basel Committee on Banking Supervision’s (“Basel Committee”) final framework for strengthening international capital regulation, known as Basel III. For additional information regarding our capital ratios, see “Consolidated Capital Resources and Liquidity” under “MD&A.”

New Capital Rules

Under the New Capital Rules, new minimum capital and buffer requirements were established and will be fully phased-in by 2019. Specifically, banking organizations are required to maintain minimum ratios for Common Equity Tier 1 (“CET1”), Tier 1 and Total capital to risk-weighted assets. In addition, all banking organizations remain subject to a minimum leverage ratio of Tier 1 capital to total adjusted average assets (as defined for regulatory purposes). Advanced approaches institutions, such as the Company, will also become subject to a supplementary leverage ratio. In addition, advanced approaches institutions calculate risk-based capital ratios under both the generally applicable standardized approach and the advanced approaches capital rule, and then use the lower of each capital ratio to determine whether it meets its minimum risk-based capital requirements. The portions of the New Capital Rules implementing the standardized approach became effective January 1, 2015.

During 2014, we began reporting our capital adequacy ratios on a parallel basis to federal banking regulators using both risk-weighted assets calculated under the Basel III standardized approach, as adjusted for certain items, and the requirements for an advanced approaches institution. During this parallel period, federal banking regulators assess our compliance with the advanced approaches requirements. We continue to make progress in complying with the requirements, including refining our calculations to align the requirements with our asset types. The parallel period will continue until we receive regulatory approval to exit parallel reporting, at which point we will begin publicly reporting capital ratios using risk-weighted assets calculated under both the advanced approaches and the standardized approach in the New Capital Rules, and will be required to use the lower of these ratios in order to determine whether we are in compliance with minimum capital requirements. Depending on how the advanced approaches are ultimately implemented for our asset types, our capital ratios calculated under the advanced approaches may be lower than under the standardized approach. The Federal Reserve has indefinitely delayed use of the advanced approaches in CCAR and, therefore, the standardized approach will remain the applicable measurement for such purposes.

Commencing January 1, 2015, the Company, Centurion Bank and American Express Bank must each maintain CET1, Tier 1 capital (that is, CET1 plus additional Tier 1 capital) and Total capital (that is, Tier 1 capital plus Tier 2 capital) ratios of at least 4.5 percent, 6.0 percent and 8.0 percent, respectively, without giving effect to the capital conservation buffer or countercyclical capital buffer discussed below.

The New Capital Rules also implement a 2.5 percent capital conservation buffer composed entirely of CET1, on top of these minimum risk-weighted asset ratios. As a result, the minimum ratios are effectively 7.0 percent, 8.5 percent and 10.5 percent for the CET1, Tier 1 capital and Total capital ratios, respectively, on a fully phased-in basis. Implementation of the capital conservation buffer began on January 1, 2016 at the 0.625 percent level and will increase in equal increments at the beginning of each year until it is fully implemented on January 1, 2019. Additionally, as noted above, the required minimum capital ratios for advanced approaches institutions such as the Company may be further increased by a countercyclical capital buffer composed entirely of CET1 up to 2.5 percent, which may be assessed when federal banking regulators determine that such a buffer is necessary to protect the banking system from disorderly downturns associated with excessively expansionary periods. As a result, when fully phased-in, the countercyclical capital buffer and capital conservation buffer could potentially result in effective minimum CET1, Tier 1 capital and Total capital ratios of 9.5 percent, 11.0 percent and 13.0 percent, respectively.

Banking institutions whose ratio of CET1, Tier 1 Capital or Total capital to risk-weighted assets is above the minimum but below the capital conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on discretionary distributions such as dividends, repurchases and redemptions of capital securities, and executive compensation based on the amount of the shortfall.

As a supervisory matter, federal banking regulators expect most bank holding companies, and in particular larger bank holding companies such as the Company, to maintain regulatory capital ratios that, at a minimum, qualify a bank holding company and its depository institution subsidiaries as “well capitalized.” The rules also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. For example, the Federal Reserve has indicated that it will consider a “tangible Tier 1 capital leverage ratio” (deducting all intangibles) and other indicators of capital strength in evaluating proposals for expansion or new activities. Furthermore, since the 2008-2009 financial crisis, federal banking regulators have encouraged larger bank holding companies to maintain capital ratios appreciably above the “well capitalized” standard. The Federal Reserve has also focused on the regulatory requirement that common equity be the “predominant” element of Tier 1 capital.

 

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In December 2015, the Basel Committee proposed a series of revisions to the standardized approach to calculating regulatory capital requirements, including new rules that would require holding additional capital for certain “unconditionally cancellable commitments” such as unused credit card lines of credit. If adopted in the United States as proposed by the Basel Committee, the changes would require credit card issuers like us to hold significantly more capital. Federal banking regulators have previously acknowledged the proposal and indicated that the revisions would apply primarily to large, internationally active banking organizations. This could include all advanced approaches institutions, such as the Company. In addition, the Basel Committee has proposed adjustments to the standardized calculation of operational risk capital requirements. If adopted in the United States as proposed by the Basel Committee, the changes would require banking organizations that are highly specialized in fee-based businesses and conduct significant fee-based activities like us to hold significantly more capital.

Leverage Requirements

Banking organizations are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s Tier 1 capital to its total adjusted average assets (as defined for regulatory purposes). All banking organizations are required to maintain a leverage ratio of at least 4.0 percent.

The New Capital Rules also establish a supplementary leverage ratio requirement for advanced approaches banking organizations such as the Company, consistent with the Basel III framework. The supplementary leverage ratio is the ratio of Tier 1 capital to an expanded concept of leverage exposure that includes both on-balance sheet and certain off-balance sheet exposures. The New Capital Rules require a minimum supplemental leverage ratio of 3.0 percent for advanced approaches banking organizations as reported to the federal banking regulators, with full implementation and compliance by January 1, 2018.

Liquidity Regulation

Liquidity risk management and supervision have become increasingly important since the financial crisis. The Federal Reserve’s heightened prudential requirements rule, which applies to the Company and is discussed in “Heightened Prudential Requirements for Large Bank Holding Companies,” includes enhanced liquidity and overall risk management requirements. The Federal Reserve’s rule focuses on a bank holding company’s process to manage liquidity risk and details certain requirements and responsibilities for boards of directors and senior management relating to liquidity planning and overall risk management. The rule also requires the maintenance of a liquidity buffer, consisting of highly liquid assets, that is sufficient to meet projected funding needs for 30 days over a range of liquidity stress scenarios.

In addition, the Company has been subject to the liquidity coverage ratio (“LCR”) requirement since January 2015, which is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets that can be converted into cash to meet its liquidity needs for a 30-day time horizon under an acute liquidity stress scenario specified by supervisors. The ratio of a firm’s high-quality liquid assets to its projected net outflows is its LCR. The most comprehensive form of the LCR requirement applies only to advanced approaches banking organizations, such as the Company, and their depository institution subsidiaries with $10 billion or more in total consolidated assets, such as Centurion Bank and American Express Bank. Under the federal banking regulators’ LCR rule, covered banking organizations are required to comply with the LCR on an accelerated schedule, maintaining a minimum ratio of 80 percent beginning January 1, 2015, 90 percent by January 1, 2016 and 100 percent by January 1, 2017. The Company is required to calculate the LCR on a monthly basis, and on a daily basis starting July 1, 2016. As of December 31, 2015, the Company, Centurion Bank and American Express Bank were in compliance with the requirements of the LCR rule. The LCR is one of the two new standards provided for in the Basel III liquidity framework.

The Basel III framework also includes a second standard, referred to as the net stable funding ratio (“NSFR”), which is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements will incent banking entities to increase their holdings of cash, U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source. On October 31, 2014, the Basel Committee published the final NSFR, which contemplates that the NSFR will be implemented as a minimum standard by January 1, 2018. The Basel Committee’s final NSFR document states that the NSFR applies to internationally active banks. Federal banking regulators have not yet proposed rules implementing the NSFR liquidity framework for U.S. banking institutions, so the ultimate requirements to which we may be subject are not yet known.

Prompt Corrective Action

The FDIA requires, among other things, that federal banking regulators take prompt corrective action in respect of FDIC-insured depository institutions (such as Centurion Bank and American Express Bank) that do not meet minimum capital requirements. The FDIA specifies five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Once an institution becomes “undercapitalized,” the FDIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the capital category in which an institution is classified.

 

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The FDIA generally prohibits a bank, including Centurion Bank and American Express Bank, from accepting brokered deposits or offering interest rates on any deposits significantly higher than the prevailing rate in its normal market area or nationally (depending upon where the deposits are solicited), unless (1) it is well capitalized or (2) it is adequately capitalized and receives a waiver from the FDIC. A significant amount of our outstanding U.S. retail deposits has been raised through third-party brokerage networks, and such deposits are considered brokered deposits for bank regulatory purposes. A bank that is less than well capitalized generally may not pay an interest rate on any deposit, including direct-to-consumer deposits, in excess of 75 basis points over the national rate published by the FDIC unless the FDIC determines that the bank is operating in a high-rate area. An adequately capitalized insured depository institution may not accept, renew or roll over any brokered deposit unless it has applied for and been granted a waiver of this prohibition by the FDIC. Undercapitalized depository institutions may not solicit deposits by offering interest rates that are significantly higher than the prevailing rates of interest on insured deposits in such institution’s normal market areas or in the market area in which such deposits would otherwise be accepted. There are no such restrictions on a bank that is well capitalized (provided such bank is not subject to a capital maintenance provision within a written agreement, consent order, order to cease and desist, capital directive, or prompt corrective action directive issued by its federal regulator). If a depository institution’s federal regulator determines that the institution is in an unsafe or unsound condition or is engaging in unsafe or unsound banking practices, the regulator may reclassify a well capitalized institution as adequately capitalized, require an adequately capitalized institution to comply with certain restrictions as if it were undercapitalized, or require an undercapitalized institution to take certain actions applicable to significantly undercapitalized institutions, all of which would adversely impact the institution’s ability to accept brokered deposits. For a description of our deposit programs, see “Deposit Programs” under “U.S. Card Services — Consumer and Small Business Services.”

The FDIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve and to growth limitations, and are required to submit a capital restoration plan. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator.

Transactions Between Centurion Bank or American Express Bank and Their Respective Affiliates

Certain transactions (including loans and credit extensions from Centurion Bank and American Express Bank) between Centurion Bank and American Express Bank, on the one hand, and their affiliates (including the Company, TRS and their non-bank subsidiaries), on the other hand, are subject to quantitative and qualitative limitations, collateral requirements, and other restrictions imposed by statute and regulation. Transactions subject to these restrictions are generally required to be made on an arms-length basis. These restrictions generally do not apply to transactions between a depository institution and its subsidiaries.

FDIC Deposit Insurance and Insurance Assessments

Centurion Bank and American Express Bank accept deposits and those deposits are insured by the FDIC up to the applicable limits. Under the FDIA, the FDIC may terminate the insurance of an institution’s deposits upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not know of any practice, condition or violation that might lead to termination of deposit insurance at either of our insured depository institution subsidiaries.

The FDIC’s deposit insurance fund is funded by assessments on insured depository institutions, which are subject to adjustment by the FDIC. For example, on October 22, 2015, the FDIC proposed rules imposing a temporary assessment surcharge for banks with at least $10 billion in assets. This surcharge would result in increased costs for Centurion Bank and American Express Bank.

FDIC Powers upon Insolvency of Insured Depository Institutions

If the FDIC is appointed the conservator or receiver of an insured depository institution, such as Centurion Bank or American Express Bank, upon its insolvency or in certain other events, the FDIC has the power: (1) to transfer any of the depository institution’s assets and liabilities to a new obligor without the approval of the depository institution’s creditors; (2) to enforce the terms of the depository institution’s contracts pursuant to their terms; or (3) to repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome and the disaffirmation or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution.

In addition, under federal law, the claims of holders of U.S. deposit liabilities and certain claims for administrative expenses of the FDIC against an insured depository institution would be afforded priority over other general unsecured claims against the institution, including claims of debt holders of the institution and depositors in non-U.S. offices, in

 

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the liquidation or other resolution of the institution by a receiver. As a result, whether or not the FDIC ever sought to repudiate any debt obligations of Centurion Bank or American Express Bank, the debt holders and depositors in non-U.S. offices would be treated differently from, and could receive substantially less, if anything, than the depositors in U.S. offices of the depository institution.

Orderly Liquidation Authority under Dodd-Frank

Dodd-Frank created the Orderly Liquidation Authority (“OLA”), a resolution regime for systemically important non-bank financial companies, including bank holding companies, under which the Treasury Secretary may appoint the FDIC as receiver to liquidate such a company if the company is in danger of default and presents a systemic risk to U.S. financial stability. OLA is similar to the FDIC resolution model for depository institutions, including granting very broad powers to the FDIC as receiver. Though creditors’ rights under OLA were modified from the FDIC regime to reduce disparities in treatment between OLA and the U.S. Bankruptcy Code, substantial differences exist between the two regimes, including the right of the FDIC to disregard the strict priority of creditor claims in limited circumstances, the use of an administrative claims procedure to determine creditor claims (as opposed to the judicial procedure used in bankruptcy proceedings), and the right of the FDIC to transfer claims to a “bridge” entity. The OLA is separate from the Company’s resolution plan discussed in “Resolution Planning.”

The FDIC has developed a strategy under OLA, referred to as the “single point of entry” or “SPOE” strategy, under which the FDIC would resolve a failed financial holding company by transferring its assets (including shares of its operating subsidiaries) and, potentially, very limited liabilities to a “bridge” holding company; utilize the resources of the failed financial holding company to recapitalize the operating subsidiaries; and satisfy the claims of unsecured creditors of the failed financial holding company and other claimants in the receivership by delivering securities of one or more new financial companies that would emerge from the bridge holding company. Under this strategy, management of the failed financial holding company would be replaced and shareholders and creditors of the failed financial holding company would bear the losses resulting from the failure.

Cross-Guarantee Provisions

Under the “cross-guarantee” provision of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), insured depository institutions, such as Centurion Bank and American Express Bank, may be liable to the FDIC with respect to any loss incurred or reasonably anticipated to be incurred by the FDIC in connection with the default of, or FDIC assistance to, any commonly controlled insured depository institution. Centurion Bank and American Express Bank are commonly controlled within the meaning of the FIRREA cross-guarantee provision. A cross-guarantee claim of the FDIC against a depository institution is generally superior in right of payment to claims of the holding company and its affiliates against such depository institution.

Community Reinvestment Act

Centurion Bank and American Express Bank are subject to the CRA, which imposes affirmative, ongoing obligations on depository institutions to meet the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the institution. The CRA requires an institution’s primary federal regulator, as part of the examination process, to assess the institution’s record in meeting its obligations under the CRA, and also to take such assessment into account in evaluating merger and acquisition proposals and applications to open or relocate a branch office. American Express Bank was examined by the OCC during the fourth quarter of 2012 and received a “satisfactory” CRA rating. Centurion Bank was examined by the FDIC for CRA compliance during the third quarter of 2015. We are awaiting the results of this examination. In its last examination, Centurion Bank received a “satisfactory” CRA rating.

Privacy and Data Protection

Regulatory and legislative activity in the areas of privacy, data protection and information security continues to increase worldwide. We have established and continue to maintain policies that provide a framework for compliance with applicable privacy, data protection and information security laws, meet evolving customer privacy expectations and support and enable business innovation and growth.

Our regulators, including regulatory examiners, are increasingly focused on ensuring that our privacy, data protection and information security-related policies and practices are adequate to inform customers of our data collection, use, sharing and/or security practices, to provide them with choices, if required, about how we use and share their information, and to safeguard their personal information in accordance with applicable privacy, data protection and information security laws.

In the United States, certain of our businesses may be subject to the privacy, disclosure and information security provisions of the Gramm-Leach-Bliley Act (“GLBA”) and its implementing regulations and guidance. Among other things, the GLBA imposes certain limitations on the ability of a financial institution to share consumers’ nonpublic personal information with nonaffiliated third parties; requires that a financial institution provide certain disclosures to

 

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consumers about its data collection, sharing and security practices and affords customers the right to “opt out” of the institution’s disclosure of their personal financial information to nonaffiliated third parties (with limited exceptions), and requires the financial institution to develop, implement and maintain a written comprehensive information security program containing safeguards that are appropriate to the financial institution’s size and complexity, the nature and scope of the financial institution’s activities and the sensitivity of customer information processed by the financial institution. The GLBA does not preempt state laws that afford greater privacy protections to consumers. Various states also have adopted laws, rules and/or regulations pertaining to privacy and/or information security, including certain potentially applicable financial privacy laws (such as a law in effect in California); data security and/or data disposal requirements (including potentially applicable requirements adopted in states such as Massachusetts and Nevada); online privacy laws (such as a law in effect in California); and laws relating to the confidentiality of certain types of data (such as laws governing certain health-related information and/or Social Security numbers, for which there are also potentially applicable federal laws, rules, regulations and/or guidance as well). Certain of these requirements may apply to the personal information of our employees and/or contractors as well as our customers.

Various U.S. federal banking regulators and 47 U.S. states, the District of Columbia, Guam, Puerto Rico and the Virgin Islands have enacted data security breach notification requirements with varying levels of individual, consumer, regulator and/or law enforcement notification in certain circumstances in the event of a data security breach. Data breach notification laws are also becoming more prevalent in other parts of the world where we operate, including Germany, Japan, Mexico, South Korea and Taiwan. In many countries that have yet to impose data breach notification requirements, regulators have increasingly used the threat of significant sanctions and penalties by data protection authorities to encourage voluntary breach notification.

We are also subject to certain privacy, data protection and information security laws in other countries in which we operate (including countries in the EU, Australia, Canada, Japan, Hong Kong, Mexico and Singapore), some of which are more stringent than those in the United States. We have also seen some countries institute laws requiring in-country data processing and/or in-country storage of the personal data of its citizens. Compliance with such laws could result in higher technology, administrative and other costs for us and could limit our ability to optimize the use of our closed-loop data.

In Europe, European Directive 95/46/EC (commonly referred to as the “Data Protection Directive”), which has been in place since 1995, provides for the protection of individuals with regard to the processing of personal data and on the free movement of such data. The Data Protection Directive requires the controller and/or processor of an individual’s personal data to, among other things, take the necessary technical and organizational steps to protect personal data. We generally rely on our binding corporate rules as the primary method for lawfully transferring data from our European entities to our entities in the United States and elsewhere globally. European Directive 2002/58/EC (commonly referred to as the “e-Privacy Directive”) sets out requirements for the processing of personal data and the protection of privacy in the electronic communications sector. The ePrivacy Directive places restrictions on, among other things, the sending of unsolicited marketing communications, as well as on the collection and use of data about internet users.

In January 2012, the Commission proposed data protection framework regulation to replace the Data Protection Directive. The EU legislative process is in the final stages and the new regulation will affect parties, such as the Company, that collect and/or process the personal data of residents of Member States and may result in additional compliance requirements and costs. The new regulation includes, among other things, a requirement for prompt notice of data breaches, in certain circumstances, to data subjects and supervisory authorities, applying uniformly across sectors and across the EU and significant fines for non-compliance.

In 2015, the European Central Bank and the European Banking Authority enacted secondary legislation focused on security breaches, strong customer authentication and information security-related policies. Likewise, the Commission released in December 2015 the text of its draft proposed network information security directive, to be implemented into national laws by Member States. PSD2 also contains regulatory requirements on strong customer authentication and measures to prevent security incidents.

Fair Credit Reporting

The FCRA regulates the disclosure of consumer credit reports by consumer reporting agencies and the use of consumer credit report information by banks and other companies. Among other things, FCRA places restrictions (with limited exceptions) on the sharing and use of certain personal financial and creditworthiness information of our customers with and by our affiliates.

The FCRA was significantly amended by the enactment in 2003 of the FACT Act. The FACT Act requires any company that receives information concerning a consumer from an affiliate, subject to certain exceptions, to permit the consumer to opt out from having that information used to market the company’s products to the consumer. We have implemented various mechanisms to allow our customers to opt out of affiliate sharing and of marketing by the Company and our affiliates, and we continue to review and enhance these mechanisms to ensure compliance with applicable laws, rules and regulations and a favorable customer experience.

 

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The FACT Act also amended the FCRA by adding several provisions designed to prevent or decrease identity theft and to improve the accuracy of consumer credit information. Our internal policies and standards, as well as our enterprise-wide data protection, information security and fraud prevention programs, are designed to comply with the identity theft requirements. The FACT Act also imposes duties on both consumer reporting agencies and on businesses that furnish or use information contained in consumer credit reports. For example, a furnisher of information is required to implement procedures to prevent the reporting of any information that it learns is the result of identity theft. Also, if a consumer disputes the accuracy of information provided to a consumer reporting agency, the furnisher of that information must conduct an investigation and respond to the consumer in a timely fashion. The FACT Act also requires grantors of credit that use consumer credit report information in making a determination to offer a borrower credit on terms that are “materially less favorable” than the terms offered to most of the lender’s other customers to notify the borrower that the terms are based on a consumer credit report. In such a case the borrower is entitled to receive a free copy of the report from the consumer reporting agency Since 2011, Dodd-Frank has required the addition of certain information about credit scores to “risk-based pricing” notices and to adverse action notices otherwise required by the FCRA. Grantors of credit using prescreened consumer credit report information in credit solicitations are also required to include an enhanced notice to consumers that they have the right to opt out from receiving further prescreened offers of credit.

The CARD Act

The CARD Act regulates credit card billing, pricing, disclosure and other practices, as well as certain aspects of gift certificates, store gift cards and general-use prepaid cards primarily for personal use. Under the CARD Act, issuers must not open a credit card account or increase a credit line without considering the consumer’s ability to make the required minimum payments under the terms of the account.

With respect to billing and payment, the CARD Act prohibits a card issuer from treating any payment as late for any purpose, including imposing a penalty interest rate or late fee, unless the issuer has adopted reasonable procedures designed to ensure that a periodic statement showing the required minimum payment is mailed to the consumer at least 21 days before the payment due date.

With respect to pricing, the CARD Act prohibits an issuer from increasing any annual percentage rate (“APR”) on an outstanding balance, except in specific enumerated circumstances. If an issuer increases an APR, the CARD Act requires that the issuer periodically reevaluate the APR increase to determine if a decrease is “appropriate.” Penalty fees for a violation with respect to an account be “reasonable and proportional” to such violation.

With respect to disclosure, the CARD Act generally requires issuers to provide certain repayment disclosures on periodic statements, such as a disclosure of the total cost to the consumer, including interest charges, of paying off a balance by making only the required minimum payment each billing cycle. An issuer is also obligated to provide advance notice prior to making “significant” changes to the terms of an account (such as increasing an APR or a late fee) and, in some cases, give the consumer the right to reject the proposed change.

Anti-Money Laundering Compliance

American Express is subject to a significant number of AML laws and regulations as a result of being a financial company headquartered in the United States, as well as having a global presence. In the United States, the majority of AML requirements are derived from the Bank Secrecy Act, as it has been amended by the Patriot Act. In Europe, AML requirements are largely the result of countries transposing the 3rd EU Anti-Money Laundering Directive (and preceding EU Anti-Money Laundering Directives) into local laws and regulations. The 4th EU Anti-Money Laundering Directive was published in June 2015, which added new AML requirements. Each Member State has two years to transpose the new Directive into national law. Numerous other countries, such as Argentina, Australia, Canada and Mexico, have also enacted or proposed new or enhanced AML legislation and regulations applicable to American Express.

The underpinnings of these laws and regulations are the efforts of each government to prevent the financial system from being used by criminals to hide their illicit proceeds and to impede terrorists’ ability to access and move funds used in support of terrorist activities. Among other things, these laws and regulations require financial institutions to establish AML programs that meet certain standards, including, in some instances, expanded reporting, particularly in the area of suspicious transactions, and enhanced information gathering and recordkeeping requirements. Any errors, failures or delays in complying with federal, state or foreign AML and counter-terrorist financing laws could result in significant criminal and civil lawsuits, penalties and forfeiture of significant assets or other enforcement actions.

American Express has established and continues to maintain a Global Anti-Money Laundering Policy, designed to ensure that, at a minimum, American Express and all of its businesses are in compliance with all applicable laws, rules and regulations related to AML and anti-terrorist financing initiatives. The American Express Global Anti-Money Laundering Policy requires that each American Express business maintains a compliance program that provides for a system of internal controls to ensure that appropriate due diligence and, when necessary, enhanced due diligence, including obtaining and maintaining appropriate documentation, is conducted at account opening and updated, as

 

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necessary, through the course of the customer relationship. The Global Anti-Money Laundering Policy is also designed to ensure there are appropriate methods of monitoring transactions and account relationships to identify potentially suspicious activity and reporting suspicious activity to governmental authorities in accordance with applicable laws, rules and regulations. In addition, the American Express Global Anti-Money Laundering Policy requires the training of appropriate personnel with regard to AML and anti-terrorist financing issues and provides for independent testing to ensure that the Global Anti-Money Laundering Policy is in compliance with all applicable laws and regulations.

Office of Foreign Assets Control Regulation

The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. The United States prohibits U.S. persons from engaging with individuals and entities identified as “Specially Designated Nationals,” such as terrorists and narcotics traffickers. These prohibitions are administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and are typically known as the OFAC rules. The OFAC rules prohibit U.S. persons from engaging in financial transactions with or relating to the prohibited individual, entity or country, require the blocking of assets in which the individual, entity or country has an interest, and prohibit transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons) to such individual, entity or country. Blocked assets (e.g., property or bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. We maintain a global sanctions program designed to ensure compliance with OFAC requirements. Failure to comply with such requirements could subject us to serious legal and reputational consequences, including criminal penalties.

Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted outside the United States by non-U.S. affiliates in compliance with applicable law, and whether or not the activities are sanctionable under U.S. law.

During the year ended December 31, 2015, American Express Global Business Travel booked three hotel reservations at Homa Hotel Tehran, one hotel reservation at Esteghlal Grand Hotel and two hotel reservations at Esteghlal East Wing Hotel. In addition, certain third-party service providers obtained approximately 40 visas from Iranian embassies and consulates around the world during the year ended December 31, 2015 in connection with certain travel arrangements on behalf of American Express Global Business Travel and TLS clients. We and American Express Global Business Travel had negligible gross revenues and net profits attributable to these transactions. American Express Global Business Travel believes these transactions were permissible pursuant to certain exemptions from U.S. sanctions for travel-related transactions under the International Emergency Economic Powers Act, as amended. American Express Global Business Travel has informed us that it intends to continue to engage in these activities on a limited basis so long as such activities are permitted under U.S. law.

In addition, a travel company that may be considered an affiliate of ours, American Express Nippon Travel Agency, Inc. (“Nippon Travel Agency”), has informed us that during the year ended December 31, 2015 it obtained 92 visas from the Iranian embassy in Japan in connection with certain travel arrangements on behalf of its clients. Nippon Travel Agency had negligible gross revenues and net profits attributable to these transactions. Nippon Travel Agency has informed us that it intends to continue to engage in this activity so long as such activity is permitted under U.S. law.

Compensation Practices

Our compensation practices are subject to oversight by the Federal Reserve. In June 2010, federal banking regulators issued final guidance on sound incentive compensation practices that applies to all banking organizations supervised by the Federal Reserve, including bank holding companies, such as the Company, as well as all insured depository institutions, including Centurion Bank and American Express Bank. The final guidance sets forth three key principles for incentive compensation arrangements that are designed to help ensure that incentive compensation plans do not encourage imprudent risk-taking and are consistent with the safety and soundness of banking organizations. The three principles provide that a banking organization’s incentive compensation arrangements should (1) provide incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risks, (2) be compatible with effective internal controls and risk management, and (3) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Any deficiencies in compensation practices of a banking institution that are identified by the Federal Reserve or other banking regulators in connection with its review of such organization’s compensation practices may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The final guidance provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

 

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Additionally, in 2011, federal banking regulators, the SEC, the Federal Housing Finance Agency and the National Credit Union Administration issued proposed rulemaking pursuant to Dodd-Frank on incentive-based compensation practices. Under the proposed rule, all financial institutions with total consolidated assets of $1 billion or more (such as the Company, Centurion Bank and American Express Bank) would be prohibited from offering incentive-based compensation arrangements that encourage inappropriate risk taking by offering “excessive” compensation or compensation that could lead the company to material financial loss. All covered institutions would be required to provide federal regulators with additional disclosures to determine compliance with the proposed rule and also to maintain policies and procedures to ensure compliance. Additionally, for covered institutions with at least $50 billion in total consolidated assets, such as the Company, the proposed rule requires that at least 50 percent of certain executive officers’ incentive-based compensation be deferred for a minimum of three years and provides for the adjustment of deferred payments to reflect actual losses or other measures of performance that become known during the deferral period. Moreover, the board of directors of a covered institution with at least $50 billion in total consolidated assets must identify employees who have authority to expose an institution to substantial risk, evaluate and document the incentive-based compensation methods used to balance risk and financial rewards for the identified employees, and approve incentive-based compensation arrangements for those employees after appropriately considering other available methods for balancing risk and financial rewards. The comment period for this rule ended in May 2011. Although final rules have not yet been adopted, officials from the Federal Reserve have indicated that federal banking regulators are in the process of preparing for public comment a new rule on incentive compensation. If these or other regulations are adopted in a form similar to what was initially proposed, they will impose limitations on the manner in which we may structure compensation for our executives.

The scope and content of these policies and regulations on executive compensation are continuing to develop and are likely to continue evolving in the future. It cannot be determined at this time whether compliance with such policies and regulations will adversely affect our ability to hire, retain and motivate key employees.

Anti-Corruption

We are subject to complex international and U.S. anti-corruption laws and regulations, including the U.S. Foreign Corrupt Practices Act (the “FCPA”), the UK Bribery Act and other laws that prohibit the making or offering of improper payments. The FCPA makes it illegal to corruptly offer or provide anything of value to foreign government officials, political parties or political party officials for the purpose of obtaining or retaining business or an improper advantage. The anti-bribery provisions of the FCPA are enforced by the U.S. Department of Justice (“DOJ”). The FCPA also requires us to strictly comply with certain accounting and internal controls standards, which are enforced by the SEC. In recent years, DOJ and SEC enforcement of the FCPA has become more intense. The UK Bribery Act, which took effect in July 2011, also prohibits commercial bribery, and the receipt of a bribe, and makes it a corporate offense to fail to prevent bribery by an associated person, in addition to prohibiting improper payments to foreign government officials. Failure to comply with the FCPA, the UK Bribery Act and other laws can expose us and/or individual employees to potentially severe criminal and civil penalties. The risk may be greater when we transact business, whether through subsidiaries or joint ventures or other partnerships, in countries with higher perceived levels of corruption. We have risk-based policies and procedures designed to detect and deter prohibited practices, provide specialized training, monitor our operations and payments, and investigate allegations of improprieties relating to transactions and the manner in which transactions are recorded. However, if our employees, contractors or agents fail to comply with applicable laws governing our international operations, the Company, as well as individual employees, may face investigations or prosecutions, which could have a material adverse effect on our financial condition or results of operations.

FOREIGN OPERATIONS

We derive a significant portion of our revenues from the use of our card products and other financial services in countries outside the United States and continue to broaden the use of these products and services outside the United States. (For a discussion of our revenue by geographic region, see Note 25 to our Consolidated Financial Statements.) Our revenues can be affected by political and economic conditions in these countries as well as by foreign exchange rate fluctuations. See “Adverse currency fluctuations and foreign exchange controls could decrease earnings we receive from our international operations and impact our capital” under “Risk Factors.”

SEGMENT INFORMATION AND CLASSES OF SIMILAR SERVICES

You can find information regarding our reportable operating segments, geographic operations and classes of similar services in Note 25 to our Consolidated Financial Statements.

EXECUTIVE OFFICERS OF THE COMPANY

Set forth below, in alphabetical order, is a list of all our executive officers as of February 19, 2016, including each executive officer’s principal occupation and employment during the past five years. None of our executive officers has any family relationship with any other executive officer, and none of our executive officers became an officer pursuant to any arrangement or understanding with any other person. Each executive officer has been elected to serve until the next annual election of officers or until his or her successor is elected and qualified. Each officer’s age is indicated by the number in parentheses next to his or her name.

 

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DOUGLAS E. BUCKMINSTER —    President, Global Consumer Services

Mr. Buckminster (55) has been President, Global Consumer Services since October 2015. Prior thereto, he had been President, Global Network and International Card Services since February 2012 and President, International Consumer and Small Business Services since November 2009.

 

JAMES BUSH —    President, Global Network and International Consumer Services

Mr. Bush (57) has been President, Global Network and International Consumer Services since October 2015. Prior thereto, he had been Executive Vice President, World Service since October 2009.

 

JEFFREY C. CAMPBELL —    Executive Vice President and Chief Financial Officer

Mr. Campbell (55) has been Executive Vice President, Finance since July 2013 and Chief Financial Officer since August 2013. Mr. Campbell joined American Express from McKesson Corporation, a health care services company, where he served as Executive Vice President and Chief Financial Officer since 2004.

 

KENNETH I. CHENAULT —    Chairman and Chief Executive Officer

Mr. Chenault (64) has been Chairman since April 2001 and Chief Executive Officer since January 2001.

 

L. KEVIN COX —    Chief Human Resources Officer

Mr. Cox (52) has been Chief Human Resources Officer since April 2005.

 

PAUL FABARA —    President, Global Risk & Compliance Group and Chief Risk Officer

Mr. Fabara (50) has been President, Global Risk & Compliance Group and Chief Risk Officer since February 2016 and President, Global Banking Group since February 2013. He also served as President, Global Network Business from September 2014 to October 2015. Prior thereto, he had been Executive Vice President, Global Credit Administration since January 2011. Mr. Fabara joined American Express from Barclays PLC, where he served as Managing Director and Global Head, Operations, Regulatory, Implementation and Planning from February 2009 to January 2011.

 

MARC D. GORDON —    Executive Vice President and Chief Information Officer

Mr. Gordon (55) has been Executive Vice President and Chief Information Officer since September 2012. Mr. Gordon joined American Express from Bank of America, where he served as Enterprise Chief Information Officer from December 2011 until April 2012. Prior thereto, he had been Chief Technology Officer and head of Global Delivery Operations at Bank of America from May 2008 until November 2011.

 

ASH GUPTA —    President, Credit Risk and Global Information Management

Mr. Gupta (62) has been President, Credit Risk and Global Information Management since February 2016. Prior thereto, he had been President, Risk and Information Management and Chief Risk Officer since July 2007.

 

MICHAEL J. O’NEILL —    Executive Vice President, Corporate Affairs and Communications

Mr. O’Neill (62) has been Executive Vice President, Corporate Affairs and Communications since September 2014. Prior thereto, he had been Senior Vice President, Corporate Affairs and Communications since March 1991.

 

LAUREEN E. SEEGER —    Executive Vice President and General Counsel

Ms. Seeger (54) has been Executive Vice President and General Counsel since July 2014. Ms. Seeger joined American Express from McKesson Corporation, where she served as Executive Vice President, General Counsel and Chief Compliance Officer since 2006.

 

SUSAN SOBBOTT —    President, Global Commercial Payments

Ms. Sobbott (51) has been President, Global Commercial Payments since October 2015 and President, Global Corporate Payments since January 2014. Prior thereto, she had been President, American Express OPEN since 2004.

 

STEPHEN J. SQUERI —    Vice Chairman

Mr. Squeri (56) has been Vice Chairman since July 2015. Prior thereto, he had been Group President, Global Corporate Services since November 2011. Prior thereto, he had been Group President, Global Services since October 2009.

 

ANRÉ WILLIAMS —    President, Global Merchant Services and Loyalty

Mr. Williams (50) has been President of Global Merchant Services and Loyalty since October 2015 and President, Global Merchant Services since November 2011. Prior thereto, he had been President, Global Corporate Payments since June 2007.

EMPLOYEES

We had approximately 54,800 employees on December 31, 2015.

 

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GUIDE 3 – STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES

You can find certain statistical disclosures required of bank holding companies starting on page A-1, which are incorporated herein by reference.

 

ITEM 1A. RISK FACTORS

This section highlights specific risks that could affect us and our businesses. You should carefully consider each of the following risks and all of the other information set forth in this Annual Report on Form 10-K. Based on the information currently known to us, we believe the following information identifies the most significant risk factors affecting us. However, the risks and uncertainties we face are not limited to those described below. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

If any of the following risks and uncertainties develop into actual events or if the circumstances described in the risks and uncertainties occur or continue to occur, these events or circumstances could have a material adverse effect on our business, financial condition or results of operations. These events could also have a negative effect on the trading price of our securities.

Strategic, Business and Competitive Risks

Difficult economic conditions may materially adversely affect our business and results of operations.

Our results of operations are materially affected by economic conditions, both in the United States and elsewhere around the world. Uncertain expectations for global economic growth have had, and may continue to have, an adverse effect on us, in part because we are very dependent upon the level of consumer and business activity and the demand for credit and payment products. A prolonged period of slow economic growth or deterioration in economic conditions could change customer behaviors, including spending on our cards and the ability and willingness of Card Members to pay amounts owed to us. Travel expenditures are sensitive to business and personal discretionary spending levels and also tend to decline during general economic downturns. Further, economic instability in certain regions or countries could negatively affect consumer and business spending in other parts of the world. If economic conditions were to worsen, we could experience adverse effects on our results of operations and financial condition.

Factors such as consumer spending, business investment, government spending, interest rates, tax rates, fuel and other energy costs, the volatility and strength of the capital markets, inflation and deflation all affect the economic environment and, ultimately, our profitability. While the recent drop in oil prices may be beneficial for the U.S. economy overall, it has negatively impacted, and may continue to negatively impact, the amount of gas spending on our cards. An economic downturn characterized by higher unemployment, lower family income, lower consumer spending, lower demand for credit, lower corporate earnings or lower business investment is likely to materially and adversely affect our business, results of operations and financial condition. Furthermore, such factors may cause our earnings, credit metrics and margins to fluctuate and diverge from expectations of analysts and investors, who may have differing assumptions regarding their impact on our business, adversely affecting the trading price of our common shares.

Our operating results may suffer because of substantial and increasingly intense competition worldwide in the payments industry.

The payments industry is highly competitive, and we compete with a wide variety of financial payment products, including charge, credit and debit card networks and issuers, paper-based transactions (e.g., cash and checks), bank transfer models (e.g., wire transfers and ACH), as well as evolving alternative payment mechanisms, systems and products, such as aggregators and web-based payment platforms (e.g., PayPal, Square and Amazon), wireless payment technologies (including using mobile telephone networks to carry out transactions), virtual currencies, prepaid systems, gift cards, mobile payments, blockchain and similar distributed ledger technologies, and other systems linked to payment cards or that provide payment solutions. We also compete with technology companies, telecommunication providers, handset manufacturers, large retailers and retailer coalitions that are seeking to integrate more financial services into their product offerings.

We are the fourth largest general-purpose card network on a global basis based on purchase volume, behind China UnionPay, Visa and MasterCard and. We believe Visa and MasterCard are larger than we are in most countries. As a result, competitive card issuers and acquirers on the Visa and MasterCard networks may be able to benefit from the dominant position, scale, resources, marketing and pricing of Visa and MasterCard.

Some of our competitors have developed, or may develop, substantially greater financial and other resources than we have, including larger cash reserves, may offer a wider range of programs and services than we offer or may use more effective advertising, marketing or cross-selling strategies to achieve broader brand recognition, cobrand card

 

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programs or merchant acceptance than we have. We may not be able to compete effectively against these threats or respond or adapt to changes in consumer spending habits as effectively as our competitors.

Spending on our cards could continue to be impacted by increasing consumer usage of debit cards issued on competitive networks, as well as adoption of payment systems based on ACH or other payment mechanisms. To the extent alternative payment mechanisms, systems and products continue to successfully expand, our discount revenues and our ability to access transaction data through our closed-loop network could be negatively impacted. If we are not able to differentiate ourselves from our competitors, drive value for our customers and/or effectively grow in areas such as mobile and online payments, fee-based services and emerging technologies, we may not be able to compete effectively against these threats.

To the extent we expand into new business areas and new geographic regions, we may face competitors with more experience and more established relationships with relevant customers, regulators and industry participants, which could adversely affect our ability to compete. We may face additional compliance and regulatory risk to the extent that we expand into new business areas and we may need to dedicate more expense, time and resources to comply with regulatory requirements than our competitors, particularly those that are not regulated financial institutions. In addition, companies that control access to consumer and merchant payment method preferences through digital wallets, mobile applications or at the point of sale could choose not to accept or could suppress use of our products or could restrict our access to our customers and transaction data. Such companies could also require payments from us to participate in such digital wallets and applications, impacting our profitability on transactions. Laws and business practices that favor local competitors, require card transactions to be routed over domestic networks or prohibit or limit foreign ownership of certain businesses could slow our growth in international regions. Further, expanding our service offerings, adding customer acquisition channels and forming new partnerships could have higher cost structures than our current arrangements, adversely impact our average discount rate or dilute our brand.

Many of our competitors are subject to different, and in some cases, less stringent, legislative and regulatory regimes. More restrictive laws and regulations that do not apply to all of our competitors can put us at a competitive disadvantage, including prohibiting us from engaging in certain transactions, regulating our contract terms and practices governing merchant card acceptance or adversely affecting our cost structure. See “Ongoing legal proceedings regarding provisions in our merchant contracts could have a material adverse effect on our business, result in additional litigation and/or arbitrations, subject us to substantial monetary damages and damage our reputation and brand” for a discussion of the potential impact on our ability to compete effectively if ongoing legal proceedings limit our ability to prevent merchants from engaging in various actions to discriminate against our card products.

We face continued intense competitive pressure that may impact the prices we charge merchants that accept our cards for payment for goods and services.

Unlike our competitors in the payments industry that rely on high revolving credit balances to drive profits, our business model is focused on Card Member spending. Discount revenue, which represents fees generally charged to merchants when Card Members use their cards to purchase goods and services on our network, is primarily driven by billed business volumes and is our largest single revenue source. In recent years, we experienced some reduction in our global weighted average merchant discount rate and have been under increasing market pressure, including pressure created by regulatory-mandated reductions to competitors’ pricing, to reduce merchant discount rates and undertake other repricing initiatives. We also face pressure from competitors that have other sources of income or lower expense bases that can make their pricing more attractive to key business partners and merchants. Merchants are also able to negotiate incentives and pricing concessions from us as a condition to accepting our cards. As merchants consolidate and become even larger, we may have to increase the amount of incentives and/or concessions we provide to certain merchants, which could materially and adversely affect our results of operations. Competitive and regulatory pressures on pricing could make it difficult to offset the costs of these incentives.

In addition, differentiated payment models and technologies from non-traditional players in the alternative payments space and the regulatory and litigation environment could pose challenges to our traditional payment model and adversely impact our average discount rate. Some merchants also continue to invest in their own payment solutions, such as proprietary-branded mobile wallets and the CurrentC app on the Merchant Customer Exchange, using both traditional and new technology platforms. If merchants are able to drive broad consumer adoption and usage, it could adversely impact our merchant discount rate and billed business volumes.

A continuing priority of ours is to drive greater and differentiated value to our merchants, which, if not successful, could negatively impact our discount revenue and financial results. If we continue to experience a decline in the average merchant discount rate, we will need to find ways to offset the financial impact by increasing billed business volumes, increasing other sources of revenue, such as fee-based revenue or interest income, or both. We may not succeed in sustaining merchant discount rates or offsetting the impact of declining merchant discount rates, particularly in the current regulatory environment, which could materially and adversely affect our revenues and profitability, and therefore our ability to invest in innovation and in value-added services to merchants and Card Members.

 

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An increasing prevalence of surcharging by merchants could materially adversely affect our business and results of operations.

In certain countries, such as Australia and certain Member States in the EU, merchants are permitted by law to surcharge card purchases. The number of countries in the EU that permit surcharging and the potential for selective surcharging of American Express cards only could increase following adoption of new EU-wide regulation, as discussed in “Global Network & Merchant Services — Regulation.” In Australia, we have seen increasing merchant surcharging on American Express cards in certain merchant categories and, in some cases, on a basis that is greater than that applied to cards issued on the bankcard networks, which is known as differential surcharging.

If surcharging becomes widespread, American Express cards and credit and charge cards generally could become less desirable to consumers, which could result in a decrease in cards-in-force and transaction volumes. The impact could vary depending on the manner in which a surcharge is levied and whether surcharges are levied upon all payment cards, whether debit cards are excluded, or whether the amount of the surcharge varies depending on the card, network, acquirer or issuer. Surcharging could have a material adverse effect on our business, financial condition and results of operations, particularly to the extent surcharging disproportionately impacts our Card Members through differential surcharging or otherwise.

If we are not able to invest successfully in, and compete at the leading edge of, technological developments across all our businesses, our revenue and profitability could be negatively affected.

Our industry is subject to rapid and significant technological changes. In order to compete in our industry, we need to continue to invest in business process and technology advances across all areas of our business, including in transaction processing, data management and analysis, customer interactions and communications, alternative payment mechanisms and risk management and compliance systems. Incorporating new technologies into our products and services may require substantial expenditures and take considerable time, and ultimately may not be successful. We expect that new technologies in the payments industry will continue to emerge, and these new technologies may be superior to, or render obsolete, the technologies we currently use in our products and services.

Our success will depend in part on our ability to innovate by offering new payment services products, develop new technologies and adapt to technological changes and evolving industry standards. Consumer and merchant adoption is a key competitive factor and our competitors may develop products, platforms or technologies that become more widely adopted than ours. If we are unable to continue to keep pace with innovation, manage the shift to mobile, device-based and multi-channel commerce, drive adoption of new products and services or improve the quality of the Card Member experience, our business and results of operations could be adversely affected.

Our ability to develop, acquire or access competitive technologies or business processes on acceptable terms may also be limited by intellectual property rights that third parties, including competitors and potential competitors, may assert. In addition, our ability to adopt new technologies may be inhibited by a need for industry-wide standards, a changing legislative and regulatory environment, the need for internal product and engineering expertise, resistance to change from Card Members or merchants, or the complexity of our systems.

We may not be successful in our efforts to promote card usage through our marketing, promotion, merchant acceptance and rewards programs, or to effectively control the costs of such programs, both of which may impact our profitability.

Increasing consumer and business spending on our cards and growing card lending balances depend in part on our ability to develop and issue new or enhanced cards and increase revenues from such products. If customers do not perceive our new offerings as providing significant value, they may fail to accept our new products and services, which would negatively impact our results of operations. Increasing spending on our cards also depends on our continued expansion of merchant acceptance of our cards. If the rate of merchant acceptance growth slows or reverses itself, our business could suffer.

One of the ways in which we attract new Card Members, reduce Card Member attrition and seek to retain or capture a greater share of customers’ total spending is through our Membership Rewards program, as well as other Card Member benefits. Any significant change in, or failure by management to reasonably estimate, actual redemptions of Membership Rewards points and associated redemption costs could adversely affect our profitability. In addition, many credit card issuers have instituted rewards and cobrand programs that are similar to ours, and issuers may in the future institute programs and services that are more attractive than ours.

We have been spending at elevated levels on a number of growth initiatives over the past couple years and expect to continue spending at similar levels in 2016. There can be no assurance that any of our investments to acquire Card Members and increase usage of our cards will be effective. We may not be able to cost-effectively manage and expand Card Member benefits, including containing the growth of marketing, promotion, rewards and Card Member services expenses in the future. If such expenses continue to increase beyond our expectations, we will need to find ways to offset the financial impact by increasing payments volume, increasing other areas of revenues such as fee-based revenues or both. We may not succeed in doing so, particularly in the current regulatory environment.

 

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Our brand and reputation are key assets of our Company, and our business may be affected by how we are perceived in the marketplace.

Our brand and its attributes are key assets of ours, and we believe our continued success depends on our ability to preserve, grow and leverage the value of our brand. Our ability to attract and retain consumer and small business Card Members and corporate clients is highly dependent upon the external perceptions of our level of service, trustworthiness, business practices, merchant acceptance, financial condition and other subjective qualities. Negative perceptions or publicity regarding these matters — even if related to seemingly isolated incidents — could erode trust and confidence and damage our reputation among existing and potential Card Members and corporate clients, which could make it difficult for us to attract new Card Members and customers and maintain existing ones. Negative public opinion could also result from actual or alleged conduct in any number of activities or circumstances, including card practices, regulatory compliance and the use and protection of customer information, and from actions taken by regulators or others in response to such conduct. Social media channels can also cause rapid, widespread reputational harm to our brand.

Our brand and reputation may also be harmed by actions taken by third parties that are outside our control. For example, any shortcoming of a third-party vendor, merchant acquirer or GNS partner may be attributed by Card Members and merchants to us, thus damaging our reputation and brand value. The lack of acceptance or suppression of card usage by merchants can also negatively impact perceptions of our brand and our products, lower overall transaction volume and increase the attractiveness of other payments systems. Adverse developments with respect to our industry may also, by association, negatively impact our reputation, or result in greater regulatory or legislative scrutiny or litigation against us. Furthermore, as a corporation with headquarters and operations located in the United States, a negative perception of the United States arising from its political or other positions could harm the perception of our company and our brand. Although we monitor developments for areas of potential risk to our reputation and brand, negative perceptions or publicity could materially and adversely affect our revenues and profitability.

If we cannot successfully execute on our strategy, our business and financial results may be adversely impacted.

We may not be able to implement important strategic initiatives in accordance with our expectations, which may result in an adverse impact on our business and financial results. These strategic initiatives are designed to improve our results of operations and drive long-term shareholder value, and include:

 

   

Growing our Card Member base and merchant network

 

   

Deepening customer relationships through lending and rewards

 

   

Increasing our international presence

 

   

Growing in commercial payments

 

   

Developing newer, adjacent opportunities like our loyalty coalition business

The process of developing new products and services and enhancing existing products and services is complex, costly and uncertain, and any failure by us to anticipate customers’ changing needs and emerging technological trends accurately could significantly harm our ability to compete effectively. In addition, we may underestimate the time and expense we must invest in new products and services before they generate material revenues, if at all.

Our growth strategy also includes the pursuit of new business opportunities and, potentially, acquisitions. However, we may not be able to take advantage of new business opportunities or to identify and secure future acquisition candidates on terms and conditions that are acceptable to us, which could impair our growth.

We also continue to pursue a disciplined expense-management strategy, although there is no guarantee that we will be able to control the growth of expenses. Expenses incurred in our foreign entities are subject to foreign exchange volatility and may cause our expenses to increase in any particular period even if we otherwise achieve cost savings. In addition, compliance, legal and related costs are difficult to predict or control given the current environment and may vary from period to period. As cybersecurity threats continue to evolve, we have invested and will continue to invest significant additional resources to continue to modify and strengthen our protective security measures, investigate and remediate any vulnerabilities of our information systems and infrastructure and develop new technology to mitigate security risks. If we are unable to successfully manage our expenses, our financial results will be negatively affected.

A significant disruption or breach in the security of our information technology systems or an increase in fraudulent activity using our cards could lead to reputational damage to our brand and significant legal, regulatory and financial exposure and could reduce the use and acceptance of our charge and credit cards.

We and other third parties process, transmit and store account information in connection with our charge and credit cards and prepaid products, and in the normal course of our business, we collect, analyze and retain significant volumes of certain types of personally identifiable and other information pertaining to our customers and employees.

 

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Global financial institutions like us have experienced a significant increase in information security risk in recent years and will likely continue to be the target of increasingly sophisticated cyber-attacks, including computer viruses, malicious or destructive code, social engineering attacks (including phishing), denial of service attacks and security breaches. For example, we and other U.S. financial services providers have been the targets of distributed denial-of-service attacks from sophisticated third parties.

Our networks and systems are subject to constant attempts to identify and exploit potential vulnerabilities in our operating environment with intent to disrupt our business operations and capture various types of information relating to corporate trade secrets, customer information, including Card Member and loyalty program account information, employee information and other sensitive business information. There are a number of motivations for cyber threat actors, including criminal activities such as fraud, identity theft and ransom, corporate or nation-state espionage, public embarrassment with the intent to cause financial or reputational harm, intent to disrupt information technology systems, and to expose and exploit potential security and privacy vulnerabilities in corporate systems and websites. As outsourcing and specialization of functions within the payments industry increase, there are more third parties involved in processing transactions using our cards and there is a risk the confidentiality, privacy and/or security of data held by third parties, including merchants that accept our cards and our business partners, may be compromised, which could lead to unauthorized transactions on our cards and costs associated with responding to the compromise.

We develop and maintain systems and processes aimed at detecting and preventing data breaches and fraudulent activity, which require significant investment, maintenance and ongoing monitoring and updating as technologies and regulatory requirements change and as efforts to overcome security measures become more sophisticated. Despite our efforts, the possibility of data breaches, malicious social engineering and fraudulent or other malicious activities and human error or malfeasance cannot be eliminated entirely, and risks associated with each of these remain, including the unauthorized disclosure, release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information (including account data information), online accounts and systems. These risks will likely evolve as new technology is deployed. For example, with the increased use of EMV technology, we may see a decrease in traditional fraud risk, but sophisticated fraudsters may develop new ways to commit fraud and we may see an increase in online fraud.

Our information technology systems, including our transaction authorization, clearing and settlement systems, and data centers may experience service disruptions or degradation because of technology malfunction, sudden increases in customer transaction volume, natural disasters, accidents, power outages, telecommunications failures, fraud, denial-of-service and other cyber-attacks, terrorism, computer viruses, physical or electronic break-ins, or similar events. Service disruptions could prevent access to our online services and account information, compromise company or customer data, and impede transaction processing and financial reporting. Inadequate infrastructure in lesser developed countries could also result in service disruptions, which could impact our ability to do business in those countries.

If our information technology systems experience a significant disruption or breach or if actual or perceived fraud levels or other illegal activities involving our cards or customer online accounts were to rise due to a data breach at a business partner, merchant or other market participant, employee error, malfeasance or otherwise, it could lead to the loss of data or data integrity, regulatory investigations and intervention (such as mandatory card reissuance), increased litigation (including class action litigation), remediation and response costs, greater concerns of customers and/or business partners relating to the privacy and security of their data, and reputational and financial damage to our brand, which could reduce the use and acceptance of our cards, and have a material adverse impact on our business. If such disruptions or breaches are not detected immediately, their effect could be compounded. Data breaches and other actual or perceived failures to maintain confidentiality, integrity, privacy and/or data protection, including leaked business data, may also disrupt our operations, undermine our competitive advantage through the disclosure of sensitive company information, divert management attention and resources and negatively impact the assessment of us and our subsidiaries by banking regulators and rating agencies.

Successful cyber-attacks or data breaches at other large financial institutions, large retailers or other market participants, whether or not we are impacted, could lead to a general loss of customer confidence that could negatively affect us, including harming the market perception of the effectiveness of our security measures or the financial system in general, which could result in reduced use of our products and services. Although we have insurance for losses related to cyber-risks and attacks and information security and privacy liability, it may not be sufficient to offset the impact of a material loss event.

We face substantial and increasingly intense competition for partner relationships, which could result in a loss or renegotiation of these arrangements that could have a material adverse impact on our business and results of operations.

        In the ordinary course of our business we enter into different types of contractual arrangements with business partners in a variety of industries. For example, we have partnered with Delta Air Lines, as well as many others globally, to offer cobranded cards for consumers and small businesses, and through our Membership Rewards program we have partnered with businesses in many industries, including the airline industry, to offer benefits to Card Member participants. Competition for relationships with key business partners is very intense and there can be no assurance we will be able to grow or maintain these partner relationships. Establishing and retaining attractive cobrand card partnerships is particularly competitive among card issuers and networks as these partnerships typically have high-spending loyal customers. Our entire cobrand portfolio

 

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accounted for approximately 22 percent of our worldwide billed business for the year ended December 31, 2015. Card Member loans held for investment related to our cobrand portfolio accounted for approximately 33 percent of our worldwide Card Member loans held for investment as of December 31, 2015, which do not include Card Member loans related to our cobrand partnerships with Costco Wholesale Corporation in the United States and JetBlue Airways Corporation that were transferred to held for sale on the Consolidated Balance Sheets effective December 1, 2015. See Note 2 to the “Consolidated Financial Statements” for additional information on loans and receivables held for sale.

We face the risk that we could lose partner relationships, even after we have invested significant resources, time and expense in acquiring and developing the relationships. The volume of billed business could decline and Card Member attrition could increase, in each case, significantly as a result of the termination of one or more partnership relationships. In addition, some of our cobrand arrangements provide that, upon expiration or termination, the cobrand partner may purchase or designate a third party to purchase the receivables generated with respect to its program, which could result in a significant decline in our Card Member loans outstanding. For example, we previously announced that our U.S. cobrand relationship with Costco is set to end in 2016 and we expect to sell the outstanding Card Member loans associated with the Costco portfolio. For a discussion on Costco and our expectations regarding the portfolio sale, see “Business Environment” under “MD&A.” In November 2015, Starwood Hotels & Resorts Worldwide, with which we have a cobrand relationship, announced that it agreed to be acquired by Marriott International, which has a cobrand relationship with a competing card issuer.

We also face the risk that existing relationships will be renegotiated with less favorable terms for us as competition for such relationships increases. In 2015, both Card Member rewards expense and cost of Card Member services increased when compared to the prior year, reflecting a portion of the increased costs related to several recently renewed cobrand partnerships.

The loss of business partners (whether by non-renewal at the end of the contract period, such as the end of our relationship with Costco in the United States in 2016, or early termination as the result of a merger or otherwise, such as the withdrawal of American Airlines in 2014 from our Airport Club Access program for Centurion and Platinum Card Members) or the renegotiation of existing relationships with terms that are significantly worse for us could have a material adverse impact on our business and results of operations. In addition, any publicity associated with the loss of any of our key business partners could harm our reputation, making it more difficult to attract and retain Card Members and merchants, and could lessen our negotiating power with our remaining and prospective business partners.

We have agreements with business partners in a variety of industries, including the airline industry, that represent a significant portion of our business. We are exposed to risks associated with these industries, including bankruptcies, liquidations, restructurings, consolidations and alliances of our partners, and the possible obligation to make payments to our partners.

We may be obligated to make or accelerate payments to certain business partners such as cobrand partners and merchants upon the occurrence of certain triggering events such as: (i) our filing for bankruptcy, (ii) our economic condition deteriorating such that our senior unsecured debt rating is downgraded significantly below investment grade by S&P and Moody’s, (iii) our ceasing to have a public debt rating, or (iv) a shortfall in certain performance levels. If we are not able to effectively manage these triggering events, we could unexpectedly have to make payments to these partners, which could have a negative effect on our financial condition and results of operations.

Similarly, we have credit risk to certain cobrand partners relating to our prepayments for loyalty program points that may not be fully redeemed. We are also exposed to risk from bankruptcies, liquidations, insolvencies, financial distress, restructurings, consolidations and other similar events that may occur in any industry representing a significant portion of our billed business, which could negatively impact particular card products and services (and billed business generally) and our financial condition and results of operations. For example, we could be materially impacted if we were obligated to or elected to reimburse Card Members for products and services purchased from merchants that have ceased operations or stopped accepting our cards.

The airline industry, which represents a significant portion of our billed business, has undergone bankruptcies, restructurings, consolidations and other similar events in the past. The airline industry accounted for approximately eight percent of our worldwide billed business for the year ended December 31, 2015. Our largest airline cobrand portfolio, American Express’ Delta SkyMiles, accounted for approximately six percent of our worldwide billed business for the year ended December 31, 2015 and approximately 20 percent of worldwide Card Member loans held for investment as of December 31, 2015. We have credit risk to the airline industry to the extent we protect Card Members against non-delivery of goods and services, such as where we have remitted payment to an airline for a Card Member purchase of tickets that have not yet been used or “flown.” If we are unable to collect the amount from the airline, we will bear the loss for the amount credited to the Card Member.

For additional information relating to the general risks related to the airline industry, see “Risk Management — Institutional Credit Risk — Exposure to the Airline Industry” under “MD&A.”

 

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We may not be successful in realizing the benefits associated with our strategic alliances, joint ventures and investment activity, and our business and reputation could be negatively impacted.

Joint ventures and minority investments inherently involve a lesser degree of control over business operations, thereby potentially increasing the financial, legal, operational and/or compliance risks associated with the joint venture or minority investment. In addition, we may be dependent on joint venture partners, controlling shareholders or management who may have business interests, strategies or goals that are inconsistent with ours. Business decisions or other actions or omissions of the joint venture partner, controlling shareholders or management may adversely affect the value of our investment, result in litigation or regulatory action against us and otherwise damage our reputation and brand.

As discussed in “Global Commercial Services,” we created a joint venture for our Global Business Travel operations in 2014. There can be no assurance that we will be able to realize the underlying assumptions related to the joint venture transaction, including accelerating the transformation and growth of the corporate travel business, creating additional investment capacity and enhancing its suite of products and services. We and the GBT JV face the risk of potential loss of key customers, vendors and other key business partners as a result of the joint venture transaction. Our failure to address these risks or other problems encountered in connection with the joint venture transaction could cause us to fail to realize the anticipated benefits of the transaction, incur unanticipated liabilities and adversely affect our operations.

We rely on third-party providers of various computer systems, platforms and other services integral to the operations of our businesses. These third parties may act in ways that could harm our business.

We rely on third-party service providers, merchants, processors, aggregators, GNS partners and other third parties for services that are integral to our operations, including the timely transmission of accurate information across our global network. If a service provider or other third party fails to provide the data quality, communications capacity or services we require, as a result of natural disaster, operational disruptions, terrorism, hacking or other cybersecurity incidents or any other reason, the failure could interrupt or compromise the quality of our services to customers.

We are subject to the risk that activities of our third-party service providers may adversely affect our business. A failure to exercise adequate oversight over third-party service providers, including compliance with service level agreements or regulatory or legal requirements, could result in regulatory actions, fines, sanctions or economic and reputational harm to us. There is also a risk the confidentiality, integrity, privacy and/or security of data held by third parties or communicated over third-party networks or platforms could become compromised, which could significantly harm our business even if the attack or breach does not impact our systems. In addition, the management of multiple third-party vendors increases our operational complexity and decreases our control. It is also possible that the cost efficiencies of certain outsourcings will decrease as the demand for these services increases around the world.

Our business is subject to the effects of geopolitical events, weather, natural disasters and other conditions.

Geopolitical events, terrorist attacks, natural disasters, severe weather conditions, floods, health pandemics, intrusion into or degradation of our infrastructure by hackers and other catastrophic events can have a negative effect on our business. Because of our proximity to the World Trade Center, our headquarters were damaged as a result of the terrorist attacks of September 11, 2001. Similar events or other disasters or catastrophic events in the future and events impacting other sectors of the economy, including the telecommunications and energy sectors, could have a negative effect on our businesses and infrastructure, including our information technology systems. Because we derive a portion of our revenues from travel-related spending, our business will be sensitive to safety concerns, and thus is likely to decline during periods in which travelers become concerned about safety issues or when travel might involve health-related risks. In addition, disruptions in air travel and other forms of travel caused by such events can result in the payment of claims under travel interruption insurance policies that we offer and, if such disruptions to travel are prolonged, they can materially adversely affect overall travel-related spending. If the conditions described above (or similar ones) result in widespread or lengthy disruptions to travel, they could have a material adverse effect on our results of operations. Card Member spending may also be negatively impacted in areas affected by natural disasters or other catastrophic events. The impact of such events on the overall economy may also adversely affect our financial condition or results of operations.

Our success is dependent, in part, upon our executive officers and other key personnel, and the loss of key personnel could materially adversely affect our business.

Our success depends, in part, on our executive officers and other key personnel. Our senior management team has significant industry experience and would be difficult to replace. The market for qualified individuals is highly competitive, and we may not be able to attract and retain qualified personnel or candidates to replace or succeed members of our senior management team or other key personnel. As further described in “Supervision and Regulation — Compensation Practices,” our compensation practices are subject to review and oversight by the Federal Reserve and the compensation practices of our U.S. bank subsidiaries are subject to review and oversight by the FDIC and the OCC. Regulatory review and oversight could further affect our ability to attract and retain our executive officers and other key personnel. The loss of key personnel could materially adversely affect our business.

 

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Legal, Regulatory and Compliance Risks

Ongoing legal proceedings regarding provisions in our merchant contracts could have a material adverse effect on our business, result in additional litigation and/or arbitrations, subject us to substantial monetary damages and damage our reputation and brand.

The DOJ and certain states’ attorneys general brought an action against us alleging that the provisions in our card acceptance agreements with merchants that prohibit merchants from discriminating against our card products at the point of sale violate the U.S. antitrust laws. Visa and MasterCard, which were also defendants in the DOJ and state action, entered into a settlement agreement and have been dismissed as parties pursuant to that agreement, which was approved by the court. The settlement enjoins Visa and MasterCard from entering into contracts that prohibit merchants from engaging in various actions to steer cardholders to other card products or payment forms at the point of sale. On February 19, 2015, the trial court found that the challenged provisions in American Express card acceptance agreements were anticompetitive and on April 30, 2015 issued a final judgment prohibiting us from enforcing certain elements of such provisions. We appealed this judgment and on December 18, 2015, the Court of Appeals for the Second Circuit stayed the trial court’s judgment pending the issuance of its appellate decision. We are also a defendant in a number of actions and arbitration proceedings, including proposed class actions, filed by merchants that challenge the non-discrimination and honor-all-cards provisions in our card acceptance agreements and seek damages. A description of these legal proceedings is contained in “Legal Proceedings.”

An adverse outcome in these proceedings against us (including an adverse final judgment following appeal in the DOJ and state action) could have a material adverse effect on our business and results of operations, require us to change our merchant agreements in a way that could expose our cards to increased merchant steering and other forms of discrimination that could impair the Card Member experience, result in additional litigation and/or arbitrations, impose substantial monetary damages and damage our reputation and brand. Even if we were not required to change our merchant agreements, changes in Visa’s and MasterCard’s policies or practices as a result of legal proceedings, lawsuit settlements or regulatory actions could result in changes to our business practices and materially and adversely impact our profitability.

Our business is subject to significant and extensive government regulation and supervision, which could adversely affect our results of operations and financial condition.

We are subject to extensive government regulation and supervision in jurisdictions around the world. The current environment of additional regulation, enhanced supervision efforts and increased and unpredictable regulatory investigations and enforcement is likely to continue to result in changes to our business practices, products and procedures, increased costs (including increased compliance costs), and potentially additional penalties and/or restitution payments to Card Members. In addition, new laws or regulations or changes in the enforcement of existing laws or regulations applicable to our businesses could impact the profitability of our business activities, limit our ability to pursue business opportunities or adopt new technologies, require us to change certain of our business practices or alter our relationships with partners, merchants and Card Members, or affect retention of our key personnel. Such changes also may require us to invest significant management attention and resources to make any necessary changes and could adversely affect our results of operations and financial condition.

If we fail to satisfy regulatory requirements to maintain our financial holding company status, our financial condition and results of operations could be adversely affected, and we may be restricted in our ability to take certain capital actions (such as declaring dividends or repurchasing outstanding shares) or engage in certain activities or acquisitions. Additionally, our banking regulators have wide discretion in the examination and the enforcement of applicable banking statutes and regulations and may restrict our ability to engage in certain activities or acquisitions or require us to maintain more capital.

In recent years, legislators and regulators have focused on the operation of card networks, including interchange fees paid to card issuers in payment networks such as Visa and MasterCard and the fees merchants are charged to accept cards. Fee regulation can significantly negatively impact the discount revenue derived from our business, including as a result of downward pressure on our discount rate from decreases in competitor pricing in connection with caps on interchange fees. In some cases, such regulation extends to certain aspects of our business, for example, GNS or cobrand arrangements or terms of card acceptance for merchants, including terms relating to non-discrimination and honor-all-cards. We have brought a legal challenge and seek a ruling from the EU Court of Justice to invalidate the application of price caps in circumstances where three-party networks issue cards with a cobrand partner. There can be no assurance that our legal challenge will be successful. For a description of certain regulations and their impact on us, see “Global Network & Merchant Services — Regulation.” Legislators and regulators around the world are aware of each other’s approaches to the regulation of the payments industry. Consequently, a development in one country, state or region may influence regulatory approaches in another.

We are subject to certain provisions of the Bank Secrecy Act, as amended by the Patriot Act, with regard to maintaining effective AML programs. Increased regulatory focus in this area could result in additional obligations or restrictions with respect to the types of products and services we may offer to consumers, the countries in which our cards may be used, and the types of customers and merchants who can obtain or accept our cards. Activity such as money laundering or terrorist financing involving our cards could result in enforcement action, and our reputation may

 

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suffer due to our customers’ association with certain countries, persons or entities or the existence of any such transactions. In addition, Member States of the European Economic Area have implemented the PSD for electronic payment services that put in place a common legal framework for licensing and supervision of payment services providers, including card issuers and merchant acquirers, and for their conduct of business. Complying with these and other regulations increases our costs and could reduce our revenue opportunities.

Various regulatory agencies and legislatures are also considering regulations and legislation covering identity theft, account management guidelines, credit bureau reporting, disclosure rules, security and marketing that would impact us directly, in part due to increased scrutiny of our underwriting and account management standards. These new requirements may restrict our ability to issue charge and credit cards or partner with other financial institutions, which could adversely affect our revenue growth.

See “Supervision and Regulation” for more information about the material laws and regulations to which we are subject.

Litigation and regulatory actions could subject us to significant fines, penalties, judgments and/or requirements resulting in significantly increased expenses, damage to our reputation and/or a material adverse effect on our business.

Businesses in the financial services and payments industries have historically been subject to significant legal actions, including class action lawsuits. Many of these actions have included claims for substantial compensatory or punitive damages. While we have historically relied on our arbitration clause in agreements with customers to limit our exposure to class action litigation, there can be no assurance that we will continue to be successful in enforcing our arbitration clause in the future. On October 7, 2015, the CFPB announced a proposal that would, among other changes, require that our consumer arbitration clause not apply to cases filed in court as class actions, unless and until class certification is denied or the class claims are dismissed. This proposal is the beginning of a rulemaking process that may not result in a final rule, if any, becoming effective before 2018. The continued focus of merchants on issues relating to the acceptance of various forms of payment may lead to additional litigation and other legal actions. Given the inherent uncertainties involved in litigation, and the very large or indeterminate damages sought in some matters asserted against us, there is significant uncertainty as to the ultimate liability we may incur from litigation matters.

We have been subject to regulatory actions by the CFPB and other regulators and may continue to be involved in such actions, including governmental inquiries, investigations and enforcement proceedings, in the event of noncompliance or alleged noncompliance with laws or regulations. Regulatory action could subject us to significant fines, penalties or other requirements resulting in increased expenses, limitations or conditions on our business activities, and damage to our reputation and our brand, which could adversely affect our results of operations and financial condition. The recent trend towards larger settlement amounts could lead to more adverse outcomes in any enforcement actions against us in the future. We expect that regulators will continue taking formal enforcement actions against financial institutions in addition to addressing supervisory concerns through non-public supervisory actions or findings, which could involve restrictions on our activities, among other limitations that could adversely affect our business.

We are subject to capital adequacy and liquidity rules, and if we fail to meet these rules, our business would be adversely affected.

Failure to meet current or future capital or liquidity requirements, including those imposed by the New Capital Rules, the LCR or by regulators in implementing other portions of the Basel III framework, could compromise our competitive position and could result in restrictions imposed by the Federal Reserve, including limiting our ability to pay common stock dividends, repurchase our common stock, invest in our business, expand our business or engage in acquisitions.

There continues to be substantial uncertainty regarding significant portions of the capital and liquidity regime that will apply to us and our U.S. bank subsidiaries. As a result, the ultimate impact on our long-term capital and liquidity planning and our results of operations is not certain, although an increase in our capital and liquid asset levels could lower our return on equity.

The capital requirements applicable to the Company as a bank holding company and our U.S. bank subsidiaries have been substantially revised to implement the international Basel III framework and are in the process of being phased-in. Once these revisions are fully phased-in, the Company and our U.S. bank subsidiaries will be required to satisfy more stringent capital adequacy standards than in the past. As part of our required stress testing, both internally and by the Federal Reserve, we must continue to comply with applicable capital standards in the adverse and severely adverse economic scenarios published by the Federal Reserve each year. To satisfy these requirements, it may be necessary for us to hold additional capital in excess of that required by the New Capital Rules as they are phased-in.

        Compliance with capital adequacy and liquidity rules, including the New Capital Rules and the LCR, will require a material investment of resources. An inability to meet regulatory expectations regarding our compliance with applicable capital adequacy and liquidity rules may also negatively impact the assessment of the Company and our U.S. bank subsidiaries by federal banking regulators.

We continue to progress through the parallel run phase of Basel III advanced approaches implementation. Depending on how the advanced approaches are ultimately implemented for our asset types, our capital ratios

 

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calculated under the advanced approaches may be lower than under the standardized approach. In such a case, we may need to hold significantly more regulatory capital in order to maintain a given capital ratio.

There are several recent proposals or potential proposals that could significantly impact the regulatory capital standards and requirements applicable to financial institutions such as the Company and our U.S. bank subsidiaries, as well as our ability to meet these requirements. The Basel Committee has adopted a framework that would impose a capital buffer on certain banks that may have an important impact on their domestic economies (so-called “domestic systemically important banks,” or “D-SIBs”). Additionally, the Basel Committee has proposed a series of revisions to the standardized approach for credit and operational risk capital requirements. If these or other proposals are adopted in the United States and applied to advanced approaches institutions, we could be required to hold significantly more capital.

For more information on capital adequacy requirements, see “Capital Adequacy” and “Liquidity Regulation” under “Supervision and Regulation.”

We are subject to restrictions that limit our ability to pay dividends and repurchase our capital stock. Our subsidiaries are also subject to restrictions that limit their ability to pay dividends to us, which may adversely affect our liquidity.

We are limited in our ability to pay dividends and repurchase capital stock by our regulators who have broad authority to prohibit any action that would be considered an unsafe or unsound banking practice. For example, we are subject to a requirement to submit capital plans that include, among other things, projected dividend payments and repurchases of capital stock to the Federal Reserve for review. As part of the capital planning and stress testing process, our proposed capital actions are assessed against our ability to satisfy applicable capital requirements in the event of a stressed market environment. If our capital plan is not approved for any reason or if we fail to satisfy applicable capital requirements, our ability to undertake capital actions may be restricted. A failure to increase dividends along with our competitors, or any reduction of, or elimination of, our common stock dividend or share repurchase program would likely adversely affect the market price of our common stock and market perceptions of American Express.

Our ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of our common stock will be prohibited, subject to certain exceptions, in the event that we do not declare and pay in full dividends for the last preceding dividend period of our Series B and Series C preferred stock.

American Express Company relies on dividends from its subsidiaries for liquidity, and federal and state law limit the amount of dividends that our subsidiaries may pay to the parent company. In particular, our U.S. bank subsidiaries are subject to various statutory and regulatory limitations on their declaration and payment of dividends. These limitations may hinder our ability to access funds we may need to make payments on our obligations, make dividend payments on outstanding American Express Company capital stock or otherwise achieve strategic objectives.

For more information on bank holding company and depository institution dividend restrictions, see “Dividends” under “Supervision and Regulation,” as well as “Consolidated Capital Resources and Liquidity — Share Repurchases and Dividends” under “MD&A” and Note 23 to our Consolidated Financial Statements.

Regulation in the areas of privacy, data protection and information security could increase our costs and affect or limit our business opportunities and how we collect and/or use personal information.

As privacy, data protection and information security laws are interpreted and applied, compliance costs may increase, particularly in the context of ensuring that adequate data protection and data transfer mechanisms are in place. In recent years, there has been increasing regulatory enforcement and litigation activity in the areas of privacy, data protection and information security in the United States and in various countries in which we operate.

In addition, legislators and/or regulators in the United States and other countries in which we operate are increasingly adopting or revising privacy, data protection and information security laws that potentially could have significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer and/or employee information, and some of our current or planned business activities. New legislation or regulation could increase our costs of compliance and business operations and could reduce revenues from certain business initiatives. Moreover, the application of existing or new laws to existing technology and practices can be uncertain and may lead to additional compliance risk and cost.

Compliance with current or future privacy, data protection and information security laws relating to customer and/or employee data could result in higher compliance and technology costs and could restrict our ability to fully maximize our closed-loop capability or provide certain products and services, which could materially and adversely affect our profitability. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory and/or governmental investigations and/or actions, litigation, fines, sanctions, ongoing regulatory monitoring, customer attrition, decreases in the use or acceptance of our cards and damage to our reputation and our brand.

 

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We may not be able to effectively manage the operational and compliance risks to which we are exposed.

We consider operational risk to be the risk of not achieving business objectives due to inadequate or failed processes or information systems, poor data quality, human error or the external environment (i.e., natural disasters). Operational risk includes, among others, the risk that employee error or intentional misconduct could result in a material financial misstatement; a failure to monitor a third party’s compliance with a service level agreement or regulatory or legal requirements; or a failure to adequately monitor and control access to data in our systems we grant to third-party service providers. As processes are changed, or new products and services are introduced, we may not fully appreciate or identify new operational risks that may arise from such changes. Compliance risk arises from the failure to adhere to applicable laws, rules, regulations and internal policies and procedures. Operational and compliance risks can expose us to reputational risks as well as fines, civil money penalties or payment of damages and can lead to diminished business opportunities and diminished ability to expand key operations.

If we are not able to protect our intellectual property, our revenue and profitability could be negatively affected.

We rely on a variety of measures to protect our intellectual property and proprietary information, including copyrights, trademarks, patents and controls on access and distribution. These measures may not prevent misappropriation of our proprietary information or infringement of our intellectual property rights and a resulting loss of competitive advantage. In addition, competitors or other third parties may allege that our systems, processes or technologies infringe on their intellectual property rights. Given the complex, rapidly changing and competitive technological and business environment in which we operate, and the potential risks and uncertainties of intellectual property-related litigation, a future assertion of an infringement claim against us could cause us to lose significant revenues, incur significant license, royalty or technology development expenses, or pay significant monetary damages.

Tax legislative initiatives or assessments by governmental authorities could adversely affect our results of operations and financial condition.

We are subject to income and other taxes in the United States and in various foreign jurisdictions. The laws and regulations related to tax matters are extremely complex and subject to varying interpretations. Although management believes our positions are reasonable, we are subject to audit by the Internal Revenue Service and by tax authorities in all the jurisdictions in which we conduct business operations. These tax authorities may challenge our positions or apply existing laws and regulations more broadly, which may potentially result in a significant increase in liabilities for taxes and interest in excess of accrued liabilities.

New tax legislative initiatives may be proposed from time to time, such as proposals for comprehensive tax reform in the United States, which may impact our effective tax rate and could adversely affect our tax positions or tax liabilities. In addition, unilateral or multi-jurisdictional actions by various tax authorities, including an increase in tax audit activity, to address “base erosion and profit shifting” by multinational companies could also have an adverse impact on our tax liabilities.

Credit, Liquidity and Market Risks

Our risk management policies and procedures may not be effective.

Our risk management framework seeks to identify and mitigate risk and appropriately balance risk and return. We have established policies and procedures intended to identify, monitor and manage the types of risk to which we are subject, including credit risk, market risk, asset liability risk, liquidity risk, operational risk, compliance risk, model risk and reputational risk. See “Risk Management” under “MD&A” for a discussion of the policies and procedures we use to identify, monitor and manage the risks we assume in conducting our businesses. Although we have devoted significant resources to develop our risk management policies and procedures and expect to continue to do so in the future, these policies and procedures, as well as our risk management techniques such as our hedging strategies, may not be fully effective. There may also be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated. As regulations and markets in which we operate continue to evolve, our risk management framework may not always keep sufficient pace with those changes. If our risk management framework does not effectively identify or mitigate our risks, we could suffer unexpected losses and could be materially adversely affected.

Management of our risks in some cases depends upon the use of analytical and/or forecasting models. Although we have a governance framework for model development and independent model validation, the modeling methodology could be erroneous or the models could be misused. If our decisions are based on incorrect or misused model outputs and reports, we may face adverse consequences, such as financial loss, poor business and strategic decision-making, or damage to our reputation. In addition, some decisions our regulators make, including those related to our capital distribution plans, may be adversely impacted if they perceive the quality of our models to be insufficient.

 

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We may not be able to effectively manage credit risk related to consumer debt, business loans, settlement with GNS partners, merchant and consumer bankruptcies, delinquencies and other credit trends that can affect spending on card products, debt payments by individual and corporate customers and businesses that accept our card products, which could have a material adverse effect on our results of operations and financial condition.

We are exposed to both individual credit risk, principally from consumer and small business Card Member receivables and loans, and institutional credit risk from merchants, GNS partners, GCS clients, Plenti partners and treasury and investment counterparties. Third parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. Country, regional and political risks can contribute to credit risk. Our ability to assess creditworthiness may be impaired if the criteria or models we use to manage our credit risk become less predictive of future losses, which could cause our losses to rise and have a negative impact on our results of operations. Rising delinquencies and rising rates of bankruptcy are often precursors of future write-offs and may require us to increase our reserve for loan losses. After write-off and delinquency rates reached historical lows, they have recently leveled out and begun to increase in line with our expectations. Higher write-off rates and an increase in our reserve for loan losses adversely affect our profitability and the performance of our securitizations, and may increase our cost of funds. In addition, our ability to recover amounts that we have previously written off may be limited, which could have a negative impact on our revenues.

Although we make estimates to provide for credit losses in our outstanding portfolio of loans and receivables, these estimates may not be accurate. In addition, the information we use in managing our credit risk may be inaccurate or incomplete. Although we regularly review our credit exposure to specific clients and counterparties and to specific industries, countries and regions that we believe may present credit concerns, default risk may arise from events or circumstances that are difficult to foresee or detect, such as fraud. We may also fail to receive full information with respect to the credit risks of our customers. In addition, our ability to manage credit risk may be adversely affected by legal or regulatory changes (such as bankruptcy laws and minimum payment regulations). Increased credit risk, whether resulting from underestimating the credit losses inherent in our portfolio of loans and receivables, deteriorating economic conditions, changes in our mix of business or otherwise, could require us to increase our provision for losses and could have a material adverse effect on our results of operations and financial condition.

Adverse financial market conditions may significantly affect our ability to meet liquidity needs, access to capital and cost of capital.

We need liquidity to pay merchants, operating and other expenses, interest on debt and dividends on capital stock and to repay maturing liabilities. If we are unsuccessful in managing our liquidity risk, we may maintain too much liquidity, which can be costly and limit financial flexibility; or we may be too illiquid, which could limit our investments in growth opportunities, curtail operations or result in financial distress during a liquidity event.

The principal sources of our liquidity are payments from Card Members and merchants, cash flow from our investment portfolio and assets, consisting mainly of cash or assets that are readily convertible into cash, direct and third-party sourced deposits, debt instruments such as unsecured medium- and long-term notes and asset securitizations, securitized borrowings through our secured financing facilities, the Federal Reserve discount window and long-term committed bank borrowing facilities.

Our ability to obtain financing in the debt capital markets for unsecured term debt and asset securitizations is dependent on investor demand. Disruptions, uncertainty or volatility across the financial markets could negatively impact market liquidity and limit our access to capital required to operate our business. Such market conditions may limit our ability to replace, in a timely manner, maturing liabilities, satisfy regulatory capital requirements and access the capital necessary to grow our business. As such, we may be forced to delay raising capital or bear an unattractive cost to raise capital, which could decrease profitability and significantly reduce financial flexibility. Market disruption and volatility could have an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

For a further discussion of our liquidity and funding needs, see “Consolidated Capital Resources and Liquidity — Funding Programs and Activities” under “MD&A.”

Any reduction in our and our subsidiaries’ credit ratings could increase the cost of our funding from, and restrict our access to, the capital markets and have a material adverse effect on our results of operations and financial condition.

Rating agencies regularly evaluate us and our subsidiaries, and their ratings of our and our subsidiaries’ long-term and short-term debt are based on a number of factors, including financial strength as well as factors not within our control, including conditions affecting the financial services industry generally, and the wider state of the economy. Our and our subsidiaries’ ratings could be downgraded at any time and without any notice by any of the rating agencies, which could, among other things, adversely limit our access to the capital markets and adversely affect the cost and other terms upon which we and our subsidiaries are able to obtain funding.

 

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Adverse currency fluctuations and foreign exchange controls could decrease earnings we receive from our international operations and impact our capital.

During 2015, approximately 24 percent of our total revenues net of interest expense were generated from activities outside the United States. We are exposed to foreign exchange risk from our international operations, and accordingly the revenue we generate outside the United States is subject to unpredictable fluctuations if the values of other currencies change relative to the U.S. dollar, which could have a material adverse effect on our results of operations. For the year ended December 31, 2015, foreign currency movements relative to the U.S. dollar negatively impacted our net revenues of $32.8 billion by approximately $1.3 billion as the U.S. dollar strengthened against many currencies over the course of the year.

We may become subject to exchange control regulations that might restrict or prohibit the conversion of other currencies into U.S. dollars. Political and economic conditions in other countries could also impact the availability of foreign exchange for the payment by the local card issuer of obligations arising out of local Card Members’ spending outside such country and for the payment of card bills by Card Members who are billed in a currency other than their local currency. Substantial and sudden devaluation of local Card Members’ currency can also affect their ability to make payments to the local issuer of the card in connection with spending outside the local country. The occurrence of any of these circumstances could further impact our result of operations.

Interest rate increases could materially adversely affect our earnings.

Interest rates have remained at historically low levels for a prolonged period of time and we expect interest rates to rise in the future. If the rate of interest we pay on our borrowings increases more than the rate of interest we earn on our loans, our net interest yield, and consequently our net income, could fall. Our interest expense was approximately $1.6 billion for the year ended December 31, 2015. A hypothetical 1.0 percent increase in interest rates would have resulted in a decrease to our annual net interest income of approximately $216 million as of December 31, 2015. In addition, interest rate changes may affect customer behavior, such as impacting the loan balance amounts Card Members carry on their credit cards or their ability to make payments as higher interest rates lead to higher payment requirements, further impacting our results of operations.

For a further discussion of our interest rate risk, see “Risk Management — Market Risk Management Process” under “MD&A.”

The value of our assets or liabilities may be adversely impacted by economic, political or market conditions.

Market risk represents the loss in value of portfolios and financial instruments due to adverse changes in market variables, which could negatively impact our financial condition. We held approximately $3.8 billion of investment securities as of December 31, 2015. In the event that actual default rates of these investment securities were to significantly change from historical patterns due to challenges in the economy or otherwise, it could have a material adverse impact on the value of our investment portfolio. Defaults or economic disruptions, even in countries or territories in which we do not have material investment exposure, conduct business or have operations, could adversely affect us.

An inability to accept or maintain deposits due to market demand or regulatory constraints could materially adversely affect our liquidity position and our ability to fund our business.

As a source of funding, our U.S. bank subsidiaries accept deposits from individuals through third-party brokerage networks as well as directly from consumers through American Express Personal Savings. As of December 31, 2015, we had approximately $54.1 billion in total U.S. retail deposits. We face strong competition in the deposit markets, particularly as to brokerage networks. Aggressive pricing throughout the industry may adversely affect our retention of existing balances and the cost-efficient acquisition of new deposit funds. If we are required to offer higher interest rates to attract or maintain deposits, our funding costs will be adversely impacted. Customers could also close their accounts or reduce balances in favor of products and services offered by competitors for reasons other than price, including general dissatisfaction with our products or services and concerns over online security or our reputation.

Our ability to obtain deposit funding and offer competitive interest rates on deposits is also dependent on capital levels of our U.S. bank subsidiaries. The FDIA in certain circumstances prohibits banks, including Centurion Bank and American Express Bank, from accepting brokered deposits and applies other restrictions, such as a cap on interest rates we may pay. See “Prompt Corrective Action” under “Regulation and Supervision” for additional information. A significant amount of our outstanding U.S. retail deposits has been raised through third-party brokerage networks, and such deposits are considered brokered deposits for bank regulatory purposes.

While Centurion Bank and American Express Bank were considered “well capitalized” as of December 31, 2015 and had no restrictions regarding acceptance of brokered deposits or setting of interest rates, there can be no assurance they will continue to meet this definition. The New Capital Rules, when fully phased in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common

 

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equity. Additionally, our regulators can adjust the requirements to be “well capitalized” at any time and have authority to place limitations on our deposit businesses, including the interest rate we pay on deposits. An inability to attract or maintain deposits in the future could materially adversely affect our liquidity position and our ability to fund our business.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

 

ITEM 2. PROPERTIES

Our principal executive offices are in a 51-story, 2.2 million square foot building located in lower Manhattan on land leased from the Battery Park City Authority for a term expiring in 2069. We have an approximately 49 percent ownership interest in the building and an affiliate of Brookfield Financial Properties owns the remaining approximately 51 percent interest in the building. We also lease space in the building from Brookfield’s affiliate.

Other owned or leased principal locations include American Express offices in Fort Lauderdale, Florida, Phoenix, Arizona, Salt Lake City, Utah, Mexico City, Mexico, Sydney, Australia, Singapore, Gurgaon, India, Manila, Philippines, and Brighton, England; the American Express data centers in Phoenix, Arizona and Greensboro, North Carolina; the headquarters for American Express Services Europe Limited in London, England; and the Amex Bank of Canada and Amex Canada Inc. headquarters in Toronto, Ontario, Canada. We own 40 acres of developable land in Sunrise, Florida, on which we are constructing our new South Florida Campus.

Generally, we lease the premises we occupy in other locations. We believe the facilities we own or occupy suit our needs and are well maintained.

 

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of business, we and our subsidiaries are subject to various claims, investigations, examinations, pending and potential legal actions, and other matters relating to compliance with laws and regulations (collectively, “legal proceedings”). We believe we have meritorious defenses to each of these legal proceedings and intend to defend them vigorously. Some of these proceedings are at preliminary stages and seek an indeterminate amount of damages.

We believe we are not a party to, nor are any of our properties the subject of, any legal proceeding that would have a material adverse effect on our consolidated financial condition or liquidity. However, in light of the uncertainties involved in such matters, it is possible that the outcome of legal proceedings, including the possible resolution of merchant claims described later in this section, could have a material impact on our results of operations. In addition, it is possible that significantly increased merchant steering or other actions impairing the Card Member experience as a result of the DOJ case described later in this section could have a material adverse effect on our business. Certain legal proceedings involving us or our subsidiaries are described below.

For those legal proceedings described in this section where a loss is reasonably possible in future periods, whether in excess of a related reserve for legal contingencies or where there is no such reserve, and for which we are able to estimate a range of possible loss, the current estimated range is zero to $350 million in excess of any reserves related to those matters. This range represents our estimate based on currently available information and does not represent our maximum loss exposure; actual results may vary significantly. As such proceedings evolve, including the merchant claims, we may need to increase our range of possible loss or reserves for legal contingencies. For additional information, see Note 13 to our Consolidated Financial Statements.

Antitrust Matters

In 2010, the DOJ, along with Attorneys General from Arizona, Connecticut, Hawaii (Hawaii has since withdrawn its claim), Idaho, Illinois, Iowa, Maryland, Michigan, Missouri, Montana, Nebraska, New Hampshire, Ohio, Rhode Island, Tennessee, Texas, Utah and Vermont filed a complaint in the U.S. District Court for the Eastern District of New York against us, MasterCard International Incorporated and Visa, Inc., alleging a violation of Section 1 of the Sherman Antitrust Act (the “DOJ case”). The complaint included allegations that provisions in our merchant agreements prohibiting merchants from steering a customer to use another network’s card or another type of general-purpose card (“anti-steering” and “non-discrimination” contractual provisions) violate the antitrust laws. The complaint sought a judgment permanently enjoining us from enforcing our non-discrimination contractual provisions. The complaint did not seek monetary damages.

 

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Following a non-jury trial in the DOJ case, the trial court found that the challenged provisions were anticompetitive and on April 30, 2015, the court issued a final judgment entering a permanent injunction. Following our appeal of this judgment, on December 18, 2015, the Court of Appeals for the Second Circuit stayed the trial court’s judgment as well as related matters before the trial court pending the issuance of its appellate decision.

In addition to the DOJ case, individual merchant cases and a putative class action, collectively captioned In re: American Express Anti-Steering Rules Antitrust Litigation (II), are pending in the Eastern District of New York against us alleging that our anti-steering provisions in merchant card acceptance agreements violate U.S. antitrust laws. The individual merchant cases seek damages in unspecified amounts and injunctive relief. These matters, including a trial previously scheduled in the individual merchant cases, have been stayed pending resolution of the appeal in the DOJ case.

Individual merchants have initiated arbitration proceedings raising similar claims concerning the anti-steering provisions in our card acceptance agreements and seeking damages. We are vigorously defending against those claims.

In July 2004, we were named as a defendant in another putative class action filed in the Southern District of New York and subsequently transferred to the Eastern District of New York, captioned The Marcus Corporation v. American Express Company, et al., in which the plaintiffs allege an unlawful antitrust tying arrangement between certain of our charge cards and credit cards in violation of various state and federal laws. The plaintiffs in this action seek injunctive relief and an unspecified amount of damages. In December 2013, we announced a proposed settlement of the Marcus case and the putative class action challenging our anti-steering provisions. The settlement, which provides for certain injunctive relief for the proposed classes, received preliminary approval in the United States District Court for the Eastern District of New York. On August 4, 2015, the court denied final approval of the settlement; further proceedings are anticipated after resolution of the appeal in the DOJ case.

On March 20, 2015, a shareholder derivative action captioned Lankford v. Chenault, et al., and American Express Co. was filed in New York State Supreme Court, New York County. The defendants include current and former Company executives, current and former members of the Company’s Board of Directors and the Company itself, as a nominal defendant. No demand preceded the filing of the complaint. The complaint alleges that the defendants permitted and/or caused the Company to violate the antitrust laws through inclusion of its non-discrimination provisions in merchant contracts, which led to the recent negative result in the DOJ case discussed above. Based on those allegations, the complaint further alleges: breach of fiduciary duties by disseminating false and misleading information in our SEC filings and other public statements; failure to maintain internal controls, and failure to properly oversee and manage the Company; unjust enrichment; abuse of control; and gross mismanagement. The amount of purported damages is unspecified in the complaint. On October 29, 2015, the court dismissed the action with prejudice; the plaintiff has filed a notice of appeal.

On November 6, 2015, a putative representative action, captioned People of the State of California, ex. rel. Dennis Herrera v. American Express Co. et al., was filed in California state court on behalf of the People of California by the San Francisco City Attorney for the benefit of California merchants that accept American Express cards. The complaint alleges that certain terms in our merchant agreements violate California law and seeks relief in the form of: (1) a declaratory judgment; (2) an injunction preventing us from enforcing those terms; (3) statutory civil penalties in an amount to be determined by the court; (4) restitution for alleged overcharges; and (5) attorney’s fees and cost of suit. This action has been stayed pending resolution of the appeal in the DOJ case.

Corporate Matters

We are a defendant in a class action captioned Kaufman v. American Express Travel Related Services, which was filed on February 14, 2007, and is pending in the United States District Court for the Northern District of Illinois. Plaintiffs’ principal allegation is that our gift cards violated consumer protection statutes because consumers allegedly had difficulty spending small residual amounts on the gift cards prior to the imposition of monthly service fees. The Court preliminarily certified a settlement class consisting of (with some exceptions) “all purchasers, recipients and holders of all gift cards issued by American Express from January 1, 2002 through the date of preliminary approval of the settlement.” A final fairness hearing to consider approval of a class-wide settlement occurred on January 22, 2016.

On July 30, 2015, plaintiff Plumbers and Steamfitters Local 137 Pension Fund, on behalf of themselves and other purchasers of American Express stock, filed a suit, captioned Plumbers and Steamfitters Local 137 Pension Fund v. American Express Co., Kenneth I. Chenault and Jeffrey C. Campbell, for violation of federal securities law, alleging that the Company deliberately issued false and misleading statements to, and omitted important information from, the public relating to the financial importance of the Costco cobrand relationship to the Company, including, but not limited to, the decision to accelerate negotiations to renew the cobrand agreement. The plaintiff seeks damages and injunctive relief. We intend to vigorously defend against these claims.

On October 16, 2015, a putative class action, captioned Houssain v. American Express Company, et al., was filed in the United States District Court for the Southern District of New York against the Company and certain officers of the Company under the Employee Retirement Income Security Act of 1974 (“ERISA”) relating to disclosures of the Costco cobrand relationship. The complaint alleges that the defendants violated certain ERISA obligations by: allowing the

 

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investment of American Express Retirement Savings Plan (“Plan”) assets in American Express common stock when American Express common stock was not a prudent investment; misrepresenting and failing to disclose material facts to Plan participants in connection with the administration of the Plan; and breaching certain fiduciary obligations. The suit seeks, among other remedies, an unspecified amount of damages. We intend to vigorously defend against these claims.

U.S. Card Services Matters

In October 2009, a putative class action, captioned Lopez, et al. v. American Express Bank, FSB and American Express Centurion Bank, was filed in the United States District Court for the Central District of California. The amended complaint sought to certify a class of California American Express Card Members whose interest rates were changed from fixed to variable in or around August 2009 or otherwise increased. On August 20, 2014, plaintiffs filed an amended nationwide complaint and an unopposed motion for preliminary approval of a settlement of the claims alleged in that complaint. The settlement provides for certain relief to class members, attorneys’ fees and costs of up to $6 million. The court granted preliminary approval of the settlement on February 3, 2016. The final approval hearing is scheduled for October 17, 2016.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

 

PART II

 

 

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) Our common stock trades principally on The New York Stock Exchange under the trading symbol AXP. As of December 31, 2015, we had 24,704 common shareholders of record. You can find price and dividend information concerning our common stock in Note 27 to our Consolidated Financial Statements. For information on dividend restrictions, see “Dividends” under “Supervision and Regulation” and Note 23 to our Consolidated Financial Statements. You can find information on securities authorized for issuance under our equity compensation plans under the caption “Item 4 — Approval of American Express Company 2016 Incentive Compensation Plan — Equity Compensation Plans” to be contained in the Company’s definitive 2016 proxy statement for our Annual Meeting of Shareholders, which is scheduled to be held on May 2, 2016. The information to be found under such caption is incorporated herein by reference. Our definitive 2016 proxy statement for our Annual Meeting of Shareholders is expected to be filed with the SEC in March 2016 (and, in any event, not later than 120 days after the close of our most recently completed fiscal year).

Stock Performance Graph

The information contained in this Stock Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act.

The following graph compares the cumulative total shareholder return on our common shares with the total return on the S&P 500 Index and the S&P Financial Index for the last five years. It shows the growth of a $100 investment on December 31, 2010, including the reinvestment of all dividends.

 

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Cumulative Value of $100 Invested on December 31, 2010 $250 $200 $150 $100 $50 $0 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2015 AXP S&P 500 Index S&P Financial Index

 

 

 

LOGO

 

Year-end Data

   2010      2011      2012      2013      2014      2015  

American Express

   $ 100.00       $ 111.62       $ 137.94       $ 220.48       $ 228.57       $ 173.21   

S&P 500 Index

   $ 100.00       $ 102.11       $ 118.44       $ 156.78       $ 178.22       $ 180.67   

S&P Financial Index

   $ 100.00       $ 82.94       $ 106.78       $ 144.79       $ 166.76       $ 164.15   

(b) Not applicable.

(c) Issuer Purchases of Securities

The table below sets forth the information with respect to purchases of our common stock made by us or on our behalf during the quarter ended December 31, 2015.

 

     Total Number
of Shares
Purchased
     Average Price
Paid Per Share
     Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs (c)
     Maximum
Number
of Shares that
May Yet Be
Purchased Under
the Plans or
Programs
 

October 1-31, 2015

           

Repurchase program (a)

     2,094,706       $ 74.01         2,904,706         119,805,248   

Employee transactions (b)

     708       $ 74.43         N/A         N/A   

November 1-30, 2015

           

Repurchase program (a)

     6,869,147       $ 72.61         6,869,147         112,936,101   

Employee transactions (b)

     38,984       $ 73.26         N/A         N/A   

December 1-31, 2015

           

Repurchase program (a)

     7,290,800       $ 69.93         7,290,800         105,645,301   

Employee transactions (b)

     6,431       $ 68.64         N/A         N/A   

Total

           

Repurchase program (a)

     16,254,653       $ 71.59         16,254,653         105,645,301   

Employee transactions (b)

     46,123       $ 72.63         N/A         N/A   

 

(a) On May 12, 2015, we announced the authorization to repurchase up to 150 million shares of our common stock from time to time, in accordance with the our capital distribution plans approved by the Federal Reserve and subject to market conditions. This authorization replaced the prior repurchase authorization and does not have an expiration date.
(b) Includes: (i) shares surrendered by holders of employee stock options who exercised options (granted under our incentive compensation plans) in satisfaction of the exercise price and/or tax withholding obligation of such holders and (ii) restricted shares withheld (under the terms of grants under our incentive compensation plans) to offset tax withholding obligations that occur upon vesting and release of restricted shares. Our incentive compensation plans provide that the value of the shares delivered or attested to, or withheld, be based on the price of our common stock on the date the relevant transaction occurs.
(c) Share purchases under publicly announced programs are made pursuant to open market purchases or privately negotiated transactions (including employee benefit plans) as market conditions warrant and at prices we deem appropriate.

 

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ITEM 6. SELECTED FINANCIAL DATA

 

(Millions, except per share amounts, share data, percentages
and where indicated)

   2015     2014     2013     2012     2011  

Operating Results

          

Total revenues net of interest expense (a)

   $ 32,818      $ 34,188      $ 32,870      $ 31,461      $ 29,876   

Provisions for losses (b)

     1,988        2,044        1,832        1,712        1,112   

Expenses (a) (c)

     22,892        23,153        23,150        23,298        21,808   

Income from continuing operations

     5,163        5,885        5,359        4,482        4,899   

Income (loss) from discontinued operations

                                 36   

Net income

   $ 5,163      $ 5,885      $ 5,359      $ 4,482      $ 4,935   

Return on average equity (d)

     24.0     29.1     27.8     23.1     27.7

Return on average assets (e)

     3.3     3.8     3.5     3.0     3.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet

          

Cash and cash equivalents

   $ 22,762      $ 22,288      $ 19,486      $ 22,250      $ 24,893   

Card Member loans and receivables HFS

     14,992                               

Accounts receivable, net

     46,695        47,000        47,185        45,914        44,109   

Loans, net

     58,799        70,104        66,585        64,309        61,166   

Investment securities

     3,759        4,431        5,016        5,614        7,147   

Total assets

     161,184        159,103        153,375        153,140        153,337   

Customer deposits

     54,997        44,171        41,763        39,803        37,898   

Travelers Cheques outstanding and other prepaid products

     3,247        3,673        4,240        4,601        5,123   

Short-term borrowings (f)

     4,812        3,480        5,021        3,314        4,337   

Long-term debt

     48,061        57,955        55,330        58,973        59,570   

Shareholders’ equity

   $ 20,673      $ 20,673      $ 19,496      $ 18,886      $ 18,794   

Average shareholders’ equity to average total assets ratio

     13.5     13.1     12.6     12.9     12.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common Share Statistics

          

Earnings per share:

          

Income from continuing operations:

          

Basic

   $ 5.07      $ 5.58      $ 4.91      $ 3.91      $ 4.11   

Diluted

     5.05        5.56        4.88        3.89        4.09   

Income (loss) from discontinued operations:

          

Basic

                                 0.03   

Diluted

                                 0.03   

Net income:

          

Basic

     5.07        5.58        4.91        3.91        4.14   

Diluted

     5.05        5.56        4.88        3.89        4.12   

Cash dividends declared per share

     1.13        1.01        0.89        0.80        0.72   

Dividend payout ratio (g)

     22.3     18.1     18.1     20.5     17.4

Book value per share

     19.71        20.21        18.32        17.09        16.15   

Market price per share:

          

High

     93.94        96.24        90.79        61.42        53.8   

Low

     67.57        78.41        58.31        47.40        41.30   

Close

   $ 69.55      $ 93.04      $ 90.73      $ 57.48      $ 47.17   

Average common shares outstanding for earnings per share:

          

Basic

     999        1,045        1,082        1,135        1,178   

Diluted

     1,003        1,051        1,089        1,141        1,184   

Shares outstanding at period end

     969        1,023        1,064        1,105        1,164   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Statistics

          

Number of employees at period end (thousands):

          

United States

     21        22        26        27        29   

Outside the United States

     34        32        37        37        33   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total (h)

     55        54        63        64        62   

Number of shareholders of record

     24,704        25,767        22,238        32,565        35,541   

 

(a) In the first quarter of 2015, the Company changed the classification related to certain payments to partners reducing both discount revenue and marketing and promotion expense. The misclassification in prior periods has been revised to conform to the current period presentation. Additionally, in the first quarter of 2013, the Company reclassified $27 million on the December 31, 2012 Consolidated Statements of Income by reducing Other revenue and reducing Marketing, promotion, rewards, and Card Member services expense, from amounts previously reported in order to conform to the current period presentation.
(b) Effective December 1, 2015, Provisions for losses does not reflect provisions related to the HFS portfolios.
(c) Effective December 1, 2015, Other, net includes the valuation allowance adjustment associated with the HFS portfolios.
(d) Return on average equity is calculated by dividing one-year period of net income by one-year average of total shareholders’ equity.
(e) Return on average assets is calculated by dividing one-year period of net income by one-year average of total assets.
(f) In the first quarter of 2012, the Company reclassified $913 million on the December 31, 2011 Consolidated Balance Sheets, by increasing short-term borrowings and reducing other liabilities, from amounts previously reported in order to correct the effect of a misclassification.
(g) Calculated on year’s dividends declared per share as a percentage of the year’s net income per basic share.
(h) Amounts include employees from discontinued operations.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)

EXECUTIVE OVERVIEW

BUSINESS INTRODUCTION

We are a global services company with four reportable operating segments: U.S. Card Services (USCS), International Card Services (ICS), Global Commercial Services (GCS) and Global Network & Merchant Services (GNMS). Refer to “Business” for a discussion of changes to our reportable operating segments, effective in the first quarter of 2016.

We provide our customers with access to products, insights and experiences that enrich lives and build business success. Our principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. Business travel-related services are offered through a non-consolidated joint venture, American Express Global Business Travel (GBT JV). Prior to July 1, 2014, these business travel operations were wholly owned.

We compete in the global payments industry with charge, credit and debit card networks, issuers and acquirers, as well as evolving and growing alternative payment providers. As the payments industry continues to evolve, we face increasing competition from non-traditional players that leverage new technologies and customers’ existing accounts and relationships to create payment or other fee-based solutions.

Our products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations. These products and services are sold through various channels, including direct mail, online applications, in-house and third-party sales forces and direct response advertising.

The following types of revenue are generated from our various products and services:

 

   

Discount revenue, our largest revenue source, which represents fees generally charged to merchants when Card Members use their cards to purchase goods and services at merchants on our network;

 

   

Net card fees, which represent revenue earned from annual card membership fees;

 

   

Travel commissions and fees, which are earned by charging a transaction or management fee to both customers and suppliers for travel-related transactions (business travel commissions and fees included through June 30, 2014);

 

   

Other commissions and fees, which are earned on foreign exchange conversions, card-related fees, such as late fees and assessments, loyalty coalition-related fees and other service fees;

 

   

Other revenue, which represents revenues arising from contracts with partners of our Global Network Services (GNS) business (including commissions and signing fees), insurance premiums earned from Card Member travel and other insurance programs, prepaid card-related revenues, revenues related to the GBT JV transition services agreement, earnings from equity method investments (including the GBT JV after June 30, 2014) and other miscellaneous revenue and fees; and

 

   

Interest on loans, which principally represents interest income earned on outstanding balances.

FINANCIAL HIGHLIGHTS

For 2015, we reported net income of $5.2 billion and diluted earnings per share of $5.05. This compared to $5.9 billion of net income and $5.56 diluted earnings per share for 2014, and $5.4 billion of net income and $4.88 diluted earnings per share for 2013.

2015 results included:

 

   

A $419 million ($335 million after-tax) charge in the fourth quarter, related to Enterprise Growth (EG), that was driven primarily by the impairment of goodwill and technology, plus some restructuring costs.

 

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2014 results included:

 

   

A $719 million ($453 million after-tax) gain on the sale of our investment in Concur Technologies (Concur) in the fourth quarter;

 

   

A $626 million ($409 million after-tax) gain as a result of the business travel joint venture transaction in the second quarter;

 

   

$420 million ($277 million after-tax) of net charges for costs related to reengineering initiatives, including $313 million ($206 million after-tax) and $133 million ($90 million after-tax) of restructuring charges in the fourth and second quarter, respectively; and

 

   

A $109 million ($68 million after-tax) charge related to the renewal of our partnership with Delta Air Lines (Delta) in the fourth quarter.

2013 results included:

 

   

A $66 million ($41 million after-tax) charge related to a proposed merchant litigation settlement in the fourth quarter.

In addition, effective December 1, 2015, we transferred the Card Member loans and receivables related to our cobrand partnerships with Costco Wholesale Corporation (Costco) in the United States and JetBlue Airways Corporation (JetBlue) (the HFS portfolios) to Card Member loans and receivables held for sale (HFS) on the Consolidated Balance Sheets. Refer to Note 2 to the “Consolidated Financial Statements” for additional information.

NON-GAAP MEASURES

We prepare our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (GAAP). However, certain information included within this report constitutes non-GAAP financial measures. Our calculations of non-GAAP financial measures may differ from the calculations of similarly titled measures by other companies.

BUSINESS ENVIRONMENT

Our performance in 2015 reflected both the strength of our business and the headwinds we have been managing throughout the year. Results for the year benefited from healthy loan growth, strong card acquisitions, excellent credit performance, disciplined operating expense control and the benefits of our strong capital position. Our results were also challenged by several factors. First, the cumulative impact from the initial increased costs associated with early renewals of certain of our cobrand relationships and the end of our relationship with Costco in Canada negatively impacted our results. Second, the U.S. dollar continued to strengthen as the year progressed. Third, our decision to increase spending on growth initiatives for the year, consistent with the elevated levels of 2014, further pressured our 2015 earnings. Fourth, the economic, regulatory, and competitive environments all became even more challenging as the year progressed.

The combination of these factors resulted in billings and revenue growth rates that were fairly steady throughout the year. Billings did grow in 2015, although growth rates decelerated modestly during the second half of the year. International billed business continued to be strong versus the prior year after excluding Canada (due to the termination of our relationship with Costco Canada last year) and adjusting for foreign currency exchange rates. In the United States, we saw softening in billings on the Costco cobrand card, where volumes dropped versus the prior year. Lower gas prices also continued to be a drag on billings. GCS billed business growth continued to slow due, in part, to lower airline volumes and a generally cautious corporate spending environment. Our billings growth rates during the second half of 2016 will be impacted by the end of our relationship with Costco in the United States, which is expected to occur around mid-year.

For the full year, discount revenue was down slightly versus the prior year driven in part by a decline in our discount rate due primarily to the continued rollout of OptBlue, and we anticipate that the discount rate will further decline by a greater amount during 2016, due to the continued expansion of OptBlue, a greater impact from international regulatory changes, and continued competitive pressures.

 

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Growth in net interest income remained strong during the year, driven by loan growth. Card Member loans held for investment were down in 2015 on a reported basis due to the transfer of the Costco and JetBlue loan portfolios to Card Member loans and receivables HFS, effective December 1, 2015. Excluding the HFS portfolios from the prior year, worldwide loans increased. We expect to see strong growth in loans held for investment in 2016, and continue to believe there are opportunities to increase our share of lending without significantly changing our overall risk profile. Our credit provision was down versus the prior year, as lending write-off rates remained at lower levels. We expect continued growth in loans will contribute to an increase in provisions; we also expect to see some upward pressure on our write-off rates, due primarily to the seasoning of loans related to new Card Members.

Our capital position allowed us to return over $5 billion to our shareholders in the form of dividends and share repurchases, representing approximately 105 percent of total capital generated during the year, reflecting our ongoing commitment to using our capital strength to create value for our shareholders.

As mentioned above, we are now reporting the Costco portfolio as HFS. We expect the sale to close around mid-year 2016 and that our merchant acceptance agreement will extend through the transaction close. The ultimate gain on sale will be determined based on the assets actually sold, but we currently estimate a gain of approximately $1 billion. We have not yet signed a definitive agreement and given that we are still several months away from the close, and the Card Member borrowing and paydown trends are difficult to predict in this type of transition, the final gain could differ from our estimate. We expect the portfolio sale gain will be partially used to fund spending on growth initiatives throughout 2016, resulting in some unevenness in our quarterly performance. As of December 31, 2015, Costco cobrand accounts were responsible for approximately 19 percent of our worldwide Card Member loans held for investment and HFS (combined) and approximately 10 percent of our total cards-in-force. Costco cobrand accounts generated approximately 8 percent of our worldwide billed business for the year ended December 31, 2015. Approximately 70 percent of the spending on these accounts occurred outside Costco warehouses. In addition, 1 percent of our worldwide billed business for the year ended December 31, 2015, came from spending on other (non-Costco cobrand) American Express cards at Costco warehouses.

In an effort to accelerate and expand our cost control efforts to right size our cost base with the evolving business environment, we have launched, in the first quarter of 2016, cost initiatives that are designed to remove $1 billion from our overall cost base, which includes total operating expenses plus marketing and promotion costs, by the end of 2017. We plan to take action throughout 2016 to drive benefits in 2017 and beyond, which we expect will result in restructuring charges in 2016.

See “Legal, Regulatory and Compliance Risk” in “Risk Factors” for information on the potential impacts of an adverse decision in the Department of Justice (DOJ) case and related merchant litigations on our business. For discussion of certain legislative and regulatory changes that could have a material adverse effect on our results of operations and financial condition, see “Card-Issuing Business and Deposit Programs — Regulation” under “U.S. Card Services,” “International Card Services — Regulation,” “Global Commercial Services — Regulation,” “Global Network & Merchant Services — Regulation” and “Supervision and Regulation” in “Business.”

 

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CONSOLIDATED RESULTS OF OPERATIONS

As a result of the GBT JV transaction, we deconsolidated the Global Business Travel net assets, effective June 30, 2014, resulting in a lack of comparability between the periods presented.

As mentioned previously, effective December 1, 2015, we transferred the Card Member loans and receivables related to the HFS portfolios (included in the USCS segment), to Card Member loans and receivables HFS on the Consolidated Balance Sheets. The primary impacts beyond the HFS classification on the Consolidated Balance Sheets are to provisions for losses and credit metrics, which no longer reflect amounts related to these loans and receivables, as credit costs are reported in Other expenses through a valuation allowance adjustment. Other, non-credit related metrics (i.e., billed business, cards-in-force, net interest yield), continue to reflect amounts related to the HFS portfolios. Refer to Note 2 to the “Consolidated Financial Statements” for additional information.

The relative strengthening of the U.S. dollar over the periods of comparison has had an impact on our results of operations. Where meaningful in describing our performance, foreign currency-adjusted amounts, which exclude the impact of changes in the foreign exchange (FX) rates, have been provided.

TABLE 1: SUMMARY OF FINANCIAL PERFORMANCE

 

Years Ended December 31,

(Millions, except percentages and per share amounts)

   2015     2014     2013     Change
2015 vs. 2014
    Change
2014 vs. 2013
 

Total revenues net of interest expense

   $ 32,818      $ 34,188      $ 32,870      $ (1,370      (4 )%    $ 1,318         4

Provisions for losses

     1,988        2,044        1,832        (56      (3     212         12   

Expenses

     22,892        23,153        23,150        (261      (1     3           

Net income

     5,163        5,885        5,359        (722      (12     526         10   

Earnings per common share — diluted (a)

   $ 5.05      $ 5.56      $ 4.88      $ (0.51      (9 )%    $ 0.68         14

Return on average equity (b)

     24.0     29.1     27.8          

Return on average tangible common equity (c)

     31.0     35.9     34.9          

 

(a) Earnings per common share — diluted was reduced by the impact of (i) earnings allocated to participating share awards and other items of $38 million, $46 million and $47 million for the years ended December 31, 2015, 2014 and 2013, respectively, and (ii) dividends on preferred shares of $62 million for the year ended December 31, 2015, and nil for both the years ended December 31, 2014 and 2013.
(b) Return on Average Equity (ROE) is computed by dividing (i) one-year period net income ($5.2 billion, $5.9 billion and $5.4 billion for 2015, 2014 and 2013, respectively) by (ii) one-year average total shareholders’ equity ($21.5 billion, $20.3 billion and $19.3 billion for 2015, 2014 and 2013, respectively).
(c) Return on average tangible common equity (ROTCE), a non-GAAP measure, is computed in the same manner as ROE except the computation of average tangible common equity, a non-GAAP measure, excludes from one-year average total shareholders’ equity, one-year average goodwill and other intangibles of $3.8 billion, $3.9 billion and $4.1 billion as of December 31, 2015, 2014 and 2013, respectively, and one-year average preferred shares of $1.6 billion, $0.7 billion and nil as of December 31, 2015, 2014, and 2013, respectively. We believe ROTCE is a useful measure of the profitability of our business.

TABLE 2: TOTAL REVENUES NET OF INTEREST EXPENSE SUMMARY

 

Years Ended December 31,

(Millions, except percentages)

   2015      2014      2013      Change
2015 vs. 2014
    Change
2014 vs. 2013
 

Discount revenue

   $ 19,297       $ 19,389       $ 18,591       $ (92       $ 798        4

Net card fees

     2,700         2,712         2,631         (12            81        3   

Travel commissions and fees

     349         1,118         1,913         (769     (69     (795     (42

Other commissions and fees

     2,517         2,508         2,414         9               94        4   

Other

     2,033         2,989         2,274         (956     (32     715        31   
  

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

Total non-interest revenues

     26,896         28,716         27,823         (1,820     (6     893        3   
  

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

Total interest income

     7,545         7,179         7,005         366        5        174        2   

Total interest expense

     1,623         1,707         1,958         (84     (5     (251     (13
  

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

Net interest income

     5,922         5,472         5,047         450        8        425        8   
  

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

Total revenues net of interest expense

   $ 32,818       $ 34,188       $ 32,870       $ (1,370     (4 )%    $ 1,318        4
  

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

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TOTAL REVENUES NET OF INTEREST EXPENSE

Discount revenue remained relatively flat in 2015 compared to 2014, and increased $798 million or 4 percent in 2014 compared to 2013, driven by 2 percent and 7 percent growth in billed business, respectively, offset by a decline in the average discount rate, faster growth in GNS billings than in overall Company billings, increases in contra-discount revenues, such as cash rebate rewards and higher payments during 2015 related to cobrand partnership agreements. U.S. billed business increased 5 percent, and non-U.S. billed business increased 8 percent on an FX-adjusted basis in 2015 compared to 2014, due to increases in average spending per proprietary basic card and basic cards-in-force.1

The average discount rate was 2.46 percent, 2.48 percent and 2.51 percent for 2015, 2014 and 2013, respectively. The decrease in the average discount rate in 2015 compared to 2014 was driven, in part, by growth of the OptBlue program to expand card acceptance by U.S. small merchants, changes in industry mix and competition, partially offset by the decline in Costco merchant volume in Canada (which was at a lower discount rate than the average) due to the expiration of our merchant agreement. The average discount rate will likely decline by a greater amount during 2016 due to the continued expansion of Optblue, a greater impact from international regulatory changes and continued competitive pressures. Overall, changes in the mix of spending by location and industry, merchant incentives and concessions, volume related pricing discounts, strategic investments, certain pricing initiatives, competition, pricing regulation (including regulation of competitors’ interchange rates) and other factors will likely result in continued erosion of our discount rate over time. See Tables 5 and 6 for more details on billed business performance and the average discount rate.

Net card fees remained relatively flat in 2015 compared to 2014 and increased $81 million or 3 percent in 2014 compared to 2013, while FX-adjusted net card fees increased 5 percent in both periods.1 The increases in both years on an FX-adjusted basis were primarily driven by higher average proprietary cards-in-force. The current year increase also reflects a benefit from certain pricing initiatives.

Travel commissions and fees decreased $769 million or 69 percent in 2015 compared to 2014 and $795 million or 42 percent in 2014 compared to 2013. The decreases in both years were primarily due to the business travel joint venture transaction, resulting in a lack of comparability between periods.

Other commissions and fees remained relatively flat in 2015 compared to 2014 and increased $94 million or 4 percent in 2014 compared to 2013. FX-adjusted other commissions and fees increased 9 percent in 2015 compared to 2014 and 6 percent in 2014 compared to 2013. 1 The increases, on an FX-adjusted basis, in both periods were primarily driven by higher loyalty coalition revenues, as well as higher delinquency fees.

Other revenues decreased $956 million or 32 percent in 2015 compared to 2014 and increased $715 million or 31 percent in 2014 compared to 2013. The decrease in the current year was primarily driven by prior-year gains related to the sales of investment securities in Concur, and the sales of investment securities in Industrial and Commercial Bank of China. The increase in the prior year was primarily driven by the gains on the sales of our investment securities in Concur, revenues earned related to the GBT JV transition services agreement, and higher Loyalty Edge revenues, partially offset by the loss of revenue from the publishing business, which was sold in the fourth quarter of 2013.

Interest income increased $366 million or 5 percent in 2015 compared to 2014, and $174 million or 2 percent in 2014 compared to 2013. The increase in both years primarily reflects higher average Card Member loans, partially offset by decreases in interest and dividends on investment securities, driven by lower average investment securities.

Interest expense decreased $84 million or 5 percent in 2015 compared to 2014, and $251 million or 13 percent in 2014 compared to 2013. The decrease in both years was primarily driven by a lower cost of funds on debt and customer deposits, partially offset by increases in average customer deposit balances.

 

1 

The foreign currency adjusted information assumes a constant exchange rate between the periods being compared for purposes of currency translation into U.S. dollars (e.g., assumes the foreign exchange rates used to determine results for the current year apply to the corresponding year period against which such results are being compared). Certain amounts included in the calculations of foreign currency-adjusted revenues and expenses, which constitute non-GAAP measures, are subject to management allocations. We believe the presentation of information on a foreign currency adjusted basis is helpful to investors by making it easier to compare our performance in one period to that of another period without the variability caused by fluctuations in currency exchange rates.

 

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TABLE 3: PROVISIONS FOR LOSSES SUMMARY

 

Years Ended December 31,

(Millions, except percentages)

   2015      2014      2013      Change
2015 vs. 2014
    Change
2014 vs. 2013
 

Charge card

   $ 737       $ 792       $ 648       $ (55     (7 )%    $ 144         22

Card Member loans

     1,190         1,138         1,115         52        5        23         2   

Other

     61         114         69         (53     (46     45         65   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total provisions for losses (a)

   $ 1,988       $ 2,044       $ 1,832       $ (56     (3 )%    $ 212         12
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(a) Effective December 1, 2015, Provisions for losses does not reflect provisions related to the HFS portfolios.

PROVISIONS FOR LOSSES

Charge card provision for losses decreased $55 million or 7 percent in 2015 compared to 2014, and increased $144 million or 22 percent in 2014 compared to 2013. The decrease in the current year primarily reflects a reserve release versus a reserve build in 2014, partially offset by higher write-offs. The increase in the prior year was primarily due to a slower reserve rate improvement in 2014 versus 2013, higher corporate card write-offs and the effects of changes in other loss reserve assumptions resulting in a reserve build versus a reserve release in 2013.

Card Member loans provision for losses increased $52 million or 5 percent in 2015 compared to 2014, and $23 million or 2 percent in 2014 compared to 2013. The increase in the current year primarily reflects a reserve build versus a reserve release in 2014. The reserve build in the current year was due to a small increase in delinquency rates combined with an increase in loan balances, partially offset by lower write-offs and the impact related to transferring the HFS portfolios to Card Member loans and receivables HFS, as related credit costs are reported in Other expenses through a valuation allowance adjustment beginning in December 2015. The increase in the prior year was driven by higher average Card Member loans, a slower improvement in the reserve rate and the effects of changes in other loss reserve assumptions resulting in a lower reserve release compared to 2013, partially offset by the benefit of lower net write-offs due to improved credit performance.

Other provision for losses decreased $53 million or 46 percent in 2015 compared to 2014 and increased $45 million or 65 percent in 2014 compared to 2013. The decrease in the current year and increase in the prior year were due, in part, to a merchant-related charge in the fourth quarter of 2014.

TABLE 4: EXPENSES SUMMARY

 

Years Ended December 31,

(Millions, except percentages)

   2015      2014      2013      Change
2015 vs. 2014
    Change
2014 vs. 2013
 

Marketing and promotion

   $ 3,109       $ 3,216       $ 2,939       $ (107     (3 )%    $ 277         9

Card Member rewards

     6,996         6,931         6,457         65        1        474         7   

Card Member services and other

     1,018         822         767         196        24        55         7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total marketing, promotion, rewards and Card Member services and other

     11,123         10,969         10,163         154        1        806         8   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Salaries and employee benefits

     4,976         6,095         6,191         (1,119     (18     (96      (2

Other, net (a)

     6,793         6,089         6,796         704        12        (707      (10
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total expenses

   $ 22,892       $ 23,153       $ 23,150       $ (261     (1 )%    $ 3        
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(a) Effective December 1, 2015, Other, net includes the valuation allowance adjustment associated with the HFS portfolios.

EXPENSES

Marketing and promotion expenses decreased $107 million or 3 percent (although they increased 1 percent on an FX-adjusted basis) in 2015 compared to 2014 and increased $277 million or 9 percent in 2014 compared to 2013.2 Both periods reflect elevated levels of spending on growth initiatives.

Card Member rewards expenses increased $65 million or 1 percent in 2015 compared to 2014, and $474 million or 7 percent in 2014 compared to 2013. The current year increase was primarily driven by higher cobrand rewards expense of $199 million, driven by rate impacts as a result of cobrand partnership renewal costs, partially offset by a decrease in Membership Rewards expense of $134 million. The latter was primarily driven by slower growth in the Ultimate Redemption Rate (URR) and a decline in the weighted average cost (WAC) per point assumption, including

 

2 

Refer to footnote 1 on page 55 for details regarding foreign currency adjusted information.

 

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the impact of the $109 million charge in the fourth quarter of 2014 related to the Delta partnership renewal, partially offset by increased expenses related to new points earned, driven by higher spending volumes.

The prior year increase was primarily due to higher Membership Rewards expense of $263 million, driven by a $266 million increase related to new points earned, in line with higher spending volumes, and a higher WAC per point assumption, including the impact of the previously mentioned charge related to the Delta partnership renewal; these increases were offset by slower average growth in the URR. Cobrand rewards expense increased $211 million in 2014 compared to 2013, primarily driven by higher spending volumes.

The Membership Rewards URR for current program participants was 95 percent (rounded down) at December 31, 2015, compared to 95 percent (rounded up) at December 31, 2014 and 94 percent (rounded down) at December 31, 2013.

Card Member services and other expenses increased $196 million or 24 percent in 2015 compared to 2014 and increased $55 million or 7 percent in 2014 compared to 2013. The increase in the current year was primarily due to higher costs related to certain previously renewed cobrand partnership agreements. The increase in the prior year was primarily driven by increased engagement levels and use of certain Card Member benefits, as well as American Express-branded airport lounges opened in 2014.

Salaries and employee benefits expenses decreased $1.1 billion or 18 percent in 2015 compared to 2014, and $96 million or 2 percent in 2014 compared to 2013. The decrease in both years was primarily due to the business travel joint venture transaction (resulting in a lack of comparability between periods). The decrease in the current year was also driven by restructuring charges in the second and fourth quarters of 2014 and lower compensation costs in 2015 as a result of those initiatives. In 2014, compared to 2013, those restructuring charges partially offset the impact of the business travel joint venture transaction.

Other expenses increased $704 million or 12 percent in 2015 compared to 2014 and decreased $707 million or 10 percent in 2014 compared to 2013. The increase in the current year reflects the net gain from the 2014 business travel joint venture transaction, partially offset by the EG charge discussed previously. Refer to Note 2 to the “Consolidated Financial Statements” for further details on the charge. The decrease in the prior year was primarily driven by the gain from the business travel joint venture transaction (resulting in a lack of comparability between periods), and a charge in 2013 related to the rejected merchant litigation settlement. See “Legal Proceedings” for further information on this merchant litigation.

INCOME TAXES

The effective tax rate was 35.0 percent in 2015 compared to 34.5 percent in 2014 and 32.1 percent in 2013. The tax rates for 2015, 2014, and 2013 include benefits of $33 million, expenses of $40 million and benefits of $150 million, respectively, related to the resolution of certain prior years’ items. The tax rate for 2015 also includes the impact of the nondeductible portion of the goodwill impairment charge in EG. The tax rates for all periods reflect the level of pretax income in relation to recurring permanent tax benefits and geographic mix of business.

 

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TABLE 5: SELECTED STATISTICAL INFORMATION

 

Years Ended December 31,

   2015     2014     2013     Change
2015 vs. 2014
    Change
2014 vs. 2013
 

Card billed business: (billions)

          

United States

   $ 721.0      $ 688.1      $ 637.0        5     8

Outside the United States

     318.7        334.7        315.4        (5     6   
  

 

 

   

 

 

   

 

 

     

Total

   $ 1,039.7      $ 1,022.8      $ 952.4        2        7   
  

 

 

   

 

 

   

 

 

     

Total cards-in-force: (millions)

          

United States

     57.6        54.9        53.1        5        3   

Outside the United States

     60.2        57.3        54.1        5        6   
  

 

 

   

 

 

   

 

 

     

Total

     117.8        112.2        107.2        5        5   
  

 

 

   

 

 

   

 

 

     

Basic cards-in-force: (millions)

          

United States

     44.8        42.6        41.1        5        4   

Outside the United States

     49.5        47.0        44.0        5        7   
  

 

 

   

 

 

   

 

 

     

Total

   $ 94.3      $ 89.6      $ 85.1        5        5   
  

 

 

   

 

 

   

 

 

     

Average discount rate (a)

     2.46     2.48     2.51    

Average basic Card Member spending (dollars) (b)

   $ 16,743      $ 16,884      $ 16,334        (1     3   

Average fee per card (dollars) (b)

     39        40        40        (3       

Average fee per card adjusted (dollars) (b)

   $ 44      $ 45      $ 44        (2 )%      2

 

(a) In the three months ended March 31, 2015, we changed the classification related to certain payments to partners, reducing both discount revenue and marketing and promotion expense. The misclassification in prior periods has been revised to conform to the current period presentation. Accordingly, the average discount rate for prior periods was also revised, resulting in a reduction of between zero and one basis point in any period from what was originally reported.
(b) Average basic Card Member spending and average fee per card are computed from proprietary card activities only. Average fee per card is computed based on net card fees, including the amortization of deferred direct acquisition costs divided by average worldwide proprietary cards-in-force. The average fee per card, adjusted, which is a non-GAAP measure, is computed in the same manner, but excludes amortization of deferred direct acquisition costs. The amount of amortization excluded was $283 million, $306 million and $262 million for the years ended December 31, 2015, 2014 and 2013, respectively. We present the average fee per card, adjusted, because we believe this metric presents a useful indicator of card fee pricing across a range of our proprietary card products.

 

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TABLE 6: SELECTED STATISTICAL INFORMATION

 

    2015     2014  
    Percentage
Increase
(Decrease)
    Percentage Increase
(Decrease) Assuming
No Changes in
FX Rates (a)
    Percentage
Increase
(Decrease)
    Percentage Increase
(Decrease) Assuming
No Changes in
FX Rates (a)
 

Worldwide (b)

       

Billed business

    2     6     7     9

Proprietary billed business

    1        4        7        7   

GNS billed business (c)

    3        15        12        15   

Airline-related volume

       

(8% and 9% of worldwide billed business for 2015 and 2014, respectively)

    (5     1        5        6   

United States (b)

       

Billed business

    5          8     

Proprietary consumer card billed business (d)

    5          7     

Proprietary small business billed business (d)

    7          10     

Proprietary corporate services billed business (e)

    2          8     

T&E-related volume

       

(26% of U.S. billed business for both 2015 and 2014)

    4          6     

Non-T&E-related volume

       

(74% of U.S. billed business for both 2015 and 2014)

    5          9     

Airline-related volume

       

(7% and 8% of U.S. billed business for 2015 and
2014, respectively)

    (2       3     

Outside the United States (b)

       

Billed business

    (5     8        6        10   

Japan, Asia Pacific & Australia (JAPA) billed business

    4        15        10        14   

Latin America & Canada (LACC) billed business

    (18     (3     (1     8   

Europe, the Middle East & Africa (EMEA) billed business

    (5     8        7        7   

Proprietary consumer and small business billed business (f)

    (10     3        2        6   

JAPA billed business

    (3     10               6   

LACC billed business

    (29     (17     (5     2   

EMEA billed business

    (3     10        9        8   

Proprietary corporate services billed business (e)

    (10 )%      7     3     6

 

(a) The foreign currency adjusted information assumes a constant exchange rate between the periods being compared for purposes of currency translation into U.S. dollars (i.e., assumes the foreign exchange rates used to determine results for the current year apply to the corresponding prior year period against which such results are being compared).
(b) Captions in the table above not designated as “proprietary” or “GNS” include both proprietary and GNS data.
(c) Included in the GNMS segment.
(d) Included in the USCS segment.
(e) Included in the GCS segment.
(f) Included in the ICS segment.

 

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TABLE 7: SELECTED STATISTICAL INFORMATION

 

As of or for the Years Ended December 31,

(Millions, except percentages and where indicated)

   2015     2014     2013     Change
2015 vs. 2014
    Change
2014 vs. 2013
 

Worldwide Card Member receivables (a)

          

Total receivables (billions)

   $ 44.1      $ 44.9      $ 44.2        (2 )%      2

Loss reserves:

          

Beginning balance

     465        386        428        20        (10

Provisions (b)

     737        792        648        (7     22   

Net write-offs (c)

     (713     (683     (669     4        2   

Other (d)

     (27     (30     (21     (10     43   
  

 

 

   

 

 

   

 

 

     

Ending balance

   $ 462      $ 465      $ 386        (1 )%      20
  

 

 

   

 

 

   

 

 

     

% of receivables

     1.0     1.0     0.9    

Net write-off rate — principal only — USCS/ICS (f)

     1.8     1.7        (e    

Net write-off rate — principal and fees — USCS/ICS (f)

     2.0     1.9        (e    

30+ days past due as a % of total — USCS/ICS

     1.5     1.6        (e    

Net loss ratio as a % of charge volume — GCS

     0.09     0.09     0.08    

90+ days past billing as a % of total — GCS

     0.9     0.8     0.9    

Worldwide Card Member loans (a)

          

Total loans (billions)

   $ 58.6      $ 70.4      $ 67.2        (17 )%      5

Loss reserves:

          

Beginning balance

     1,201        1,261        1,471        (5     (14

Provisions (b)

     1,190        1,138        1,115        5        2   

Net write-offs — principal only (c)

     (967     (1,023     (1,141     (5     (10

Net write-offs — interest and fees (c)

     (162     (164     (150     (1     9   

Transfer of reserves on HFS loan portfolios

     (224                            

Other

     (10     (11     (34     (9     (68
  

 

 

   

 

 

   

 

 

     

Ending balance

   $ 1,028      $ 1,201      $ 1,261        (14     (5
  

 

 

   

 

 

   

 

 

     

Ending reserves — principal

   $ 975      $ 1,149      $ 1,212        (15     (5

Ending reserves — interest and fees

   $ 53      $ 52      $ 49        2        6   

% of loans

     1.8     1.7     1.9    

% of past due

     164     167     169    

Average loans (billions) (a)

   $ 67.9      $ 66.0      $ 63.3        3     4

Net write-off rate — principal only (f)

     1.4     1.5     1.8    

Net write-off rate — principal, interest and fees (f)

     1.7     1.8     2.0    

30+ days past due as a % of total

     1.1     1.0     1.1    

 

(a) Effective December 1, 2015, does not reflect the HFS portfolios.
(b) Provisions on principal and fee reserve components on Card Member receivables and provisions for principal, interest and/or fees on Card Member loans.
(c) Write-offs, less recoveries.
(d) 2015 includes the impact of the transfer of the HFS receivables portfolio, which was not significant.
(e) Historically, net loss ratio as a % of charge volume and 90 days past billing as a % of receivables were presented for ICS. Beginning in the first quarter 2014, as a result of system enhancements, 30 days past due as a % of total, net write-off rate (principal only) and net write-off rate (principal and fees) have been presented.
(f) We present a net write-off rate based on principal losses only (i.e., excluding interest and/or fees) to be consistent with industry convention. In addition, because we consider uncollectible interest and/or fees in our reserves for credit losses, a net write-off rate including principal, interest and/or fees is also presented. The twelve months ended December 31, 2015 reflect the impact of a change in the timing of charge-offs for Card Member receivables and loans in certain modification programs from 180 days past due to 120 days past due.

 

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TABLE 8: NET INTEREST YIELD ON CARD MEMBER LOANS

 

Years Ended December 31,

(Millions, except percentages and where indicated)

   2015     2014     2013  

Net interest income

   $ 5,922      $ 5,472      $ 5,047   

Exclude:

      

Interest expense not attributable to the Company’s Card Member loan portfolio

     961        1,019        1,181   

Interest income not attributable to the Company’s Card Member loan portfolio

     (387     (359     (361
  

 

 

   

 

 

   

 

 

 

Adjusted net interest income (a)

   $ 6,496      $ 6,132      $ 5,867   

Average loans including HFS loan portfolios (billions) (b)

   $ 69.0      $ 66.0      $ 63.3   

Exclude certain non-traditional Card Member loans and other fees (billions)

     (0.2     (0.2     (0.3
  

 

 

   

 

 

   

 

 

 

Adjusted average loans (billions) (a)

   $ 68.8      $ 65.8      $ 63.0   

Net interest income divided by average loans

     8.6     8.3     8.0

Net interest yield on Card Member loans (a)

     9.4     9.3     9.3

 

(a) Adjusted net interest income, adjusted average loans, and net interest yield on Card Member loans are non-GAAP measures. Refer to “Glossary of Selected Terminology” for definitions of these terms. We believe adjusted net interest income and adjusted average loans are useful to investors because they are components of net interest yield on Card Member loans, which provides a measure of profitability of our Card Member loan portfolio.
(b) For purposes of the calculation of net interest yield on Card Member loans, average loans continues to include the HFS loan portfolios.

 

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BUSINESS SEGMENT RESULTS

We consider a combination of factors when evaluating the composition of our reportable operating segments, including the results reviewed by the chief operating decision maker, economic characteristics, products and services offered, classes of customers, product distribution channels, geographic considerations (primarily United States versus outside the United States) and regulatory considerations. Refer to Note 25 of the “Consolidated Financial Statements” for additional discussion of the products and services by segment.

In light of the organizational changes discussed under “Business,” our financial disclosures will reflect segment changes starting in the first quarter of 2016. This overview discusses the operating segments used for financial reporting in 2015.

Results of the business segments generally treat each segment as a stand-alone business. The management reporting process that derives these results allocates revenue and expense using various methodologies as described below.

TOTAL REVENUES NET OF INTEREST EXPENSE

We allocate discount revenue and certain other revenues among segments using a transfer pricing methodology. Within the USCS, ICS and GCS segments, discount revenue generally reflects the issuer component of the overall discount revenue generated by each segment’s Card Members; within the GNMS segment, discount revenue generally reflects the network and acquirer component of the overall discount revenue. Net card fees and travel commissions and fees are directly attributable to the segment in which they are reported.

Interest and fees on loans and certain investment income is directly attributable to the segment in which it is reported. Interest expense represents an allocated funding cost based on a combination of segment funding requirements and internal funding rates.

PROVISIONS FOR LOSSES

The provisions for losses are directly attributable to the segment in which they are reported.

EXPENSES

Marketing and promotion expenses are included in each segment based on actual expenses incurred, with the exception of brand advertising, which is primarily reflected in the GNMS and USCS segments. Rewards and Card Member services expenses are included in each segment based on actual expenses incurred within each segment.

Salaries and employee benefits and other operating expenses reflect expenses such as professional services, occupancy and equipment and communications incurred directly within each segment. In addition, expenses related to support services, such as technology costs, are allocated to each segment primarily based on support service activities directly attributable to the segment. Other overhead expenses, such as staff group support functions, are allocated from Corporate & Other to the other segments based on a mix of each segment’s direct consumption of services and relative level of pretax income.

CAPITAL

Each business segment is allocated capital based on established business model operating requirements, risk measures and regulatory capital requirements. The business model operating requirements reflect the capital needed to support operations and specific balance sheet items. The risk measures reflect considerations for credit, market and operational risk.

INCOME TAXES

An income tax provision (benefit) is allocated to each business segment based on the effective tax rates applicable to the various businesses that comprise the segment.

 

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U.S. CARD SERVICES

TABLE 9: USCS SELECTED INCOME STATEMENT DATA

 

Years Ended December 31,

(Millions, except percentages)

   2015     2014     2013     Change
2015 vs. 2014
    Change
2014 vs. 2013
 

Revenues

               

Non-interest revenues

   $ 13,180      $ 12,628      $ 12,019      $ 552         4   $ 609        5
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

   

Interest income

     6,267        5,786        5,565        481         8        221        4   

Interest expense

     654        604        693        50         8        (89     (13
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

   

Net interest income

     5,613        5,182        4,872        431         8        310        6   
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

   

Total revenues net of interest expense

     18,793        17,810        16,891        983         6        919        5   

Provisions for losses

     1,453        1,396        1,250        57         4        146        12   
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

   

Total revenues net of interest expense after provisions for losses

     17,340        16,414        15,641        926         6        773        5   
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

   

Expenses

               

Marketing, promotion, rewards, Card Member services and other

     7,776        7,197        6,721        579         8        476        7   

Salaries and employee benefits and other operating expenses

     4,209        4,117        3,926        92         2        191        5   
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

   

Total expenses

     11,985        11,314        10,647        671         6        667        6   
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

   

Pretax segment income

     5,355        5,100        4,994        255         5        106        2   

Income tax provision

     1,942        1,900        1,801        42         2        99        5   
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

   

Segment income

   $ 3,413      $ 3,200      $ 3,193      $ 213         7   $ 7       

Effective tax rate

     36.3     37.3     36.1         

USCS offers a wide range of card products and services to consumers and small businesses in the United States, provides travel services to Card Members and other consumers, and operates a coalition loyalty business.

TOTAL REVENUES NET OF INTEREST EXPENSE

Non-interest revenues increased $552 million or 4 percent in 2015 compared to 2014, driven by 6 percent growth in billed business, partially offset by a decline in the average discount rate and increases in contra-discount revenues, such as cash rebate rewards from new Card Member acquisition offers and payments under previously renewed cobrand partnership agreements. The increase in billed business was primarily driven by 6 percent higher cards-in-force and a 1 percent increase in average spending per proprietary basic card.

Net interest income increased $481 million or 8 percent in 2015 compared to 2014, due to higher interest income resulting from higher average Card Member loans, partially offset by higher interest expense.

Total revenues net of interest expense increased $919 million or 5 percent in 2014 compared to 2013, primarily driven by higher discount revenue, as a result of 8 percent growth in billed business, partially offset by a decrease in the average discount rate and higher cash rebate rewards. The increase also reflected higher net interest income, primarily driven by higher average Card Member loans and lower funding costs.

PROVISIONS FOR LOSSES

Overall, provisions for losses increased $57 million or 4 percent in 2015 compared to 2014. Charge card provision for losses decreased $31 million or 7 percent, primarily due to a reserve release in 2015 versus a reserve build in 2014, partially offset by higher write-off rates. Card Member loans provision for losses increased $88 million or 9 percent, driven by a higher reserve build in the current year, versus a reserve release in 2014, due to a small increase in delinquency rates combined with an increase in loan balances, partially offset by lower net write-offs and the impact related to transferring the HFS portfolios to Card Member loans and receivables HFS, as credit costs related to the HFS portfolios are reported in Other expenses through a valuation allowance adjustment beginning in December 2015.

Provisions for losses increased $146 million in 2014 compared to 2013, primarily due to higher average Card Member loans, a slower reserve rate improvement and a lower reserve release in 2014, partially offset by the benefit of lower net write-offs for Card Member loans.

Refer to Table 10 for the charge card and lending write-off rates for 2015, 2014 and 2013.

 

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EXPENSES

Marketing, promotion, rewards, Card Member services and other expenses increased $579 million or 8 percent in 2015 compared to 2014, driven in part by a $233 million or 5 percent increase in Card Member rewards expense. The increase in rewards costs was driven by higher cobrand rewards expenses of $252 million, partially offset by a decrease in Membership Rewards expense of $19 million. The increase in cobrand rewards expense was driven by higher spending volumes and rate increases, which were due in part to the previously renewed cobrand partnership agreements. The decrease in Membership Rewards expense was primarily driven by slower growth in the URR and a decline in the WAC per point assumption, including the impact of a $96 million charge in the fourth quarter of 2014 related to the Delta partnership renewal, partially offset by higher spending volumes. Card Member services and other expenses increased $207 million or 42 percent in 2015 compared to 2014, primarily driven by higher costs related to renewed cobrand partnership agreements. Marketing and promotion increased $139 million or 9 percent in 2015 compared to 2014, reflecting elevated levels of spending on growth initiatives.

Salaries and employee benefits and other operating expenses increased $92 million or 2 percent in 2015, compared to 2014, primarily driven by higher spending on growth initiatives and the December 2015 valuation allowance adjustment related to the HFS portfolios mentioned previously, partially offset by lower fraud losses in the current year and a change in the estimated value of certain investments in our Community Reinvestment Act (CRA) portfolio in the prior year.

Total expenses increased $667 million in 2014 compared to 2013, primarily driven by higher marketing and promotion expenses, higher cobrand rewards expenses related to higher spending volumes and an increase in Membership Rewards expense, which was due to higher new points earned and a higher WAC per point assumption, including the impact of the previously mentioned charge related to the Delta partnership renewal. The increase also reflected higher salaries and employee benefits and other expenses, driven by an increase in card-related fraud losses, a change in the estimated value of certain investments in our CRA portfolio and higher restructuring charges in 2014.

 

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TABLE 10: USCS SELECTED STATISTICAL INFORMATION

 

As of or for the Years Ended December 31,

(Millions, except percentages and where indicated)

  2015     2014     2013     Change
2015 vs. 2014
    Change
2014 vs. 2013
 

Card billed business (billions)

  $ 572.3      $ 542.0      $ 501.0        6     8

Total cards-in-force

    48.3        45.6        43.7        6        4   

Basic cards-in-force

    36.2        34.0        32.5        6        5   

Average basic Card Member spending (dollars)*

  $ 16,413      $ 16,294      $ 15,689        1        4   

U.S. Consumer Travel:

         

Travel sales

  $ 3,761      $ 3,774      $ 3,967               (5

Travel commissions and fees/sales

    7.0     7.2     7.1    

Total segment assets (billions) (a)

  $ 117.3      $ 113.2      $ 103.5        4        9   

Segment capital

  $ 10,320      $ 10,433      $ 9,269        (1     13   

Return on average segment capital (b)

    32.4     32.5     35.6    

Return on average tangible segment capital (b)

    33.7     33.6     37.0    
 

 

 

   

 

 

   

 

 

     

Card Member receivables: (c)

         

Total receivables (billions)

  $ 23.3      $ 22.5      $ 21.8        4        3   

Net write-off rate — principal only (d)

    1.7     1.6     1.7    

Net write-off rate — principal and fees (d)

    1.9     1.8     1.9    

30+ days past due as a % of total

    1.5     1.7     1.6    
 

 

 

   

 

 

   

 

 

     

Card Member loans: (c)

         

Total loans (billions)

  $ 51.4      $ 62.6      $ 58.4        (18 )%      7

Net write-off rate — principal only (d)

    1.4     1.5     1.8    

Net write-off rate — principal, interest and fees (d)

    1.6     1.7     2.0    

30+ days past due loans as a % of total

    1.0     1.0     1.1    
 

 

 

   

 

 

   

 

 

     

Calculation of Net Interest Yield on Card Member Loans:

         

Net interest income

  $ 5,613      $ 5,182      $ 4,872       

Exclude:

         

Interest expense not attributable to the Company’s Card Member loan portfolio

    164        157        183       

Interest income not attributable to the Company’s Card Member loan portfolio

    (16     (11     (9