What Ken Chenault Isn't Telling You About AmEx's Performance

This morning's Wall Street Journal's front page of the Money & Investing section carries a headline at midpage screaming, "AmEx Net Sinks 79% as Customer Spending Falls."

Buried in the article is the passage,

"In addition to cutbacks in spending, the financial firms that issue credit cards are being hit hard by strapped consumers, who are falling behind on the bills with increasing frequency."

Maybe so, but that first element is circular, and Ken Chenault isn't telling you why AmEx is experiencing such a drop in charge volume.

The truth is, AmEx encouraged it. How?

Beginning several months ago, the firm began cutting the credit lines of even its best customers by 50%!

For example, a colleague of mine was told, while on a business trip, that his AmEx card had reached its limit. In a scene reminiscent of that old AmEx ad showing a young man being embarrassed when his Visa card can't handle the charge for his fiancee's ring, or a business dinner, this colleague was told to come up with another way to pay his hotel bill.

Upon contacting AmEx, he was told that, to use his card again that month, he'd have to immediately send them a check. Mind you, this customer has been with AmEx for decades.

Going back some twenty years, it was common knowledge at Chase Manhattan Bank that credit card users charged more in proportion to their credit lines. The key to the process of profitably growing credit card businesses is to sensibly extend more credit to capable, creditworthy customers, who will then, as a group, on average, obligingly carry higher balances.

AmEx has stood this principle on its head now, cutting credit lines, and, thus, balances and spending with their cards.

It should come as no surprise that the firm is now seeing a plunging net income.

The colleague in question was so furious that he closed every AmEx relationship he had, including business loans, and transferred all of them to a local bank's competing credit card.

AmEx has been a sinking ship ever since their naturally-hedged businesses, travelers checks and credit cards, unlinked. Without the free source of funding, their credit cards became less competitive just as credit card volumes soared.

This is yet another financial services company which, pursuant to today's first post, should have been allowed to die, merge, or be acquired, rather than become a commercial bank and suck up public funds to survive.