Word: amex
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Initially, the strategy produced one success after another, contributing to American Express's almost mythic reputation for savviness and invincibility. But a recent chain of misfortunes, miscues and poor managerial decisions is prompting a reappraisal of Amex's sterling reputation. Acquisitions that looked like masterstrokes only a few years ago are now facing criticism; the managerial decision-making process that was once considered fine-tuned and flawless is suddenly being second-guessed; businesses that were thought to be impervious to economic downturns have proved to be vulnerable after all. In short, American Express is showing that it has chinks...
...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...