美國運通 (AXP) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the American Express Q3 2020 Earnings Call. (Operator Instructions) As a reminder, today's call is being recorded.

I would now like to turn the conference over to our host, Head of Investor Relations, Ms. Vivian Zhou. Please go ahead.

Thank you, Linda, and thank you all for joining today's call. As a reminder, before we begin, today's discussion contains forward-looking statements about the company's future business and financial performance. These are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these statements are included in today's presentation slides and in our reports on file with the SEC.

The discussion today also contains non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter's earnings materials as well as earnings materials for the prior periods we discussed. All of these are posted on our website at ir.americanexpress.com.

We will begin today with Steve Squeri, Chairman and CEO, who will start with some remarks about the company's progress and results; and then Jeff Campbell, Chief Financial Officer, will provide a more detailed review of our third quarter financial performance. After that, we will move to a Q&A session on the results with both Steve and Jeff.

With that, let me turn it over to Steve.

Thanks, Vivian. Good morning, and thank you for joining us today. I hope you and your families are all healthy and safe. As you saw this morning, we announced third quarter earnings of $1.30 per share on $8.8 billion in revenues. While our results continue to be significantly affected by the impacts of the pandemic, we're increasingly confident that our strategy for managing through the current environment is the right one.

Overall, I feel very good about the progress we made in the quarter in a number of key areas. We've seen a steady recovery in our overall spending volumes since the lows of mid-April. In fact, non-T&E spending in the quarter, which has long accounted for the large majority of our volumes, was up slightly year-over-year. Online consumer retail spending was particularly strong, up 32% over last year. And within our commercial business, AP automation volumes continued their rapid growth, although from a small base, doubling since last year's third quarter as more businesses adopt digital payment solutions.

Our credit metrics continue to be excellent, with delinquencies and net write-offs at the lowest levels we've seen in a few years. Nevertheless, we continue to be cautious about the direction that the pandemic packs on the economy, and this is reflected in our reserve levels, which Jeff will cover in more detail. Voluntary attrition rates in our proprietary products remain lower than last year, demonstrating that our customers continue to see value in our products and services.

We continue to invest in our business by launching our largest-ever Shop Small initiative, supporting small merchants in 18 markets around the world. Also, the enhancements we made to the value propositions on many of our card products have produced strong results, both in terms of increased spending and customer retention. In addition, we've begun to selectively increase customer acquisition activities across our businesses.

Let me quickly review our 4 key priorities for 2020, which I'll remind you include: supporting our colleagues and winning as a team, protecting our customers and the brand, structuring the company for growth and remaining financially strong. This last priority, remaining financially strong, is critically important in any environment and especially in these uncertain times as it establishes the foundation for executing against our strategic imperatives across our businesses. I'm pleased to say that we've maintained a strong liquidity position. Our capital ratios are well above our targets, and we've continued to pay our dividend each quarter.

In terms of our first priority, supporting our colleagues and winning as a team, from the beginning, our goal has been to take care of our colleagues so that they could continue to take care of our customers. As conditions begin to improve in a number of countries since moving virtually all of our 64,000 colleagues to work-from-home arrangements in March, we have begun the phased reopening of our offices in 25 of our locations, including our headquarters in New York, with a range of new safety procedures to ensure the health and well-being of our colleagues. And we are giving our colleagues the flexibility to continue working from home through June of 2021, should they choose to do so.

We're really proud of the resiliency and dedication of our colleagues -- our colleagues have demonstrated through this period, which has helped to drive our progress on our next priority, protecting our customers and the brand. Throughout this period, thanks to the efforts of our frontline staff, our customer satisfaction levels have remained strong and have actually improved globally on a year-over-year basis. Our customers have recognized our commitment to service excellence, ranking us #1 in the J.D. Power 2020 U.S. Credit Card Satisfaction Study, the 10th time we've achieved the top spot.

In addition to the expansion of our Shop Small program and the enhancements to our value propositions, a key differentiator for us has been the timely rollout of short-term and enhanced longer-term relief programs for customers who have experienced financial challenges during the pandemic. We're no longer seeing new inflows into our short-term programs in the U.S., and we've expanded our longer-term programs to 20 countries around the world.

Our last priority is structuring the company for growth. We continue to selectively invest for the long term. You've seen this in the announcements, such as our recent acquisition of Kabbage, a leading financial technology company serving small businesses in the U.S., and in the official launch of our network in Mainland China, where in addition to signing merchants and cementing relationships with key digital partners, WeChat and Alipay, we're currently working to develop debit capabilities on our network to capture some of the significant debit usage within China.

Let me step back for a moment and tell you how we're thinking about our financial decisions moving forward. We've been looking at our strategy for managing through this cycle through the lens of 3 phases. The first phase has been about navigating through the peak of the crisis, and we've been focused on this phase the past few quarters. The second phase, which we're now in the early stages of, is about rebuilding our growth momentum by increasing investments in key strategic areas.

Our goal in doing this is to enable us to enter the third phase, generating pre-COVID levels of earnings and returning to our financial growth algorithm. While we hope that the worst is behind us, we do not know for certain that, that's the case. We recognize that there remains a high degree of uncertainty in the environment. And that's why we'll continue our strategy of focusing on the 4 priorities I just discussed.

What's different is that now as we're beginning to see improvements in our business, we'll be placing even a greater emphasis on accelerating investments in core strategic areas in order to build momentum and position the company for long-term growth as economic conditions improve. Key areas of investment will include: accelerating customer acquisition activities across our businesses; continuing to refresh value propositions on our card products, including new, broader lifestyle benefits and additional business-centric offerings; developing additional solutions beyond the card to expand our relationships with small businesses; maintaining virtual parity coverage in the U.S. and expanding merchant coverage in key international markets while strengthening and broadening critical partnerships and enhancing our digital capabilities across our business.

The pace of our investment acceleration will be driven by the economic environment, which, as you know, is highly dependent on the course the pandemic takes and the availability of additional government stimulus in the U.S. and key international regions. In addition, while we plan to ramp up investments, we'll maintain our flexibility by controlling operating expenses and pulling back on investments if conditions deteriorate significantly.

Now I can't tell you when phase 3 will begin, but we're confident that the groundwork we will lay in phase 2 will provide us with the foundation we need to generate momentum to gain share, scale and relevance as we exit the recovery phase and return to pre-COVID levels of earnings and our financial growth algorithm.

Before I hand the call over to Jeff, I want to take a moment to share my personal thoughts on the current environment. Over the past few months, I've spent a lot of time talking with other key leaders across industries, but particularly with our partners, our customers and our Board. I would say that while I'm personally less optimistic in the near term, I am more optimistic about the longer-term prospects for our economy and for American Express.

Near term, there continues to be a high degree of uncertainty about the direction of the virus and its impact on the economy, developments in the political environment, the availability of future stimulus packages and how local governments will react to changes in local conditions. However, I believe we're well positioned to continue operating successfully through this period by being prepared for the unexpected, maintaining financial flexibility and quickly adjusting our strategies as necessary.

Looking at the longer term, I am more optimistic. I believe there is a pent-up demand among consumers to travel again once they feel safe to do so after many months sheltering at home. At the same time, I believe the increases we see in online spending and the creative pivoting of business models in the small business community will continue, and I believe we are poised to take advantage of the opportunities these trends present.

I also believe that this crisis has made us even more resilient and agile and flexible as a company, which will continue beyond this crisis and make us even stronger over the longer term. Having said that, no one knows what the future will bring. But regardless, we'll continue to do what we're best at: focusing on what we can control, such as taking care of our colleagues and serving our customers, putting the right building blocks in place and creating momentum to drive future growth.

Thank you. And let me now hand it over to Jeff, who will walk you through our financial results.

Well, thank you, Steve, and good morning, everyone. As I have the last 2 quarters, I'm going to talk you through a different, somewhat more detailed set of slides from what we've used historically in order to help you understand how our business is performing in this unprecedented environment. The key drivers of our financial performance in this environment remain volume and credit trends, along with this quarter, the early days of some spending on what Steve just called phase 2, our efforts to rebuild growth momentum. So I'll spend most of my time in these areas.

Let's get right into our summary financials on Slide 3. As you can see, our results this quarter are better than Q2. The spending rose sequentially. Our credit provision was much lower, and we used these improved results to begin to fund more efforts to rebuild growth momentum. That said, our results obviously continue to be significantly impacted by the global pandemic and the resulting containment measures that governments are taking around the world.

Third quarter revenues of $8.8 billion were down 20% year-over-year on an FX-adjusted basis, driven by declines in spend, lend and other travel-related revenues, while card fee revenues continued to grow. Net income was $1.1 billion and earnings per a $1.30 in the third quarter, down 38% from a year ago.

To get into the details of our performance, let's start with volumes. As we have all year, we'll continue to show you our billed business performance with a bit more granularity on monthly trends. Looking at the first few weeks of October, I would point out that we have not seen any material changes thus far in October compared to the monthly and quarterly data for Q3 that we'll focus on this morning.

Slide 4 shows that after hitting a low in the second quarter, overall billed business declines have improved sequentially to down 20% year-over-year in Q3 on an FX-adjusted basis. Our proprietary business, which makes up 86% of our total billings, drives most of our financial results, it was down the same 20%. The remaining 14% of our overall billings, which comes from our network business, GNS, was down 16% in the third quarter.

Now when you look at our proprietary billed business today, you really have to talk T&E spending and non-T&E spending separately, given the very different impacts the pandemic has had on these volume trends, as you can see on Slide 5. Non-T&E spending, which has long been the majority of our volumes, has recovered to pre-COVID levels and actually grew 1% year-over-year in the quarter. T&E spending remained down much more significantly, though it did show some continued modest, sequential improvements throughout the third quarter, driven primarily by consumers.

These very different trends in non-T&E versus T&E drive much of the difference in volume performance by segment and by customer type that you see on Slide 6. In the consumer segment, for example, U.S. consumer spending has recovered faster than international consumer due to the higher mix of non-T&E spending in our U.S. volumes. In the commercial segment, spending from small and medium-sized enterprise customers, which historically has the highest mix of non-T&E spending, has been the most resilient so far. Whereas large and global corporate card spending, which historically has been primarily T&E, has been down the most during the pandemic. I'd also remind you that spending from our SME customers represents the majority of our commercial billed business.

We drill down further into all these points, as you turn to Slide 7, which points out that, while historically non-T&E spending was 70% of our proprietary billed business, today, non-T&E categories represent 88% of our proprietary billed business. This mix shift has occurred across all customer types, as you see at the bottom of the slide.

So what's driving this beyond the obvious decline in T&E spend? Well, as you would expect, we have continued to see an increasing shift to online and card-not-present spending in the current environment. The shift is most evident in the consumer business, whereas commercial spending in the non-T&E categories has been predominantly online for quite some time, as you can see on Slide 8.

You see more about these shifts on Slide 9, with consumer online spend continuing to grow in the double digits at an accelerated pace relative to pre-COVID levels, up 20% year-over-year in the third quarter, even as off-line spend has gradually recovered from the April low. In our commercial segment in contrast, since most of the spend was online even prepandemic, the online and off-line trends are more similar.

You see other drivers of the growth in non-T&E spending as you look at the categories of non-T&E spend by segment on Slide 10. For consumers, you see the growth in non-T&E spending is driven by strong growth in online retail spending, in line with the growth we just spoke about. For commercial, since the bulk of spending was already online, the most significant area of growth is in advertising, media and communications, particularly from small and medium-sized enterprises as they evolve their marketing and customer engagement strategies in the current, more digital environment. So overall, we see the consumers and SMEs, in particular, have adapted their behaviors to the challenges of the current environment, which is why non-T&E spending has recovered to pre-COVID levels and is starting to show some growth.

Now coming back to T&E on Slide 11. As a reminder, the majority of our T&E spending has historically come from our consumer business, and that is even more true today. And consumer T&E spending has continued to see a much faster recovery, as shown on Slide 12, followed by small and medium-sized enterprises and then large corporations. We expect this trend to continue, given the pent-up demand to travel that we see in our consumer base and our expectation that corporations, particularly large ones, will continue to limit their T&E spending for some time.

You also see the different pace of recovery within the categories of T&E. Cruises, which are a very small part of our business, have been slower to recover, followed by the airlines. Restaurant spending, on the other hand, has been the most resilient throughout. In between, you see lodging and other T&E, where you continue to see spending volumes modestly recover, but at varying paces. For example, spending on home rentals and at resorts servicing domestic leisure travelers have been performing better than spending at hotels in urban locations.

You see the impact of different mixes of T&E spend when you look at our international regions on Slide 13, which have more travel-related spending historically and, thus, are showing larger overall declines in volume. U.S. spending volumes continue to steadily recover throughout the third quarter. On the other hand, the volume recovery in Europe and Asia has moderated a bit, somewhat in line with some additional restrictions in key markets for Amex, such as the U.K., parts of the EU, Japan and Australia.

And finally, as we look at spending in the U.S. across our 6 largest states from a volume standpoint on Slide 14, I would say that the trends across states have been perhaps surprisingly similar, given the variance in medical trends and government policies.

So moving next now to loans and receivables on Slide 15. Loans declined by 17% year-over-year in the third quarter, primarily driven by lower spending volumes. As you've heard from many other institutions, we also saw higher paydown rates in the third quarter, which drove a small sequential decline in loan volumes despite the improvement in spend versus Q2.

Based on what we see today, if you assume some continued improvement in spending levels, I would expect this quarter to be the low point for loan balances, and looking forward, for those balances to start to grow modestly sequentially beginning in Q4, mostly driven in the beginning by transactor volumes rebounding. Card Member receivables, on the other hand, were up 9% sequentially in the third quarter relative to the second quarter, driven by the improvement in spending volumes I just spoke about.

So let's go now to our traditional credit metrics, which you see on Slide 16. And you see the credit trends in the third quarter were solid and remained best in class. Card Member loans and receivable write-off dollars, excluding GCP, were actually down 3% and 15% year-over-year, respectively, in the third quarter. You do see an increase in write-off rates year-over-year, but this is primarily due to the significantly lower loan and receivable balances as opposed to there being any significant change yet in these traditional credit metrics, though we would expect to see some impact on these metrics in future quarters. In addition, our delinquency dollars and rates continue to be down year-over-year and sequentially in the third quarter. And in fact, our third quarter delinquency rates are the lowest we've seen in several years, which is certainly unusual given the economic environment.

We feel good about our credit performance, our risk management capabilities and the work we've done to manage our exposure so far. It all starts with the changes we've made over the last few years in our risk management practices, which gave us a solid starting position, as well as the way we mobilized our organization to ensure that we had the appropriate programs and people in place to support our Card Members who needed financial assistance.

Of course, like others, our customers are also helped by external factors such as the impact of record levels of government stimulus and the broad availability of forbearance programs. As a result, we do remain cautious about the potential for future shocks to the economy, and that caution is reflected in the macroeconomic outlook that informs our credit reserves.

Moving on to Slide 17, you will see that our provision expense for the third quarter is significantly lower sequentially and also declined 24% year-over-year, simply reflecting our strong credit performance as well as a modest adjustment to our reserves. As we think about the range of economic outcomes that are used in our modeling of CECL reserves to the expected lifetime loss of the receivables and loans on our balance sheet, you will see on Slide 18 that the range of macroeconomic assumptions we have used in our calculations are more divergent for the third quarter relative to Q2. The baseline scenario has improved a bit for the prior quarter, but the downside scenario is more pessimistic. And we have weighted it more than we did in Q2, given the continued high level of uncertainty in the economy and the pace of recovery.

The impact of this more cautious set of macroeconomic assumptions on our reserve models was offset by our favorable credit metrics and also a modest sequential decline in loan volumes this quarter, resulting overall in there being very little change to our reserve levels, as you can see on Slide 19. We ended the third quarter with $6.5 billion of reserves, representing 8% of our loan balances and 1% of our Card Member receivable balances, respectively, in line with Q2 and up $2.2 billion from their prepandemic levels.

So how do we feel about this level of reserves in today's environment? We believe that the reserves on our balance sheet are appropriate, given the broad range of economic outcomes envisioned in our baseline and downside scenarios. And looking at the balances that are in delinquent status or in one of our Financial Relief Programs on Slide 20, those balances continue to decline sequentially to $4.2 billion at the end of Q3 and now stand $1.4 billion higher than they were prepandemic.

As we wound down the short-term customer pandemic relief program that we put in place at the height of the crisis in March, we've continued to see that the majority of the balances that have exited the program have remained current. The increase in our longer-term Financial Relief Program balances over the past 2 quarters reflects the effectiveness of the work we have done to help Card Members that need financial assistance enroll in the right longer-term program for them. Historically, the credit outcomes of Card Members that enroll in these programs are better than those that do not, with around 80% of enrolled balances successfully completing these programs. And the repayment trends of the Card Members currently enrolled in FRP have been in line with our historical experience. Only time will tell what the ultimate level of write-offs will be given the completely unprecedented nature of the global environment, but we feel good about our risk management practices, the way we are managing our exposure through the current environment and the resulting level of reserves we are holding.

Moving on to revenues on Slide 21. Revenues were down 20% year-over-year in the third quarter. Given the spend-centric nature of our business model, revenue declines have improved sequentially in line with volume since the lows in mid-April.

Turning to our largest component of revenue, discount revenue. I would move you ahead to Slide 23. As expected, the contraction in discount revenue was larger than the decline in billed business due to the difference in T&E and non-T&E billings trends. This drove a 12 basis point decline in the average discount rate in the third quarter relative to the prior year since we, on average, earn higher discount rates with T&E merchants versus non-T&E merchants. Looking forward, if T&E spending continues to modestly recover, we would expect to see slightly less year-over-year discount rate erosion in the fourth quarter.

Turning next to Slide 24. Net card fee growth has been strong throughout this year and grew 15% this quarter, demonstrating the impact of the continued strong Card Member engagement that Steve discussed. But growth has been decelerating steadily because of our decision to pull back on new card acquisitions as we were managing through the peak of uncertainty during the crisis. I do expect some continued deceleration in growth rates, but I would still expect double-digit net card fee growth in the fourth quarter.

Moving on to the details of net interest income and yield on Slide 25. On the left-hand side, you see that net interest income declined 15% on an FX-adjusted basis, which was slightly less than the loan declines we saw in the third quarter due to the year-over-year expansion in yield that you see on the right-hand side of the page. Net interest yield on our Card Member loans increased 40 basis points year-over-year in the third quarter, driven by modest tailwinds from lower funding costs, mix and effectively pricing for risk. Looking forward into the fourth quarter and assuming we continue to see higher paydown rates from revolving Card Members, I'd expect net interest income to be relatively flat sequentially.

Moving on to Slide 26. We're continuing to break out our expenses between variable customer engagement expenses, which come down naturally as spend declines and benefits uses changes and marketing and OpEx, which are driven by management decisions. Variable customer engagement expenses in total were down 27% year-over-year, driven by lower spend and lower usage of travel-related benefits. The year-over-year decline in variable customer engagement expenses provided a 50% offset to the revenue decline in the third quarter.

In the fourth quarter, I'd expect to see somewhat less of an offset if the recent modest uptick in T&E rewards redemptions and usage of travel-related benefits continues. We are clearly seeing evidence of pent-up demand for travel in our Membership Rewards base as Card Members are banking points to use on future travel as opposed to redeeming them on one of our many non-travel-related redemption alternatives.

In contrast to the declines in variable customer engagement expenses, marketing expenses were up 23% year-on-year. This aligns with Steve's earlier point that we have entered the second phase of our strategy for managing through this cycle, which is about rebuilding growth momentum. The increase was driven by the enhancements we have made to our value propositions and by the approximately $200 million we spent on our largest-ever Shop Small campaign. Based on the current economic environment, I would expect our marketing expense in the fourth quarter to be at levels similar to the third quarter.

Finally, operating expenses were down 8% year-over-year in the third quarter as we executed on our cost-reduction plans. Looking ahead, we have begun to selectively spend in areas critical to rebuilding growth momentum as we enter phase 2. As a result, we expect our Q2 through Q4 year-over-year OpEx declines will be somewhat less than the $1 billion we initially discussed back in April, which, in hindsight, was at the moment of peak uncertainty about the future.

Moving last to capital and liquidity on Slide 27. Our capital and liquidity positions remain tremendously strong as they have all year. Our CET1 ratio increased to 13.9%, our highest level since we began reporting this ratio, reflecting the retention of capital generated by stronger earnings this quarter. Our cash and investment balance remained at a near-record high of $55.5 billion in the third quarter. We obviously remain confident in the significant flexibility we have to maintain a strong balance sheet and liquidity in periods of heightened stress and uncertainty. Looking forward, we are committed to our dividend distribution and to our long-term CET1 target ratio of 10% to 11% as the economic situation becomes clearer and as the Fed allows banks to resume share repurchases.

In summary, though the external environment remains uncertain in the near term, we are confident in how we are managing the company for the long term. The investments we are making in phase 2 will provide us with the foundation we need to rebuild growth momentum to gain share, scale and relevance as we exit the recovery phase and return to pre-COVID levels of earnings in our financial growth algorithm in phase 3.

And with that, I'll turn the call back over to Vivian.

Thank you, Jeff. Before we open up the lines for Q&A, I will ask those in the queue to please limit yourself to just 1 question. Thank you for your cooperation. With that, the operator will now open up the line for questions. Operator?

(Operator Instructions) Our first question comes from the line of Don Fandetti with Wells Fargo.

So Jeff, October, you said, hasn't changed much. But if you look at September, I mean, in the U.S., most of the states are sort of ramping up in terms of their year-over-year. Has that ramp-up continued? Or has that stalled?

Yes. Good question. We chose not to add the first half of October this time because the trends all continue. So what that means is you do continue to see modest but steady improvement in the U.S. and you do continue to see a little bit more caution in Europe and markets like Australia and Japan. So I think if you look at those July, August, September trends, it gives you a pretty good sense of what we're seeing right up through today.

Next, we will go to the line of Betsy Graseck with Morgan Stanley.

Question on the phased -- entry into phase 2 in the marketing. I heard you're moving into the phase 2 here. Wanted to understand what you saw in your customer set that said this is the right time to do this now. And how that feeds into not only the marketing piece, but the other investments you're making? Should we take from that, that year-on-year is now going to be more normal than down?

And then the other piece of that question is if this more negative scenario that you outlined very cleanly and clearly in your deck on the negative environment, if that were to happen, do you flex back to the phase 1 environment?

So let me -- I'll take that, Betsy. And let me provide a little bit of context overall on how we think about this. When I first took over, I was asked the question how I would navigate in a credit situation. Nobody ever asked me to question how I'd navigate in a pandemic, but I was asked that question. I was also asked that question when we had our investor call this year. And what I said was we would invest for the long term through a crisis. And that's what we're doing.

So why start now? And look, we entered phase 2 basically towards the latter stages of the third quarter as far as I'm concerned. What we saw is exactly what Jeff just talked to Don about. We saw a steady improvement in billings. We have a real understanding of what's going on from a credit perspective. And for us, it makes sense to invest in the business. And let's look at sort of how I think and how the executive team thinks about this.

When we look at this particular quarter, if you dive into these numbers, what you will see is that our marketing expenditure in this quarter was up 23% year-over-year, not sequentially, but year-over-year. And I don't know how many people had that, either in their calculus or sort of in their models, but during times like this, probably the go-to move is to reduce marketing. But we don't believe that that's true.

What we believe in a situation like this is the most important thing that we can do is solidify our foundation. And our foundation is built on 2 things. It is built on our Card Members, our merchants -- Card Members and merchants and our brand. And what you saw us do in the third quarter from a merchant perspective and a brand perspective, we invested $200 million in 18 countries over 12 weeks in the largest small business campaign that we've ever done in the history of the company. And that has given us, with our constituents in small business, a lot of positive impact. It has helped the brand. It resonates on who we are.

From a Card Member perspective, we continue to make value injections. And the reality is, is what has happened is that you see attrition levels lower than last year. And a lot of our Card Members are fee-paying Card Members, and they are sticking with us because: number one, we continue to invest in the relationship; number two, we continue to provide the best service in the industry. So it was very important for us to solidify that foundation. And I said that's what we would do, and that is exactly what we are doing.

The second point I would make, and this gets to investing for growth, was once you solidify that foundation, how do you build on that foundation? And we did 3 very specific things in the quarter.

The 3 things that we did were: number one, we stepped up card acquisition. Sequentially, quarter-over-quarter, we have 40% increase in cards acquired. We acquired 1.4 million Card Members in the quarter versus 1 million. That's down from last year, but we're selectively doing it because what we are doing is we have more line of sight right now into behaviors. We have more line of sight into the potential customers that we can acquire.

We went out and we acquired Kabbage. Kabbage is going to accelerate our efforts in small business from a platform perspective by anywhere from 18 to 24 months from what we would invest on ourselves. And Kabbage will help us create really an SME digital banking platform, which is all-inclusive. And so we feel good about that. And we launched our network in China, and we certainly feel good about that. And we continue to invest in coverage.

So as I sit here, it would have been pretty easy for me to say to the team, "Let's reduce marketing by 20%. Let's do this and so forth." And if you look at sort of the numbers that we reported, our -- between our increase in marketing and the lack of reduction, that's like a $0.40 EPS swing. So if I would reduce marketing by 20% as opposed to increased marketing by 20%, we'd be sitting here potentially talking about $1.70 EPS. But the reality is, in this environment, $1.70 EPS is short term, short lived and not what we're focused on as a company. What we are focused on as a company is continuing to build this brand and to build this franchise for the long term. And the investments that we are making will play out for years to come.

To your question about will we pull back. And what do we need to see about pulling back? We'll continue to watch the credit markets. We will continue to see how our Card Members behave. We'll continue to see how governments open up.

So for example, if everything was closed, it made no sense to do that small business promotion. We had decided to do that small business promotion really in early May at the right time, and we waited until the end of June to launch it in the United States because states weren't opening. So we will pull back on marketing from both an acquisition perspective and a support perspective if we see closures or if we don't have the line-of-sight insight. And a nice part about that is, is we have the flexibility to do that and we're not committed. But what we are committed to doing is to continue to invest in this franchise for the longer term.

Next, we will go to the line of David Togut with Evercore ISI.

I think we lost him.

(technical difficulty)

David, are you there?

Yes, I am. Can you hear me now?

Yes. Great.

Steve, you called out maintaining virtual parity coverage in the U.S. with Visa and Mastercard, and you articulated some initiatives there. I'm wondering if you could talk a bit more about your thoughts around the MDR and how that could evolve going forward.

And then international expansion, you also highlighted you pulled back in Europe and Australia with GNS being effectively shut down. How are you thinking about expanding in some of these international areas in this environment? Is it more with the proprietary card going forward?

Well, let me just answer the second question first, and I'll come back to the first one. But yes, look, I think, in Europe and in Australia, the way sort of regulations work, our economic model doesn't really work in a GNS environment. And so to remind people, we do have a premium discount rate within Europe and within Australia. And within Europe, if, in fact, we had gone to a 4-party model, which we had a 4-party model, and we had a 3-party model, it would have regulated our interchange and, therefore, reduced our margins significantly. So we're effectively out of GNS as it relates to Europe and as it relates to Australia.

But if you look at our business, the 2 fastest-growing pieces of our business prepandemic was our international SME business and our international consumer business. And with the advantage that we do have is we are able to really target Card Members who were looking for tremendous value within the products. And so you see a preponderance of fee-based products in international with a lot of value from a Card Member and driving significant spend into those markets.

So we continue to invest in Europe in card acquisition. But more importantly, right now, we're investing in merchant coverage. And what we've done is we've looked at sort of our international markets, and we've talked about strategic markets and sort of the top markets that we invest in. But we also look at the cities where our Card Members live and where they travel to. Now obviously, Card Members aren't traveling anywhere right now, but we do look at the top cities across the world. And we have focused our coverage efforts in really to get a lot more targeted coverage, and we've had lots of success, and we will continue to do that.

So -- and we're using the same kinds of tools that we did in the United States, whether it's -- while we can't use an OptBlue program in Europe per se, we're using our 1 point, eases, telemarketing and so forth. And we see significant coverage increases in those markets in international. So we're still committed. We're still investing. And once we get through this pandemic, they will continue to be some of the fastest-growing pieces of our business.

As far as the U.S., and let's just talk about the discount rate for a second, we saw actually a sequential increase in the discount rate this quarter, obviously, a decrease year-over-year. And that is really due to mix. And so when you look at mix, with T&E being 69% down year-over-year and those industries having the higher MDR, that's what's really driving it. Maintaining virtual parity coverage, we are there. Any discount rate erosion that was either contemplated or done has been done as it relates to OptBlue and virtual parity coverage. So we're beyond that. I think what you're seeing now in the discount rate erosion is really due to mix of business. And what our expectations are is when we get back to a normal environment whenever that may be, you will see a normal mix.

Because we believe -- and look, I don't know about you, but I'm going a little bit crazy just sort of staying in my house and not traveling and not being on the road seeing customers and partners and colleagues or taking vacations with my family. And so there is a pent-up demand certainly for consumer travel. And you're seeing a little bit more of that, very, very small right now, but there is going to be a big pent-up demand. And we'll be there and ready to serve that demand when it comes to fruition.

Next, we'll go to the line of Bill Carcache with Wolfe Research.

If we look ahead 12 months from now, hopefully, we're in an environment where travel and spending have more fully normalized. But retaining existing customers until we get to that point seems like a critical element of your strategy. Can you frame for us how you think about the dynamics around the cost of retaining an existing customer today versus the cost of losing that customer and having to reacquire them later?

Well, I think the dynamic is very simple. It is traditionally and over time and will always be a lot cheaper to retain a customer than it is to acquire a new customer. And so it is an investment that we are making and will continue to make. I mean just think about what it takes to sort of mine, to go get new customers and then to bring them along from a spending perspective. We have sort of worked with our customers here to target their spending. And what we're seeing is, obviously, some of our customers are spending in areas now that they hadn't spent before. And if you look at sort of some of the things that we've done with streaming credits and even with wireless credits and even shipping credits, we have actually engaged our Card Members to spend in areas that they hadn't spent in before.

And it's always amazing to me the dynamic of how people compartmentalize their spending. And you would just think that everybody who is using the product would use it consistently across these things. But some of these programs that we've had to retain customers have actually helped to open up new categories and so -- where they're spending with us.

And so what happens here is, as we open up those new categories, that will continue and be consistent over time as they then get back to their travel spending. So I think some of the investment and some of the spending that we're seeing now is going to benefit us going forward. So bottom line, much, much cheaper. And I can't give you the exact numbers, the ROIs and so forth, but much cheaper to retain an existing customer than it is to mine for a new one.

Steve, I might just also point back to your earlier comments about our attrition rates being down versus prepandemic. The foundation of our business are very long-term customer relationships. So when you look at our best customers, the attrition rates are remarkably low. Customers stay with us for a very long time. And so that's what we build the company on, Bill, and that's what we're focused on maintaining through the pandemic.

Next, we'll go to the line of Rick Shane with JPMorgan.

I really appreciate the additional disclosure. It's very helpful in understanding a lot of these trends. Jeff, looking at Slide 20, I am curious if the Financial Relief Programs that you're offering are disproportionately being offered to the SME borrowers. And if that's an area that we should be watching in terms of emerging credit?

So that's actually a really good question, Rick. And since you flipped to Page 20, I'll encourage everyone to flip. Because the really interesting thing is that, if you go back to April, so the peak moment really in hindsight of uncertainty, in April, there were a disproportionate number of our SME customers who signed up for our very short term, to 1 month as you recall, customer pandemic relief program.

The really interesting thing, though, as the months have gone by is when you go to today and to the numbers on the far right of Page 20, in fact, the SME customers are no longer a disproportionate share. And so it appears to us that the small and mid-sized enterprise customers, I think, prudently said, "Well, heck, I'm not sure what the future holds. If this program is out there, I'm going to sign up for it," back in April. But most of them have pulled out of it, have not signed up in disproportionate numbers for the FRP programs. And so we feel good about small business.

And in fact, I think it's probably worth reminding everyone that our Small Business Card members are predominantly people like contractors and architects and lawyers who, for the most part, are thriving in the current environment. And only a very small percentage of our Small Business Card members are in some of the hardest-hit sectors, like restaurants or online retail -- or excuse me, off-line retail.

Next, we'll go to the line of Bob Napoli with William Blair.

Steve, the B2B payments market is an area that you've done -- American Express has done a lot of investing in. And I know it's off a small base, but you bought acompay. You're partnering with Bill.com with Middle Tree, with Coupa, with others. What is the long-term vision for that business? When does it become not off of a small base? And is this something that could be 10% or a real material portion of the American Express business over the long term?

Yes. Well, look, I think that you call out a number of the partnerships that we have, whether it's with Coupa or whether it's with SAP, whether it's with Ariba, obviously -- or acompay, our own product. That's only a component of it. I would argue that a lot of the B2B is built into the SME piece of it right now because, look, 80% of our SME volume is non-T&E. And if you are a small business, if you're a lawyer or you're a contractor, you're buying your supplies to run your company that way. So I think what you're really talking about, Bob, is the automation piece of that, right?

And even if you look at our corporate card business, our corporate card business, obviously, there's nobody, I mean, hardly anybody that is sort of traveling at this point. And the T&E component of our corporate card business is really, really down. And the reality is that component, though, of our business is only 6% of our overall business. And yet, our corporate card business is not down nearly as much as the corporate card T&E piece because of some of the inroads we've made with B2B from a corporate perspective.

And so I think what we probably need to do is figure out how to frame this a little bit better. But the reality is, is that so much of our SME and corporate spending is actually B2B today. What we're really talking about is how do you automate it. And that's what we're working on. And I think, over time, that will become bigger. But I would argue, a lot of that spending is a large percentage of our growth right now in SME. And I think when you get into large corporate, there is a big opportunity to do that.

And that's -- when you look at the partnership with Bill.com, obviously, that is not targeted at a large corporation. That is targeted at an SME, and our acompay is the same thing. So more to come on that, but I think it is a growing piece. And what you're seeing with the doubling of acompay automation is the actual automation versus the normal card usage that you would normally see.

Next, we'll go to the line of Jamie Friedman with Susquehanna.

Thank you for the additional disclosures. Steve, Jeff, I just wanted to ask, the GNS actually declined less than proprietary. I was just -- maybe a minor detail, but I was just wondering is that because of easier comps. Or is that less T&E in GNS.

Well, Jamie, if you think about the fact that because, as Steve talked about earlier, we have had to pull out of the GNS business in Europe and Australia, what's left is not necessarily a group of business that is representative of what's happening around the globe. And in fact, a handful of company -- countries account for a large percentage of the volume, and those countries happen to be places like South Korea and Japan and Brazil and Israel. So particularly with South Korea as the largest single country, and if you think about how they have done with their particular approach to the control of the virus and economy, it kind of makes sense that it would be a little bit stronger. But it's not really -- those numbers aren't reflective of kind of an average across the whole rest of the world is what I would say.

Next, we'll go to the line of Mark DeVries with Barclays.

Jeff, as you alluded to earlier, you maintain that 10% to 11% economic capital requirement. And prior to the pandemic, you had managed down to it quite effectively, but it's obviously expanded again with the roll-off of balances here and the suspension of the buyback. Can you just help us think through when you'll be able to return the buybacks? Is that just going to be Fed-driven based on the results of your new stress test? Or is it going to be also self-determined based on what you see? And when you feel comfortable buying back shares, at what pace should we think about you kind of drawing that down back to your longer-term economic capital requirements?

Yes. All good questions, Mark. So a couple of things. I mean clearly, we do need to wait until the Fed allows share repurchases again. But as I say that I'd remind everyone that, for us, the Fed requirements on capital are well below our 10% to 11% target. So they're not really a constraint on being at that level. They're only a constraint because right now they've just blanketly said to everyone, "You can't do share repurchase." So once they give the green light.

The other thing is we do want to make sure we have visibility into the future direction of the economy. As you sit here today, we've talked a couple of times, both Steve and I, about the fact that while our baseline as things continue to get a little bit better, we have to be ready for the fact that they may not. We'll have to see. So we need a little bit of economic clarity, and then we'll go and we'll start working towards our 10% to 11% target.

I wouldn't expect, Mark, to see -- to have us do an accelerated share repurchase and get there in 1 quarter. But you'll see us go back to the kind of pace we were doing before, which will get us there over the course of a relatively small number of quarters.

Next, we'll go the line of Meng Jiao with Deutsche Bank.

Steve, I just wanted to check in with you. In your conversations with some of your larger partners, I wanted to get a sense on how they're doing. And what's continuing to be worrisome to them in this climate and going forward?

Well, I mean, if you look, we've got lots of partners, right? I mean I had a conversation with Dan Schulman. He didn't have a lot of worries then. And they're doing great, and we're doing great partnership with them between pay with points and being embedded within the PayPal ecosystem. And that's a great partnership for us.

And when I talk to Ed Bastian, I think Delta is doing a great job navigating the crisis, but they're at the mercy of how people feel. And -- but when you look at our cards with Delta, that spending is at or better than the spending that we have on all our other products. And the same thing when -- if I talk to Chris Nassetta and Arne over at Marriott, Chris, at Hilton, their perspective is it's a slow recovery here. And when you think about sort of the hotel industry, conventions is a big part of it, and that's not going to probably come back anytime soon, but they're starting to see an uptick in more localized stays, where people can drive to a hotel and not travel.

And even Delta is starting to see a little bit of a pickup as well. But I think, consistent with what I've said, I think you're looking to see a tick-up in consumer behavior from a travel perspective sort of towards the end of the year, first quarter next year. But I think we're all consistent in terms of how we feel about business travel, which is probably not going to be until late 2021 or early 2022.

But what I would say is that whether it's Hilton, BA, Marriott or Delta, we are really pleased with the partnerships that we have from a co-brand perspective. And those cards in the markets they're in are performing at or better than our overall portfolio. And it's because, as I've said many times, people are invested in their products for the longer term. They're invested in their miles, they're invested in their experiences. And when you put great brands like that together and create great experiences, people will hold on, and that's what's happening.

And this will pass. When it's going to pass? I can't tell you, but it will pass. And as a society, as a world, we will figure out how to navigate this over time.

Next we'll go the line of Craig Maurer with Autonomous Research.

So 2 questions for you. First, on the merchant discount rate. More specifically, when typical seasonality would suggest that the implied rate or the calculated rate would fall in the fourth quarter. Curious if your expectation is that T&E will recover enough in the fourth quarter to offset that typical decline.

And secondly, professional fees were materially higher than what we had expected. And was curious if that was driven by support for things like the small business campaign.

Well, the answer to the first one is easy and quick. I do expect that the steady improvement we're seeing in T&E will more than offset any of the normal seasonality on the discount rate. I would remind you that, even though T&E is down a lot more than non-T&E, if you actually look at the rate of improvement from the second quarter to the third quarter, Craig, T&E is improving faster because it fell so much. And so we'd expect that, in general, to continue.

And then the professional fees, remember, we're constantly moving back and forth between, particularly on the technology side, work we do in-house versus work we do through a variety of different firms we work with around the globe. So you really need to focus overall on OpEx, which we feel good about being down a couple of hundred million again this quarter versus the prior year and, of course, being down much more than that versus our original plan.

Our final question will come from the line of Sanjay Sakhrani.

So I wanted to follow up on the improvement going forward through the back part of this year. Are you guys concerned maybe the cooler weather might affect people eating out? You might have some more closures, lack of stimulus, the small business initiative that you have kind of sunset. Can you just talk about your confidence in the acceleration of the growth? And then these new accounts that you're bringing on, when do you expect to get traction on the top line from those customers?

Well, look, I think, just to the first piece of this, as I said in my remarks, I mean, there's just so much uncertainty on everything that you just mentioned, which is why I think it's so important to keep that flexibility. I mean everything that you said could come to pass. Whether it does or not, I do not know. And that's why we need to keep flexibility.

And that's why also, we did our investment in sort of small business when we did it. We will still do our Small Business Saturday on a global basis. We're committed to doing that, and we will continue to invest in those brand-building activities.

But I think, Sanjay, look, I mean, I think when you look at the Northeast, you don't know what's going to happen in terms of restaurants. You don't know if you're going to be at 25%, you're going to be at complete closures. It's going to be pretty hard to eat outside in the snow and things like that. But then if you go to Florida, you have 100% openings right now.

So you have inconsistency across the United States. You have inconsistency across the globe. And so we're going to have to just continue to watch that, and we're also going to continue to make sure that we are taking into account, from an investment perspective, how the 2 of those things meet up.

But what I would also tell you is, look, we've got salespeople out right now doing face-to-face calls. Obviously, social distancing, masks and so forth. And the reality is they want to get out, and people want to see them. So you've got a very different environment depending upon where you are in the United States.

As far as sort of top line growth for new cards acquired, I think it's going to be hard to see the top line growth because you've got this compression that's happened due to the travel. So we'll be looking at -- obviously, we're adding on more Card Members. They're adding on spend. But even as they add on spend, they're not going to be at (inaudible) because they're not going to have the travel component within early on.

And so I think we'll look at it. But as far as from the outside perspective, you're still going to have this push down on revenue year-over-year up until the first quarter of sort of next year probably just because of what has happened to the economy. And so I think it's more second, third and fourth quarter of next year where additional Card Members that we add, you'll have a grow over, over 2020.

But when I think about this and the team thinks about this, we anchor everything off 2019. I mean we want to get back to that normal state and to get to that grow over from 2019. So that to us is truly a return to normal.

With that, we will bring the call to an end. Thank you, Steve. Thank you, Jeff. Thank you again for joining today's call, and thank you for your continued interest in American Express. The IR team will be available for any follow-up questions. Operator, back to you.

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