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|  | FEBRUARY 3, 2005
By Mara Der Hovanesian AmEx Plays Its Winning Card [Page 2 of 2] "GROWTH BUSINESS." Selling the financial-planning unit also rids Chenault of a business rife with potential conflicts. Until 1999, AmEx advisers were encouraged to sell in-house products such as mutual funds and insurance policies, mediocre performers at best. Since then, the unit has been hit by Securities & Exchange Commission enforcement actions and clients' class actions for allegedly failing to adequately explain investment offerings, not awarding certain bulk-rate discounts, and selling inappropriate financial plans. Chenault says worries about conflicts and legal quagmires didn't drive the sale: "This was not a situation where we said we need to get out of this business because the compliance and regulatory issues are too challenging," he said, adding: "Quite the contrary. This is a growth business, and we are constraining that growth." Flying solo may not be easy, however, and AmEx's James Cracchiolo, who'll remain chairman and CEO of the renamed AEFA after the spin-off, has his work cut out for him. He'll be competing directly with the likes of Merrill Lynch (MER ) and Morgan Stanley (MWD ), which are under attack from discount brokers. So he'll be counting on marketing deals with AmEx, including offerings from Financial Advisors' Gold & Platinum Financial Services and co-branded programs with partners such as Delta Air Lines (DAL ) and Costco Wholesale (COST ). FILLING IN THE BLANKS. Chenault's goals for increasing profitability in the card business also will face challenges. Visa and MasterCard have an edge over American Express in that they charge merchants less. That's the main reason many more merchants today accept those two cards: Visa and MasterCard each boast some 5.4 million merchants in their networks, vs. 3.2 million for American Express. Chenault believes merchants should pay for quality, since his customers tend to spend more per transaction than those using rival cards. New bank partners are also being lured into the fold with promises that Chenault will give them a cut of those lucrative fees. But there's a catch-22: AmEx can't add card members without increasing merchant acceptance at the same time -- and merchants won't pay the outfit's higher fees until it can prove it will deliver enough high-spending card members to justify the higher cost. Chenault was clearly elated the day the spin-off was announced, eager to be one step closer to achieving his grand plan of building a card-focused American Express. But even as investors cheered the decision to spin-off the financial planning arm, it was clear that achieving all the results he hopes will require several more pieces falling into place.
 Der Hovanesian is Finance & Banking editor for BusinessWeek in New York Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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