American Express Banks on Federal Help

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Plus, American Express needs funding because its credit-card holders are having more trouble paying off their monthly balances. American Express' brand may have an upscale image, but even its customers apparently are feeling economic pain. According to a recent analysis by Oppenheimer's Whitney, American Express' delinquency rate in September was 4%, compared to an average for the industry of 4.8%.

Questions about the Business Model

However, credit quality at AmEx has deteriorated far faster than at its rivals. In the past year, delinquencies had jumped 57%, while competitors saw increases in the teens or single digits, ranging from just a 4% rise for Capital One to a 18% rise for Citigroup. "Their exposure to people with credit issues has been surprising," says Gwenn Bézard, research director with the Aite Group, a financial consulting firm.

Indeed, these mounting credit troubles, which could deepen if the economy worsens, may be investors' biggest worry about American Express. "Funding…was not our primary concern with [AmEx], consumer credit losses have been," Whitney wrote.

Bézard notes the company has other challenges too: Its business model relies on charging merchants more than other card systems, in an effort to earn more money on each transaction. But this revenue slows as overall consumer spending weakens. Also, he notes, credit-wary consumers gradually have been shifting from credit to debit (BusinessWeek, 10/29/08) but AmEx doesn't offer a debit card.

Protecting the Brand

Thus, becoming a bank holding company hardly solves all of American Express' problems. FBR's Valentin notes that competition among banks for deposits "remains intense." To get access to more deposits, AmEx may consider acquiring a regional bank or two, Bézard says. But this expansion into traditional banking risks distracting AmEx from it prime focus on serving the affluent. If executives aren't careful, it could even "diminish the value of the American Express brand," Bézard says.

The future of American Express will depend on how important Nov. 10's decision is seen in retrospect. This may have been a clever move to win extra funding and get federal help, helping AmEx ride through a temporary rough patch. Or it could be the moment when, in the face of unprecedented turmoil, American Express was forced to entirely rethink its business model.

Steverman is a reporter for BusinessWeek's Investing channel.