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Ed Gilligan

Okay and I think that’s the right answer is well I think what we are focused on how do we continue to become, be a growth company and achieve our long term financial objectives that we put out there. It’s been out there I think since 1997 that we say on average and overtime that our revenue growth would be 8% or higher, earnings per share 12% to 15%, return on equity 25% plus.

And I think when you look at the last couple of years obviously we all are focused on how do we grow revenue the right way and get it at or above that corporate hurdle. And billings growth is the biggest driver, not the only one, but it’s the biggest driver of our revenue. And we are a spend-centric model meaning that we have an incredible customer franchise of consumer’s affluent consumers around the world.

Small businesses, corporate accounts, our average card member spends three to five times more than a Visa MasterCard member and that drives premium economics for us that we continually reinvest and the output of all our investments should be higher spend in our network.

So we grow spend by doing a number of things. One, focusing on our incredible customer franchise and give them reasons to put more of their spending on the American Express card, to capture a higher share of wallet whether it’s consumers small businesses or corporate accounts around the world. We also have many countries that are franchise like that are being managed by large banks around the world who operate our business.

And there our focus is to capture a higher share of that bank’s credit card business. And you do that whether it’s a consumer or a small business by having great value propositions that encompass rewards a variety of other benefits service and having a strong brand. Having a brand that you can trust and one that has integrity and one that’s constantly trying to innovate to create more value. So we invest a lot of time and money in sharpening value propositions to earn a higher share of a customer’s wallet.

So that’s one tranche. Probably the biggest tranche of investments we have that drive the most growth is acquiring new customers again whether it’s consumer small businesses or corporate accounts around the world. We do invest a lot to acquire, and that investment, particularly in the last couple of years have yielded very strong returns for us.

If you look at the last three years in the U.S. and if you look at share of credit charge card spending in the U.S. we have gained more share in this three 3.5 year period than in any other period of American Express’s history. And we are around 26% to 27% of credit charge card spending in the U.S. now. In fact our credit and charge card spending in the U.S. is bigger than MasterCard’s. We surpassed MasterCard last year.

So that’s been the result of a very aggressive investment strategy. Focused clearly on our strategic intent which is affluent consumers small businesses et cetera. But we have been executing very well. We have been improving our value propositions and we have been growing faster than the competition in the U.S. for much of the past three or four years coming out of the recession.

And have built a very strong franchise in terms of share the largest we have ever had in the U.S. Outside the U.S. we are doing similar things we don’t have the share that we have in the U.S. But when you look at all issuers outside the U.S. and you look at spending by issuer, we are the largest issuer operating outside the U.S. There is very few banks outside the U.S. that issue across multiple countries.

There is very few so we compete with Citi’s and HSBC’s et cetera we do. But in most countries we are competing with the large retail banks. But if you look at our international franchise, we are a very large, the largest issuer and have a presence in over 100 countries some of which is proprietary where we are the issuer and some of which, most of which are operated by banks particularly in emerging markets where we have a different model.

So we look at all these different levers to invest and to grow share of wallet, to grow customers, to grow bank relationships and lastly to expand the merchant network, right, to be able to get more merchants to accept the card. And we target merchants where our customers live, work, and where they travel to. So we are, it’s building a network where you get more people on the network spending you get more merchants accepting and that’s a driver of our growth as well.

And particularly focusing on small merchants. That’s where we tend to have a gap compared to Visa and MasterCard. We have created lots of different constructs in the U.S. and around the world to bring on smaller merchants in large numbers. And in the last two years we have brought on 2 million more merchants around the world and that’s been a driver of our growth and that doesn’t include all the micro merchants that come onboard through aggregators like Square.

So I think, we've building up both card member spending and the merchant acceptance, you know, very methodically over the last three or four years and the company’s results reflect that.

Betsy Graseck - Morgan Stanley

Thanks Ed.

Ed Gilligan

That's a long answer Betsy, but.

Betsy Graseck - Morgan Stanley

You hit the highlights.

Ed Gilligan

Yes.

Betsy Graseck - Morgan Stanley

So we'll dig in a little bit.

Ed Gilligan

Okay.

Betsy Graseck - Morgan Stanley

One question is on how you are increasing your card acceptance and usage among younger, the millennial? And maybe you could broaden out the answer to include other folks that you're targeting with your increased investment spend, but the millennials keep on coming up in conversations with investors.

Ed Gilligan

Yes, I think it's, it's a great situation for us in that our brand resonates with people under 35. And we know that to be true because a lot of under 35 people, consumers in the U.S. particularly, you can focus on, applied for American Express cards. A number of years ago, we launched a card that was predominantly focused on under 35s, a charge card, a zinc card.

And what we found after a year of being in the market where we had a dedicated value proposition in marketing focused on under 35s, so yes they liked the card, but we still had more people under 35 applying for green cards and blue credit cards. So we know our brand resonates, the challenge we've had is credit approval, because many of those folks particularly under 30 have thin credit files. Some have negative credit files, put those aside, but you know there's a large part of the under 30 population that just have very little credit.

And it's very hard to approve them for a credit product. But we know the brand resonates, so that's the good situation we're in. And in the last year or so you can see we focused a lot on reloadable prepaid with Bluebird and increasingly a wider range of products to try to get those folks we couldn't approve for credit into the AMEX franchise on a product with an AMEX brand in their pocket to bring them into the tent with us and then over time look to expand our relationship with them.

So I think you know really for the first time in our history we have a product for folks who don't have a credit history, where we can get them on an AMEX brand and then build a longer term relationship with them.

Betsy Graseck - Morgan Stanley

And they're building that history, that credit history that you need to see, it's not really because it's a prepaid.

Ed Gilligan

It's a prepaid, so it's not building credit history, but we are collecting more information. Now, so if someone gets a reloadable prepaid card and they connect their direct deposit to it, we now have more information on that customer. We can see how they behave, and that information will come into play at some point in the future when we look to do a credit approval.

But it certainly gives us a relationship and it gives that customer a flavor of what it's like to be an American Express customer. So I do believe it will result in a stronger connection to our charge and credit card products over time as we have a longer term relationship with them.

Betsy Graseck - Morgan Stanley

Okay. Other question on acquiring accounts, that frequently comes up with investors is what's the cost to acquire, how has that been trending over time? When we look simply at the rewards costs as a percentage of billing, it looks like it's going up but that's a very rough metric. So wish for little more insight.

Ed Gilligan

So the way we look at it internally is we don't look at a cost per card, so to speak to acquire. We look at what the first year of spending of a new customer is and what it takes, what is the cost it takes to acquire that and do we get a positive return on that. And we look at all different kinds of deciles, card member acquisition.

And theoretically you want to keep investing to acquire customers, so that that last decile of customers you bring on is at or slightly above your cost of capital, right. So we look at all this stuff and what I can say is all of the returns on our acquisition are very strong, very positive and that makes us feel very confident that we can continue to invest to bring on new customers, regardless of the competitive environment in the U.S. or in many countries around the world.

We're getting a very positive return on our investment in acquisition. So last year I think we said at the Financial Community meeting, American Express hosted in, I believe it was in February, but last year we got 5% increase in new accounts but spending on those accounts were up 9% versus the year before. And then we showed different segments of you know different types of customers we're bringing on.

But that's telling you we're focused on the spending, not on the accounts. And the spending has been very strong and that's been the key driver of why our billings growth in the last three or four years have outpaced the industry certainly in the U.S., is very strong returns on acquisitions. So what we feel, we feel very good about that. Now our efficiency of acquisition is getting better as well, if you looked five to 10 years ago, American Express was predominantly a direct marketing, a direct mail channel that was the largest channel we had to acquire new customers, direct mail.

And you know we had world class metrics and had a great prospect database, we look at credit worthiness of the prospects, we look at projected response rates, and we would mail in very effective and efficiently to acquire customers. But direct mail is still in the mix for us and for many of our competitors.

But for us it's much smaller now than it used to be. We have replaced much of our direct mail with online digital acquisitions, finding customers online, making right to right offers with the right product at the right moment, depending on where you are on your online journey. Certainly driving people to our website to apply but finding prospects who we know something about in their digital journey.

And online has proved to be, is now become the biggest channel of acquiring customers for American Express. And it's helped us improve our efficiency year after year, getting a positive return on what we spent to acquire new customers.

Betsy Graseck - Morgan Stanley

So coming out of the financial crisis you've had competitors focus on your sweet spot right, on the spend centric model. So there has been, hearing from other folks at the conference, continued interest in acquiring those spend centric customers. And we hear about partnerships that are expanding elsewhere which raises the question has it become, are you taking some of that benefit that you're getting and moving to the digital, that lower cost of acquisition there and reinvesting that in, the rewards, reinvesting that in extending your brand with other partners?

Ed Gilligan

Well what I would say, I think a lot of the folks you talk to are predominantly, if you talk about the card business to big banks, perhaps who were here, most of them are focused on the U.S. credit card issuing business. And American Express is more than a U.S. credit card issuer. We are an issuer with a global footprint, we're a merchant acquirer, we're a network. We have a closed loop model.

I would say there are some things that are similar to our competitors and some things that are different. We have many different options now to grow billings, to grow revenue for American Express. Certainly the U.S. credit card market is big, we're a major player, we have scale, it's very important to us. But there's number of other things we're doing to grow beyond just a U.S. credit card business.

And we do look to see where we invest, where we get the best returns and I will say we have a number of good places in addition to the U.S. where we get strong returns. There's a number of international markets, there's growing the merchant network, there is doing deals with network issue where is around the world that we investing.

There is whole lot of digital activity that we’ve invested in order to bring what you need about American Express to like on digital platforms. There is new products like Bluebird that we’re investing in. But having said that the U.S. is a competitive marketplace. I think a lot of our credit card competitors are realizing it’s very hard to grow our balances, to grow their lending book of the credit cards because that market is relatively flat.

It’s been down for the last couple of years. And they are moving to try to acquire higher spending card members to get more other types of revenue to diversify their own revenue.

So which means they’re coming into a space where American Express has a large presence in the U.S. And let’s say completion is good. We welcome the competition and I think we have fared very well over the last couple of years with competing head-to-head with banks in the U.S. And we do so by as you’re saying improving the value proposition.

We have invested in rewards but we also look at the cost of goods sold, look at the whole package of benefits we have. We invest in things that are very important to customers and we kind of take money out or cut investments that don’t seems to be adding value. So we look overall like the margin of our business in the U.S. And we’re comfortable with where we are.

We’re comfortable now that we’re holding slightly growing share based on the first quarter numbers. And we look at what competitors are doing, we look at what the networks are doing in the U.S. and we’re holding our own for sure. But we also look beyond the U.S. credit card business, is my point to get growth. And I think there, when you look at the next five to ten years in the payment business, there is a number of markets outsides the U.S. that we’ve done market for credit card spending is projected to be double digit, a healthy double digit growth in the marketplace and we want to make sure we have enough presence in these.

You can’t even call in emerging markets, but high growth markets. And that should drive a lot of our growth over the next five to 10 years. And I think a lot of the U.S. players who are predominately just a U.S. footprint will find too hard, will have a harder time trying to get double digit growth in the market that is slower growing.

Betsy Graseck - Morgan Stanley

And so in terms of these high growth markets, I mean some of them have some various (entries) now.

Ed Gilligan

Yes. I mean, each one is story into itself. I mean the largest fastest growing market is China in the credit and debit cards space. But for it’s a market of that’s highly controlled right now. There is one network in China that the local Chinese (use) China UnionPay. But over time this thing will evolve and we like Visa and MasterCard work with a number of banks.

We have very strong partnerships with ICBC, with Bank of China, with China Merchant’s Bank, with China CITIC Bank. And they issue cards that are dual network, China UnionPay and American Express in our case. And those cards are used by traveling Chinese when they’re outside of China.

But there is a lot of focus in China saying eventually China UnionPay will open and other networks may exist there. I mean it’s a marathon, it’s not a sprint. So you have to be patient. But we have good building blocks in strong relationships with the biggest banks in China, some of the biggest banks in the world that we’ve been working on for years.

Other than China though, there’s lots of markets that where our value proposition resonates today and we want to have a bigger presence. Brazil, Turkeys, Korea, Indonesia places like that where you look in next five or ten years then markets are growing double digit. Russia is on that list.

And there is a number of international markets that have been slow growth but where American Express has done very well because of our execution of both our premium products as well as having bank issuance products in markets like the UK and like Japan and even Australia, where in last five years we’ve been able to outgrow the market. So, I think we have healthy international franchise.

But when I look over the next five to ten years that’s going to be a bigger focus of ours than it’s been in the last five years where we have won a lot of share in the U.S. and I think that has served us very well. And our financials are very strong as a result but we want to continue to, we want to continue to diversify across the different parts of our business model, international and merchant acquiring, network, digital as examples.

Betsy Graseck - Morgan Stanley

And can you talk a little bit about the form factors because you’ve got different form factors in different market and in particular mobile and the high growth markets. Feels like it’s an important part of the toolkit. How you’re thinking about that?

Ed Gilligan

Well, I think we’re watching mobile very carefully as we have for the last three years and those couple of different things about mobile like there is mobile payments where you can say where the phone becomes the form factor and it may have a chip in the phone that talks to a chip on the POS device to conduct the transaction.

There is contact list in different parts of the world today, but generally speaking it’s relatively small. Now, in Japan, the contact was part of payments that have been going on for over a decade. But it’s predominately focused on cash replacement for transportation for wending machines, it really hasn’t got into the merchant world.

If you look at everywhere else, it’s still emerging and it’s not quite clear yet what the standard for technology will be, NFC or something else. And that is something is we’ve been watching for over three years. But we knew three years ago as we do now, it’s complicated. Because, just because you can have technology that makes a phone, the form factor doesn’t mean the consumer will use it, will want to use they have to have something more.

Because swiping a card works pretty effectively today. And there is also a big cost on infrastructure for merchants to swipe out or to change all their infrastructure to be able to read a chip. So, this is been a slow burn which we kind of knew three years ago. We did not get overly focused on NFC or having pilots around the world because we knew there was a big cost of doing that and it wasn’t necessarily going to be the winning technology.

I think if the jury is still out, there is a lot of factors here that will determine whether NFC comes into, if we hit the tipping point and it starts to scale faster, we’re watching very closely. There’ll be few telling signs in the next year whether that happens. And if that does happen, American Express is going to make sure we’re into operate with all of the NFC capability that rolls out around the world both for the card members and for merchants.

That infrastructure piece, we’ve been working on for number of years. The other part of mobile is really mobile commerce, not mobile payments, mobile commerce is just buying things off the web but from your phone or tablet and that is a very fast growing part of commerce today where all of us have multiple devices from work stations or PCs or laptops at home, phones, iPads, Galaxy tablets, whatever and conducting commerce as you’re walking down the street from your phone.

That part I think is certainly very interesting and to me this is something AMEX has thought a lot about the last few years and continues to think a lot about in invest in. Because at the end of the day, the question is will American Express be relevant, if you’re not picking out platinum card but you’re buying something from phone from a merchant online.

And we have lots of promising signs that, yes we’re staying relevant. We’ve been working really hard to ensure we stay relevant and to ensure we stay a growth company and three years ago we started looking at and talking to financial community about online spend on the AMEX network as an example. And we look at online spend because today 17% 18% of our volume, people in that taking up their cards, they’re clicking a mouse.

And we had over $150 billion of online spend last year and we have more online volume on the AMEX network than PayPal has in total. As an example and we’ve been showing that comparison. Why is that important? It’s interesting factoid but says that AMEX customer value what we delivered rather they’re swiping a card or clicking a mouse and that goes well from mobile commence because the lines are blurring between online and mobile and the real trend is about convergence, right.

It’s about how you’re using the internet that’s now sitting in your pocket that to shape your buying decisions and will AMEX be relevant when it comes to making that purchase. And all the things we’ve been in digital and with customer value propositions have been gearing for this moment is to stay relevant regardless of how you decide to pay for something whether you’re swiping a card, clicking a mouse or perhaps tapping a phone a year or two from now.

Our value proposition has to resonate and we’re working hard to say top of mind and all our information of last three years says it’s working for us. Because our brand is more than the color of plastic you have. It is about everything else to trust, integrity, the service, the rewards, right.

We’re a company that are our customers like admire and respect and we measure this with an obsession and all of that has boards well as four factors may or may not change over the future.

Betsy Graseck - Morgan Stanley

Okay thanks just want to (queue) the audience and see, we have five minutes left. If there is anybody in the audience that is interested.

Okay, we have one way upfront hope you can quickly jog to the front of the row, thank you, first row firs row over here, thank you.

Unidentified Analyst

Just the continuing thought on the AMEX network. I mean, how does it affect the fees that you charge, inside with the online transaction increasing is it any different than the brick and mortar versus online and mobile and all of that. Does it affect your margins in any way inside the AMEX (inaudible)?

Ed Gilligan

Is there different between an online transaction and offline? No in fact, I was going to go look at, I was thinking of who the largest, there was some as you might imagine very large merchants who are online only, but many merchants who are both online and offline. In our relationships with merchants you know acquired merchants directly. We have direct relationship.

We set the price based on the industry of merchant is in, based on their growth, their volume, a few other things that we have our, the way we’ve been pricing to merchants for decades. And there is really no difference in margin between online and offline transactions. So it’s completely consistent with the way we’ve been doing business.

So the merchant price reflects the growth, the volume, the industry they’re in, our relevance, how much value we’re adding to that merchant. Our pricing tries to reflect that and it doesn’t matter whether it’s online or offline.

Unidentified Analyst

And emerging technologies like Square and all how does that affect?

Ed Gilligan

Well, Square is interesting. Square is an aggregator. Square has signed, they say millions of merchants to accept plastic. Now we looked at that so these are predominately micro-merchants in the U.S. they’re considering some expansion plans today. I think they’ve launched in Mexico looking at few other countries. But they’re U.S. player right now. They’re in aggregator up small merchants.

The way we look at it is when you as a merchant accept Square or you Square, you get acceptance for American Express. So we know how many merchants were used last year by AMEX card members and we looked at that and it’s hundreds of thousands of merchants and we looked at those merchants, the vast majority of the never accepted American Express before.

Because the micro merchants. They’re flea markets, they’re farmer markets, they’re spa technicians, they’re plumbers who are coming to your home. That’s who Square has focused on in this phase and I think they have done very well and they have added a lot more merchants to our network. And our relationship with them reflects that but they’ve done a really good job of converting cash into plastic acceptance predominantly with small merchants.

Unidentified Analyst

Hi, to what extent do you think surcharging is a material risk to your value proposition and business model taking a medium to long term view?

Ed Gilligan

Well, the only market which I am sure you’re well aware where surcharging has been in place for a number of years had been Australia. And Australia has been certainly in a bumpy ride where there has been a lot of regulation capping, the interchange reviews (MasterCard back) 2002, 2003 and then surcharging that has occurred.

So if you look at Australia, we see that regulation came in, it reduced interchange reviews of MasterCard, didn't touch American Express, but overtime we had to adjust our pricing again, as you well aware, to come back more in line but we had years to adjust our business model in Australia.

We signed all four major Australian banks to be issued as American Express card. Our share of spending Australia is higher now that’s ever been. And surcharging has taken hold, and in fact a new round of regulation that was going after surcharging or trying to manage it in Australia. While before was highly encouraged, there were number of merchants who were surcharging well above their cost of acceptance and new regulations have coming in Australia.

So what I would say is when there is parity surcharging, well I’ll say this first thing, surcharging is first anti-consumer for sure. And I think a lot of governments around the world see it that way. In fact even in the U.S. it’s a mixed bag right. There is at least 10 states now that prohibits surcharging because its viewed has been anti-consumer, which it certainly feels like it is.

Then in Australia when we look at it many merchants are were parity surcharging and a few doing differential surcharging meaning charging different for AMEX than for Visa or MasterCard. And that is a problematic and then we go back and have numerous discussions with merchants on the value of American Express.

We certainly do a lot of marketing with merchants who don’t surcharge. We try to make our customers aware of the situation because it’s not a great customer experience to be differentially surcharged. And I think we’ve managed that fairly effectively in Australia. Outside of Australia, there is very little surcharging that goes on.

There is a number of places like in U.S. that are considering as part of litigation against Visa and MasterCard allowing merchants to do that. But again I’d say there are countervailing laws forbidding it in a number of states and generally I think people regulators have seen it for what it is which is anti-consumer. But it’s a complicated issue. It’s one that regardless of what happens we try to find ways to navigate, there’s certain threats that come out of surcharging but also we look for opportunities.

And I think Australia has been a good example where there have been a number threats to our business model over the years but we found many more opportunities to grow our business differently as a result and to adjust our economic model.

Betsy Graseck - Morgan Stanley

That’s all time we have, thanks Ed very much for joining us.

Ed Gilligan

Thank you Betsy