Word: amex
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Dates: during 1990-1999
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...latest shock is the poor performance of one of Amex's youngest and most vaunted products: the Optima card. Launched four years ago as Amex's response to Visa and MasterCard, the revolving-charge card was perceived as a winner. But the company announced earlier this month that Optima (total card members: more than 3 million) had suffered much higher defaults than expected. The result: $155 million in Optima write-offs during the third quarter, which will produce a loss -- the first one ever -- of $50 million to $75 million for the company's Travel Related Services division...
...Manhattan headquarters, falsified records to hide the true degree of card-holder defaults. The Federal Deposit Insurance Corp. is probing the matter as well, because the American Express Centurion Bank, which issues Optima, filed incorrect documents with federal regulators as a result of the apparent cover-up. Amex investors, who suffered from a sharp drop in the company's stock when the Optima trouble came to light, have filed a class-action lawsuit claiming that the company misrepresented the card's performance...
With Optima, Amex had planned to cash in on a part of the card business the company had always disdained: revolving credit. Amex had issued only charge cards, which had to be paid in full each month. But Visa and MasterCard had successfully turned credit cards into a consumer lending vehicle, and were gaining a huge share of the total charge volume at the expense of Amex's green, gold and platinum cards. (Visa has 257 million cards worldwide vs. 163 million for MasterCard and 37 million for Amex.) So American Express decided to counterattack with a credit card...
Unlike its competitors, however, Amex had woefully little experience in running a revolving-credit operation. Optima managers lacked the subtle nuances of knowing when to close bad accounts and start collecting. As a result, in the second quarter Optima's charge-off rate on accounts unpaid after 180 days was 8%, or about twice the average for similar cards. Says Alex (Pete) Hart, president of MasterCard: "American Express painfully ; discovered that the revolving-credit business is a different animal...
...Many Amex customers, though accustomed to paying in full each month, proved much less disciplined in their approach to the Optima card. "We thought we had better demographics and experience with our customers," says James Robinson, Amex's chairman, who defended the company's assumptions. "Either our hypothesis was wrong or we didn't manage it right." But Robinson believes that external factors, most notably the current recession, hit Amex's clientele especially hard. "We had models for dealing with tough times but not for a white-collar recession. The model wasn't tested for hurricanes...