Card Sharks : American Express, Facing Merchant Revolts, Tries to Fend Off Its Charge-Business Rivals


Reaching into her wallet to pay for a new rug and a lamp shade, Karen Paterson cast a vote in the credit card wars. She plunked her Visa card on the counter to make the $250 purchase because the Laura Ashley shop no longer accepts American Express.

But as Paterson lugged her purchase from the store, she vowed to return less often. “I use American Express for everything,” she said. “There are stores I like just as much that still take it.”

How many consumers share Paterson’s reaction has much to do with the outlook for besieged American Express. The giant card issuer contends that the vast majority of its 25.3 million cardholders will react as Paterson did, though some merchants say their experience proves otherwise. Men’s clothing shops, restaurants and leisure travel firms such as Carnival Cruise Lines contend that the loss of the American Express card hasn’t hurt business.


“I’m delighted to say it was a non-event,” said Andre Higginson, group finance director for London-based Laura Ashley.

While these defections aren’t enough to do damage--American Express is taking on more merchants than it is losing--”the fear is that their image will suffer as the trend develops,” said Donald Auriemma, a Long Island credit card industry consultant. “When heavyweight folks say they dropped American Express and didn’t feel a bump, that’s not good news for American Express.”

The problem for American Express is not one that is easily solved. Because it does not charge its cardholders interest, it relies largely on fees from merchants to keep its business going. Those fees are usually twice what rivals Visa and MasterCard charge to process transactions.

For merchants trying to cut costs in a recession, the American Express card may not be worth the added expense. The defectors point out that more than 90% of American Express cardholders also have either a Visa or a MasterCard in their wallets. Though some may prefer to use American Express, many others don’t mind reaching for a different brand of plastic.

Take the experience of Reno Pompeo, a Montreal restaurateur and president of that city’s restaurant association. At his Le Piemontais restaurant, and at dozens of other establishments across the city, diners are greeted with cards that declare: “Enough is Enough! Why you should leave home without it.”

Pompeo said that since the cards were distributed in Montreal restaurants last November, his American Express charge volume has dropped in half, with Visa and MasterCard picking up much of the difference.


According to Pompeo, American Express has tolerated the Montreal protest. It has swiftly squashed other rebellions. Last winter, it threatened to cut off restaurateurs who used “Vail Loves Visa” check presenters provided by the rival card issuer.

A few months ago, it told a seafood restaurant in La Jolla to scrape the word Visa from its leather check presenter. American Express cut Laura Ashley off several days before Christmas when it discovered that Ashley clerks were asking American Express cardholders for another form of payment.

Robert H. Dickinson, vice president of sales and marketing for Carnival Cruise Lines, said American Express retaliated when the company decided to drop the card. A meeting of American Express-owned travel agencies last year featured a slide presentation that depicted a burning Carnival brochure. “I feel like a victim,” Dickinson said.

Norma Arnold, vice president of marketing at American Express, said the hardball tactics with merchants are necessary to defend the firm’s contracts with the stores. At the same time, she said, the company is taking steps to soften its approach and work more closely with merchants.

“It is always a painful thing for us to cut off a client,” she said.

The revolt against American Express started last year in Boston, when a group of restaurant owners, angry about high fees, called for a boycott of the card. The boycott ended when American Express agreed to offer lower fees to restaurants that enter charges electronically rather than on paper.

The Boston episode struck a nerve among merchants looking for ways to cut expenses in a recession. It also signaled to American Express’ competitors that the company so dominant in the coveted travel and restaurant business might be vulnerable.

Discover, Sears & Roebuck Co.’s charge card, swooped into Boston, San Diego and several other U.S. cities with “swat teams” charged with signing up restaurateurs. Edmund Moore was among the San Diego restaurant owners who bought Discover’s pitch after a sales representative dropped in. “It doesn’t cost me anything,” said Moore, owner of the Bungalow. “So why not?”

By most measures, last year was a bad one for American Express. The slump in travel brought on by the recession handed the company’s card business its first no-growth year. At the end of 1991, charge volume was flat at $111.4 billion, and the number of card members dropped slightly to 25.38 million from 25.62 million in 1990.

Ravaged by missteps with its Optima card, its version of a bank card, profits in its travel-related services unit plunged last year to $396 million from $956 million a year earlier.

By contrast, rivals Visa and MasterCard gleefully assert that last year their business was growing. Visa said it now commands more than half of the U.S. charge volume, with significant growth coming from restaurants, rental cars and hotels--traditional American Express strongholds.

Visa says it has twice as many wealthy cardholders as American Express, taking the luster off American Express’ aristocratic image. “The prestige factor doesn’t work any more,” boasted Visa spokesman Brian Henning. “Consumers are seeing they can leave their American Express cards at home.”

If the higher-ups at American Express are worried about inroads from the bank cards, they aren’t talking about it. Phillip J. Riese, executive vice president and general manager of American Express’ charge card division, said his company doesn’t want much of the business that is fueling its competitors’ growth. “If you look at the markets that we are interested in”--people with incomes over $50,000--”our share is constant over time,” he said.

W. Wilson Davis, an analyst and senior vice president of the securities firm Gerard Klauer Mattison & Co. in New York, said it makes sense in a recession for American Express to hunker down. Davis pointed out that much of the growth in charge volume at Visa and MasterCard hasn’t come from purchases but from credit lines tapped by stressed-out consumers who have made “an apples and oranges comparison” between the bank cards and American Express.

Even so, Davis said, lack of growth at American Express is a concern.

And Keith S. Kendrick, senior vice president of marketing at MasterCard, doubts his rivals at American Express are really so secure: “I don’t believe American Express planned a no-growth year.”

Credit Card Competition

American Express’ share of the credit card business has eroded over the past decade as competition has increased.


American Express: 25.5%

MasterCard: 32.9%

Visa: 41.6%


American Express: 20%

Discover: 7.1%

MasterCard: 26.8%

Visa: 41.6

* First six months

Source: Company reports, Sanford Bernstein