While the U.S. economy is weak, American Express Co. leaders are closely monitoring U.S. billings growth and the credit market overall.

"We saw the first signs of significant weakness in our credit numbers at the end of last year and this trend has continued in 2008," AmEx Chairman and CEO Kenneth I. Chenault told analysts at Keefe Bruyette & Woods' Diversified Financials Conference on Wednesday.

The issuer's net write-off rate in the first quarter increased by 90 basis points compared with the fourth quarter of 2007, "but remained best-in-class against our major peers," Chenault said.

"We're taking appropriate actions to control credit [but] we do expect that write-offs would be higher in the second quarter than in the first," he continued.

AmEx's net write-off rate during the March quarter was 5.3%, up from 4.0% at the end of March 2007. This rate was lower than most of the company's peers.

"There are three reasons for our generally lower write-off rates versus the industry," Chenault said. He cited AmEx's "premium Cardmember base," consumers who typically have higher incomes and strong payment rates. "We look for [cardholder] prospects largely from the Super-prime and Prime segments, who have the capacity to generate profitable spend," he explained.

AmEx's second advantage is risk management. "Whether it's approving an application or authorizing a higher line of credit, our process is disciplined and our capabilities are advanced. Our models and expert systems employ a wide range of data," some of which is specific to geography, such as local real estate values, and data specific to the terms and obligations of a potential cardholders' mortgage, for example.

This range allows AmEx's credit modeling to be dynamic and allows adjustments based on a changing external environment, said Chenault. The company has gone so far as to apply for patents on many of its models.

The third reason for AmEx's advantageous write-off rate is the fact that cardholders "must pay on a timely basis in order to earn their membership rewards points," he said. "Membership rewards effectively [act as] a carrot and stick when it comes to Cardmember behavior," Chenault said.

AmEx's chairman defended the use of Fair Isaac's FICO score –even as it has come under some harsh criticism recently.

"I know that some people have questioned the use of FICO in extending credit. There is a belief that the scores have become inflated overtime and that it's no longer a valid indicator of creditworthiness," said Chenault. "I will concede that FICO scores have crept up over time, but there is still exceptional correlation between FICO scores and delinquency rates. So FICO should not be dismissed."

AmEx uses the FICO score as one measure among many to determine its credit actions, he said. "We base our [Cardmember] approvals on a broader range of data that is more predictive of our prospects' true creditworthiness. We consider their total size of wallet, we segment our prospects needs between their spend and revolve capacities, we look at their home value and we look at the amount and type of debt they hold.

"By using a range of factors, we believe we're knowledgeable about an applicant before they even join our franchise," Chenault said.

Subscribe Now

Authoritative analysis and perspective for every segment of the payments industry

14-Day Free Trial

Authoritative analysis and perspective for every segment of the industry