American Express does not expect the discount rate it charges merchants to fall under the jurisdiction of regulations being considered by the European Union to place caps on interchange fees.
The rule would cover interchange fees on "all card transactions that are widely used by consumers and therefore difficult to refuse by retailers," according to the draft versions of the European Commission's proposal. But Daniel Henry, Amex's chief financial officer told analysts during the company's July 17 second quarter 2013 earnings conference call that the draft proposal is aimed at four-party payment networks like Visa and MasterCard, where the card issuer and merchant acquirer are different entities.
It would not apply to three-party networks like American Express (and others, like the Discover Network), where the card network both issues cards to consumers and charges fees to merchants to handle payments, essentially acting as both the issuer and acquirer, Henry adds.
"The discount rate that American Express charged to merchants would not be regulated. Our proprietary consumer and corporate card businesses are not covered by the pricing caps," Henry told analysts, adding, "The provisions that focus on separating the payment network and processing functions do not appear to impact proprietary networks like ours."
The rule would apply, however, to its Global Network Services, or GNS, business, where Amex provides licenses that authorize other institutions to issue its cards. But Henry said the GNS unit represents a relatively small percentage of our European business, approximately 12% of the $505 million in pre-tax income Amex earned in the combined Europe, Middle East and Africa region in 2012.
"There are many aspects to the EC draft proposal. They will play out over time. Some will impact us directly. Some will impact us indirectly," Henry says. "We are accustomed to changing business environments and reacting to them in an appropriate manner and we will do the same in this situation."
There is precedent for Henry's assessment of the European proposal. When bank regulators in Australia began setting caps on interchange fees in 2003, three-party networks were not included in the regulations.
Still, should the interchange rates charged by four-party networks decrease as a result of regulation, Amex and others may have to respond to stay competitive.
"Initially, the gap between what our discount rates are and the cap will probably widen that gap somewhat. But realistically, we know we'll have to react to a certain place in the marketplace," Henry says. "And I don't want to analogize this exactly to Australia because every market is different, but what we did in Australia I think demonstrates the fact that we have a flexible business model and are thoughtful in terms of having to react as the environment changes."
American Express reported net income of $1.4 billion for the second quarter of 2013, up 5% from $1.3 billion a year earlier. Revenue (net of interest expenses) was $8.2 billion, up from $8 billion a year earlier, which the New York-based card issuer and network attributed to higher consumer spending and growth in its cardholder loan portfolio.
During the first quarter of 2013, Amex posted net income of $1.28 billion, results that came after the company announced in January that it would cut 5,400 jobs, citing technological changes to existing business lines.
The earnings call was the last for Henry and marked one of his final acts as CFO before the 23-year Amex veteran retires this year. In June, the company hired former McKesson Corp. CFO Jeffrey Campbell as executive vice president of finance and said he will assume the CFO duties after Amex completes its financial filings for the second quarter.