AmEx charges ahead

Venerable financial colossus American Express has a hit on its hands with the Blue card. But that's just the beginning of what it wants to achieve on the Web.

Venerable financial colossus American Express has a hit on its hands with the Blue card. But that's just the beginning of what it wants to achieve on the Web.

Seven years ago, then newly-appointed American Express CEO Harvey Golub seemed to have his work cut out for him. The gruff, Brooklyn-born boss would have to first stabilize and then turn around the flailing financial services giant; restructure its businesses amid mounting credit card losses; and sell off troublesome divisions, the legacy of a poorly conceived attempt by his predecessor to turn AmEx into a financial services supermarket.

Within this story, you'll find these pages:
  1. Strategies and tactics
  2. Making privacy pay
  3. The future looks blue
  4. The strategy of partnering
  5. 4 steps to success

In all that, Golub succeeded. Profit margins were restored and subsidiary companies disposed of. The stock sprinted more than fivefold during his stewardship. And AmEx's return on equity as Golub prepared to hand over the keys to the executive suite was more than 25 percent, far above that of Bank of America or even J.P. Morgan Chase.


But now, having stepped down from the top job, Golub may find himself with quite a different place in history: not as a turnaround guy, but as the man who laid the foundation for a new American Express, a company that today has a shot at becoming the dominant force in online financial services. In 1997, Golub ordered each of AmEx's businesses to develop a technology strategy. Suddenly, virtually every aspect of AmEx's operation was being rethought as an Internet presence. "He got the Web," AmEx chief information officer Glen Salow says. "He simply got it, no ifs, ands, or buts. He said, 'This is going to transform the world, and we can't afford not to do it.' "

Today customers can pay their bills, book their travel, open brokerage accounts, get mortgages, buy CDs and mutual funds, manage their portfolios, obtain auto loans, and even plan their retirements online. Business customers can go online to manage their floats; make collections; and outsource payroll, pensions, and even procurement to AmEx.

And it's just the beginning. To fully understand American Express's task and the opportunities it presents, you have to also comprehend the scope of a company that has grown from a freight forwarder founded by Henry Wells, William Fargo, and others in 1850, to a gargantuan financial conglomerate. AmEx, with assets of $153.6 billion at last count, had $22.1 billion in revenue for fiscal year 2000, on which it earned $2.8 billion.

Executive Summary: American Express

Corporate Headquarters: New York City
Year founded: 1850
CEO: Kenneth Chenault
Revenue: $22.1 billion* (up 13% over 1999)
Net Income: $2.8 billion* (up 14% over 1999)
Assets: $153.6 billion**
Return on Equity: 25.3%*
Number of Employees: 88,378
Major Industries: Financial services

*For fiscal year 2000.
**As of September 30, 2000
Sources: Bloomberg, Hoovers, Yahoo, Company Reports

AmEx is getting smarter about the things they do. And if they play their cards right, they may become the world's best user of technology.

AmEx offers a mind-boggling spectrum of services, ranging from mundane retail banking to esoteric business insurance. Its four core businesses—Global Financial Services, U.S. Consumer and Small Business Services, Global Corporate Services, and Global Establishment Services and Travelers Cheque Group—are the result of a reorganization instituted by new CEO Kenneth Chenault last June. Among them, they must serve 51.7 million cardholders across the globe, as well as 2.3 million financial service customers.

AmEx's card products, as they are known in the company, include the familiar—green, gold, platinum, and now black cards—as well as lines of credit to various utility services that allow cardholders to plan their travel, finances, and even dinner reservations. By the end of 2000, the company had introduced 20 utilities and had deployed them in more than 200 business initiatives.

The position of chief information officer—at the executive vice president level—has become crucial to the development of the company. "Something beyond being a strategist, but something less than being a copresident with each of our businesses," is how Glen Salow describes his role. From his cavernous office on American Express's executive floor in Manhattan's World Financial Center, the boyish Salow supervises technology initiatives in more than 40 countries.

Anne Busquet, president of American Express Interactive Services and New Businesses, the in-house incubator, explains the company's strategy: "We're in financial services, cards, travel—most of what we do can be digitized. When you think about it, our businesses lend themselves to the Internet." Says Jennifer Scutti, a securities analyst for Prudential Securities, "The Web offers a definite chance for growth of their businesses. They are using it as another way to reach customers and enhance new account growth."

One of the first decisions AmEx made was to locate its entire Internet presence at one Web address. At, consumers worldwide can navigate through a seemingly endless array of services.

While AmEx has granted an enormous amount of autonomy to its business units on the issue of how they use the Web, some guiding principles have informed most of the company's initiatives. "The vision for my group is for American Express to be the world's best user of technology," says Salow. "We go at things in the following sequence: First, we look to reuse anything we have; second, we try to partner with someone who can provide what we want; third would be to look to buy it; fourth would be to do it ourselves."

AmEx has developed a philosophy of minority ownership it calls e-Partnering. It has bought interests in a number of technology companies, including Ventro, a B2B e-commerce company in Mountain View, California. Ventro is developing MarketMile, an online B2B marketplace where AmEx plans to offer office supplies, electronics, and even temporary office help.

At its own site, AmEx offers services including mapping, weather, and restaurant guides; personal financial planning; and mortgage-rate calculators—all of which come from outside sources. "We're getting smarter about the small things we do and we're finding things that will integrate with our architecture," Salow says. From stagecoach in the wildnerness to the Net in cyberspace—AmEx continues to protect customers' money and privacy.

One of the biggest challenges for American Express is ensuring that its great Web offensive does not collide with the core values that have been part of its mission statement for decades: protect customer privacy at all costs and secure customers' money. AmEx executives' fervent hope is that they will be able to leverage the company's reputation for discretion, security, and dependability.

"People used to entrust their money to us when we were a stagecoach company going out into the wilderness," says Salow. "That's what American Express is doing on the Internet. It's the new wilderness."

Given this backdrop, it is not surprising that one of the company's major Internet initiatives is its Privacy Suite, an evolving series of security features that aim to guarantee consumer privacy on the Web. It plays directly to AmEx's strength.

"When you buy something over the Internet, there's no reason a merchant needs to know your card number," says Jessica Zoob, a vice president in the Interactive Services and New Businesses division. Zoob oversees Private Payments, a free online service that generates temporary card numbers that can be used only once, eliminating the risk of unauthorized card use.

Using Private Payments, cardholders with Windows-based computers can download free software that expedites service with more than 100 of the biggest online shopping sites. If a customer buys a book or CD from, for instance, a pop-up window will automatically display at checkout, allowing the customer to generate a number that is transmitted to the merchants and recognized by AmEx as a charge to the customer's account.

"If you have a problem with a purchase, you can look up the one-time number and refer to it when you deal with the merchant, or you can call customer service and have us handle it," says Zoob.

Although Private Payments has only been available since last summer, Morgan Stanley Dean Witter's Discover card has already announced a similar, competing service, and Visa and MasterCard will follow suit shortly.

"When I update the board, I say, 'Here's proof that we're doing it right; they're copying us,' " says Salow. The company has announced that it will enhance the Privacy Suite with Private Browsing, software that allows users to visit Web sites and divulge as little—or as much—information about themselves as they wish. AmEx offers customized support for Online Brokerage, higher rates for online banking, and 60-second processing on home equity loans.

While Private Payments is restricted to AmEx cardholders, many of the company's other online products are not. And many features are offered free of charge without requiring customers to register at the site. "We have to walk a fine line," says Trevor Langsdale, senior manager of online brokerage business development. "You have to come through our financial service center to use these tools, but we don't want to be too pushy."

In theory, a noncustomer could devise a budget, get investing advice, comparison shop for mortgages, set up a college savings strategy, map out a retirement plan, and then take his or her business elsewhere. But AmEx is betting that most people won't, and convenience and top-notch service are two of the reasons.

The company's online brokerage strategy is integrated with its fee-based traditional business, American Express Financial Advisors. "We thought that investors were divided into two groups," Langsdale explains. "We thought there was a do-it-yourself camp and a let-my-adviser-do-it camp. Those don't really exist. There's a whole group of people in the middle."

For these customers the online brokerage offers a sliding scale of fees, depending on the amount of support the customer uses. At one extreme, a customer can open an account online, trade personally, and never deal directly with an American Express employee. Those with $100,000 or more in assets receive 10 free online market orders—buys and sells—per month.

AmEx hopes to turn a profit through the sale of online ads and the fees it charges on money market funds. At the other extreme, a customer can establish an online account, request a financial adviser, and delegate trading authority to that person.

Wall Street is generally upbeat about Online Brokerage, which launched in October 1999 and now has more than 500,000 customers, even though it accounts for just a small fraction of AmEx's total sales. "Not having much of an installed base, it's not going to have to cannibalize itself to grow, like some other companies," says Moshe Orenbuch of Credit Suisse First Boston.

AmEx entered the online banking business later than some competitors, but it has emerged as an aggressive contender. With 8,700 of its own ATMs around the country, AmEx has a bigger physical presence than most online banks.

Citibank, by contrast, has 3,800 ATMs in 46 countries. AmEx has also joined financial networks, such as NYCE and MAC, to allow customers to withdraw money at convenient locations. And it has brought its financial muscle to bear: "If you get charged a fee, we will reimburse you up to four times a month, up to $1.50 a transaction," says David Kroner, director of Internet marketing for American Express Membership Banking.

If the prestige and security of the name are not enough to attract new customers, the rates may be. "As of this week, our checking account interest is at twice the national average," Kroner said in December. "Our money market rate is more than double the national average."

Anyone who ever spent weeks waiting for a bank to process the voluminous paperwork that goes into an old-economy mortgage or home equity loan can appreciate one use for AmEx's proprietary credit algorithms: the 60-second home equity loan. Any applicant, whether or not a current AmEx customer, can fill out an online application and have it processed instantly. It's modern. It's hip. It's smart. It's secure. It's Blue. And it has attractive features for every cardholder, from conservative to ultra-savvy.

Far and away American Express's most talked about new product in recent years is its entry into the smart card market, the Blue card. "The Blue card is an enormous success—not in terms of technology, but in terms of marketing," says Orenbuch. Blue—a term the company prefers to "Blue card," as if to signify that the item in question is a mirror of the zeitgeist rather than a piece of plastic embedded with a 16K silicon chip—streaked out of the gate on September 8, 1999.

The card itself is a striking piece of industrial design, with a central hologram that speaks of modernity, the future, and coolness—and serves absolutely no practical function. A small chip, embedded at the side of the card, has the potential to identify the user's likes, dislikes, and habits; breeze that person past cashiers; and in general make his or her life easier in myriad ways. With a dedicated card reader (manufactured by Compaq), Blue members can plug into their own PCs and use a special encryption system to make Web purchases from merchants who, as with Private Payments, never learn their actual account numbers.

Smart cards that were precursors to Blue were issued to customers of American Airlines and Continental Airlines, who used them to go directly to the gate and, with no human interaction, obtain their own boarding authorization. The chip identified and vouched for them.

At Camp Lejeune, a Marine Corps base in Jacksonville, North Carolina, leathernecks could use their cards to voucher automatic weapons and other ordnance, manage their purchases at the PX, and check in for deployments. AmEx has even launched a contest, with prizes up to $50,000, for cardmembers who come up with cool new uses for Blue.

Not surprisingly, the card has sparked an avid following. Brittain Associates, an Atlanta market research firm, estimates that 5.5 million Blue cards have been issued in barely a year, a significant portion of the 33 million active U.S. cards AmEx confirms.

Blue cards have a Java platform, enhanced by proprietary software that AmEx has licensed to companies as diverse as Microsoft; software developer Orga of Paderborn, Germany; and Tesa Entry Systems, the Atlanta electronic lock maker. AmEx has not only retained the rights to its chip, but invited its slower competitors to sing from the same page. When a worldwide smart card standard emerges, AmEx, rather than its larger competitor, Visa, is poised to dictate the rules of the game.

But the great unspoken secret of Blue is that today it does little more than an ordinary AmEx green card—in some parts of Europe, green cards already contain smart chips.

A Brittain Associates survey found that fewer than 1 percent of Blue cardholders use their card for secure online transactions. "Almost no one is using it in a way that would take advantage of the security part," says Bruce Brittain, the market research firm's founder. In fact, although Blue was marketed as a card aimed at Generation Y, Brittain's research found that the average cardholder was about 42 years old—almost the same demographic as other AmEx cardmembers. "I visited my dad in California, and he whipped out his Blue card," Brittain says. "He's 81."

AmEx has upgraded the Blue chip to 32K, and plans to offer a cabinet of interactive products in the future. Already, it provides access to electronic wallets—online files that store and manage a cardmember's entire financial life, from managing his or her assets to keeping track of Visa and MasterCard accounts, at no charge.

Still, the real attraction of Blue to consumers, many observers believe, is that it charges no annual membership fee. Its interest rate—sometimes as low as zero—undercuts virtually all the competition. "The bottom line is that Blue is a package," says Molly Faust, a company spokeswoman. "It has multiple features that are attractive."

Prudential's Scutti sees Blue as a shrewd marketing move—both for its cool design and its interactive promise. "They've succeeded in recruiting a very fickle customer base," she says, referring to Gen Y Blue cardholders. "Blue could build loyalty to American Express, and help the company build business." With its customized Internet solutions and business services, AmEx aims to use technology to bring merchants and customers together.

It's natural that the retail customer has been the major focus for AmEx, but the company is equally obsessed with developing Web services for business customers. "Our customers expect an Internet solution with every new product," says Anne Busquet, president of the company's in-house incubator. "For large customers, we're able to offer customized solutions." For midsize and small businesses, she says, "we can offer customizable solutions."

If American Express realizes its vision of the future, businesses small and large may turn to AmEx online for as many services as individual cardholders can. "We can offer procurement services through MarketMile," says Busquet. "We offer financial solutions, credit, card services. Companies can arrange their travel through us." Payroll, pension plans, even handling human resources are among the services AmEx either currently offers online or plans to soon.

Once MarketMile is fully implemented, it should allow AmEx's midsize and small-business customers to outsource all their purchases, from paper clips to major capital items, to AmEx. Funded with a $46 million investment from AmEx and eVolution Global Partners, a venture capital firm, MarketMile is targeting what it calls "the fragmented $1.4 trillion" U.S. market for everyday business products and services. As a sort of gigantic Web wholesaler, MarketMile aims to offer costs savings and efficiencies for its buyers, while increasing volumes for participating manufacturers.

In one sense, MarketMile is a logical extension of the services American Express has long offered to business customers—especially large businesses. In-house AmEx travel agencies, for instance, have been situated in Fortune 500 companies for decades. Salow's technology staff works with large customers to devise specific solutions for their needs. Now, AmEx is using technology to push its customizable services down to a smaller business customer.

AmEx's Internet strategy is designed to bring together businesses, particularly merchants, and their customers. But for the moment, online is more of a promise than a reality. Only 3 million of the 33 million cardholders are currently registered with AmEx online, although the company says that 70,000 are signing up each month.

And of course, AmEx is not alone in targeting the markets it does. Giant banks and such juggernauts as Fidelity Investments and Charles Schwab are among those eyeing all or some of these opportunities. Still, AmEx, with its sterling brand and its reputation as a customer's champion, could just grab the brass ring. One of AmEx's goals is to adapt cutting-edge technology effectively for its own purposes.

Former CEO Harvey Golub insisted that the company hook up with smaller businesses that were taking innovative approaches to the Internet. Today, AmEx has more than 30 equity positions in companies, including:

Connects freelancers and consultants with projects that can take advantage of their expertise.

Offers consumers Internet promotions that can be used on- or offline at participating retailers. Prio powers the special offers AmEx cardholders receive online.
A major provider of Internet foreign exchange trading solutions for Japanese banks.
Brings together groups of buyers and sellers to exchange goods, services, and information in online trading communities.
An online barter service that allows companies to exchange excess goods and services over the Internet.
Allows customers to use a secure service to print movie, concert, and theater tickets at home on their own printers.

The company has been reorganized into four core business groups. Here's a preview of where their gainful enterprises will be relocated.

American Express's new CEO, Kenneth Chenault, moved swiftly to make his mark on the company, reorganizing it into four core groups, down from eight, before he even formally took over the top post. New Businesses and Interactive Services, which is not one of the core groups, runs the incubator that has spawned Private Payments, Blue, and other products. Those enterprises that succeed will eventually be transferred to one of the core businesses, which are:

1. Global Financial Services brings together American Express Financial Advisers, the company's army of 10,000 financial advisors in the U.S., with the American Express Bank, which operates mostly outside of North America. The group also has responsibility for all consumer card business and risk management outside of North America.

2. U.S. Consumer and Small Business Services runs the U.S. card business and consumer travel, small business services, risk management, and the Centurion Bank.

3. Global Corporate Services runs the company's Corporate Card and Business Travel businesses; Chenault has publicly challenged it to increase growth of these services outside the United States. This group also directs AmEx's B2B operations and Tax and Businesses Services divisions.

4. Global Establishment Services and Travelers Cheque group handles AmEx's sometimes touchy relations with merchants. The unit has a mandate to expand the international base of the company. As its name suggests, it also handles AmEx Traveler's Cheques.